Consequences of a Failed Franchise | Franchise Law Blog

Consequences of a Failed Franchise

For existing franchisees and individuals considering the purchase of a franchise‚ an extremely instructive – but unfortunate – discussion appeared on the question and answer section of CNNMoney’s Small Business website. In the article‚ “Escaping a franchise deal gone bad,” the franchisee of a children’s entertainment franchise inquired about her legal options following what appears to have been the unsuccessful launch of her business. In the article‚ the franchisee mentions a couple of important factors/issues that all prospective and current franchisees should consider.

Issue I – Insure that You Possess Adequate Capital Before Committing to a Franchise

In the article the franchisee mentions that to open the franchise‚ she needed $250‚000.00 in capital. She attributes a portion of her failure to her inability to raise adequate capital. However‚ this franchisee readily admits that she did not “attempt” to raise capital until after paying her franchise fee and signing the franchise agreement.

Issue II – Be Cautious with “Light or Express” Versions of a Full Service Franchise Concept

Although specifics are lacking in the article‚ the franchisee mentions that since she did not possess the recommended level of capital‚ she was permitted by the franchisor to open a “smaller version of the franchise”.

Issue III – Be Cautious of Post-Termination Restrictive Covenants and Obligations

The franchisee mentions that she is looking to get her money back and set up her own‚ non-franchised‚ competing business.

For current franchisees who find themselves in a similar situation‚ the article offers some good advice from Ed Teixeira of franchiseknowhow and attorney Robin Day Glenn. For prospective franchisees‚ the critical factor remains “look before you leap” – consult with an experienced franchise lawyer and do your homework.

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Date: 12/08/2014 | Category: General

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