News reports in 2018 showed KFC restaurants across the UK turning customers away, due to the seemingly impossible event that they ran out of chicken. Aside from presenting some bad PR for the Kentucky fried company, the situation with KFC highlights some wider issues for franchisees to be aware of.
Being a franchisee might sound like a safe option for a start-up, as you can leverage an established brand with an ‘out of the box’ business solution but in fact comes with many perils.
As with KFC, the franchisor will usually tie you into buying products only from its preferred suppliers, on the basis that it seeks conformity and quality, but what happens if, like in the KFC case, the supplier lets you down? Can you suffer a quiet period?
Often, you will have forked out a heavy initial fee for the franchise, which you are still trying to recoup, made more difficult because you are paying a chunk of your profits each month to the franchisor.
If you fall behind in your payments, you will be in breach of the agreement, and the franchisor may terminate it. They may even enforce a restrictive covenant which prevents you from carrying on at your premises, or even other premises, under a different brand.
You may find you have no livelihood, and have employees you need to lay off. The franchisor will often have ‘step-in’ rights allowing it to take over your business and your premises, but the amount they have to pay will often be limited to the value of the assets, not the full market value. You may even find that your franchisor charges you a fine, or sues you, for breach of contract.
Franchise agreements can be a complex world to navigate and the wider implications to your business can be damaging if you do not fully understand your responsibilities and obligations.
The terms of franchise agreements are all too often drafted heavily in favour of the franchisor so it’s important to be sure you know what you’re getting into before you sign on the dotted line.
For expert guidance and support in all franchise matters, get in touch with our Corporate and Commercial Solicitors.