Tom’s Franchise Information Blog

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The unscrupulous franchiser initially develops the franchise in a company-owned-operated store. Within this framework, the necessary expertise is developed and ALL the set-up and operating expenses are established. The franchiser then sets a franchising-fee and marketing-fee structure; these are applied to the franchisee contract and can be set in such a way so as to ensure that no profit is achieved based on the Sales volume that is projected. This sales volume is invariably and substantially less that the “predicted” volume declared in the mandatory DISCLOSURE document.

The major initial investment by the franchisee involves the “fit-out”; let’s say, for example, that this amounts to $300,000, a typical figure. Now let’s see what happens to this investment; it is normally a loan secured by the family home. Once the unprofitable franchise operation is in ongoing financial trouble, with a negative Profit Before Tax (PBT) result, the actual Negotiable Sale Value of the Business becomes zero.

The lending institution that holds the property mortgage “moves” on the franchisee family and often the family home is sold. Marriage breakups and other personal traumas follow. The franchiser makes a “token” offering for the fit-out, say $30,000, knowing that the franchisee is financially desperate. The “bastardry” is now complete and the franchise is now available for “recycling”. With minor dollars expended, the fit-out is dressed up for resale to the next wide-eyed small business family at, say, $250,000.

It is clear that the profit margin on this recycled franchise is many times that of the franchise fees that are normally received, i.e. typically 8% of turnover or the equivalent in cost of goods purchased. So, provided that the unscrupulous franchiser keeps the percentage of recycled franchisees below the threshold of “suspicion”, the franchiser gets away with the insidious plan, invariably stating that the exiting franchisee was a “BAD operator”.

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