Considering Franchising With A Very Large or Small Franchisor? Read On.
Aside from the risks disclosed in the FDD are general dangers specific to all franchise operations. Some of these risks apply only to small or new franchise systems, and some are unique to large systems. The risks of small systems are that the franchisors are usually inexperienced, the system is not time-tested, and it has no name brand value. The FDD does not require a franchisor warn you about these risks. That's why we are doing it. One might thus conclude that large systems with thousands of franchisees are safer. Not always. Large franchisors make big money reselling their own failed/defaulted franchises in the so-called after market. Since many franchisees default from time to time, franchisors repossess these stores for free. Often they are worth a quarter million dollars or more. Franchisors can then resell them to new prospects, in which case they capture not only new initial franchise fees, but also the price of the business itself. They may reduce this price so it appears to be a bargain. It may be only half the cost of establishing a brand new store. But considering that they seized it for free, they make a great deal of money on these transactions. Hence, unscrupulous franchisors have a big incentive to make you default if possible, so they can seize and resell your store. Perversely, this risk grows as your store becomes more successful. It will sell for a greater sum. It is not unheard of for franchisors to schedule inspections to coincide with moments you are sure to fail, such as during deliveries or during remodeling which they themselves require you to undertake. They are hoping they can default you and seize your valuable store. The FDD does a poor job describing these risks. In fact, they are not disclosed at all. Keep these in mind as you read your federally required Franchise Disclosure Document.