Worst Franchise Ever

Posted by Joe Caruso  |  category Sales

Alright it wasn't the worst franchise ever. 

Start-up franchisor had been selling franchisees under Area Development Agreements for about 2 1/2 years. The investment ran about $450K a unit including franchise fee. 

They sold 8 Area Development Agreements that had close to 400 unit development commitments.

The Area Developers were not sub-to franchise and were required to directly operate the franchises.

The franchisor seemed to be on solid ground for a start-up since they also had 22 company locations.

It looked very promising! This franchise brand seem ready to take off and be the next McDonald's.

Well not so fast.

The franchisor had some high powered always be closing, do anything to get a sale, sales team who had moved on to greener pasturers. If you could envision the character played by Vin Diesel in "Boiler room" that might fit the type.

Here's what they left behind for the new team:

The Area Development Agreements had been executed by faxing the the front page and signature page then filed with a printed development schedule. That's all that was in the file. Nothing else, no applications, background checks, etc... When it came to disclosure document Item 23 Acknowledgement Receipts in most cases they were missing with some found in a pile in a desk drawer. 

Oh wait there was one more thing in the franchise file, a promissory note. Yes there were 10 year promissory notes for the Area Development Fees and the Area Development Agreements were for 10 year terms. 

Typically franchisors who sell Area Development Agreements charge a fee of $10K or more per unit franchise in the development schedule to be later applied against the each unit franchise agreement executed.

A 25 unit deal would be $250K upfront paid in full and fully earned. Not here, this franchisor took $0 down and the Area Developer paid over time.

Not surprisingly as it turned out the Area Developers stop making their payments and also didn't build out the their markets. They weren't fully committed to developing the franchise.

The new franchising team over the next 10 months worked with each Area Developer to mutually terminate the Area Development Agreements. 

Once this fix was done the franchisor started over selling franchises.

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January 22, 2014 10:59 PM