Top Risks Facing Franchises

Posted on: September 2, 2020 by RMS Hospitality

Between favorable real estate, strong performances in the restaurant industry during the COVID-19 outbreak, and low interest rates, Franchise sales are expected to hit record highs in 2021. But while this may sound like good news for someone wanting to branch out into franchising or expand their already-successful business, there are still risks to consider for franchises.

There are chances of going wrong if a franchisee’s search takes too long or important details are overlooked. Even after recruiting a franchisee, there is a hurry to start a new unit as quickly as possible. If this kind of decision goes awry, the scenario moves into a crisis.

Read on to get a better look at some of the top risks facing franchises today.

Regulatory Risk

Franchising is a highly regulated industry, and before buying or selling franchises, a franchise owner needs to ensure they comply with the laws that govern franchises. Franchisees should know about state franchise laws. If a state has not enacted its franchise laws, only the federal franchise rule applies to an individual state. Many states have enacted their own franchise laws and regulations which govern how franchises operate and how they are established.

Once compliance is assured, there are advantages of franchising. However, one slip up when it comes to regulations leads to legal and regulatory risk.

Employer Liabilities

A person working inside a franchise location is indirectly an employee of the business. Depending on the laws and the agreement between them, the franchisor may not have employer liabilities connected to them. There are many employer liabilities toward their employees’ well-being, including safety, breaks, training, and fair pay.

To protect against liabilities and legal risks associated with regulations and funding compliance, the Franchise Select Program is here to help. The Franchise Select Program from RMS Hospitality Group provides financial and legal protection for franchisees and their owners through such coverage as general liability, excess liability, liquor liability, and more. Having this coverage provides peace of mind when working to create a compliant and safe franchise expansion.

Capital Funding Risks

Like every other business expansion type, franchising requires capital funding investment to develop a franchise system and satisfy regulatory obligations. Unfortunately, obtaining capital is difficult in some situations. Also, there is no magic way to receive money and no short cuts to help potential franchisees.

Capital risks are involved when the franchisor doesn’t have the resources to meet its growth plans. A franchisee should closely examine the franchise disclosure document (FDD) to determine just how well-funded the franchisor is. A potential franchisee should run a credit report on both the franchisor and any affiliated companies to get a clear financial picture.

About RMS Hospitality Group

At RMS Hospitality Group, our expertly crafted policies are written specifically for the hospitality industry. We offer custom-tailored solutions to meet any venue’s specific needs. For more information, contact our experts today at (888) 359-8390.

Posted in: Franchise Select

COVID-19 Update:

At RMS and associated firms, business continues as usual. Our staff is remote-capable and available to handle all partners, brokers, and insureds at the present time. Contact us today!