Shrinking spa chain Planet Beach is suing a Mississippi franchisee who allegedly walked away from her franchise, demanding royalties she would have paid if her tanning salon had stayed open. The company charges in court papers that Marie Porter “abandoned” her Biloxi unit and is demanding she pay royalties for the remaining nine years of her franchise agreement – plus attorney’s fees and “additional sums arising from and related to Defendants’ damage to Plaintiff’s brand and the resulting loss of goodwill.”
Porter is not alone in closing up shop. Although Planet Beach touts itself as “the future of the spa industry,” a wave of closures has hit its franchisees, who have shuttered 85 outlets in the last three years. That represents 30 percent of the chain’s 280 units at the start of 2012, according to the Planet Beach Franchise Disclosure Document.
The Wall Street Journal reported that the Small Business Administration had charged off over $10 million in loans to Planet Beach franchisees over a 10-year period. WeAreMainSt research also shows rising failure rates on SBA loans to franchised businesses. Please let us know what you think about the risks and financial pressures in your franchise system.
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Some franchisors, including some of the biggest, have failed to accurately disclose in their Franchise Disclosure Documents a key indicator of the health of a franchise system: the system’s annual unit growth. This can make it difficult for prospective franchisees to assess the likely success of a franchise before investing.
Growth in franchised units can be calculated in two ways from the numbers in Item 20 of the FDD, and those two methods failed to match in at least one year’s FDD for 7-Eleven, Dunkin’ Donuts, Subway and Little Caesars, among the 310 franchised systems with inaccurate data analyzed by FranchiseGrade.com. That’s 12.8% of systems of the over 2,400 systems reviewed by the research firm.
Highlighting the accuracy problem, Blue Mau Mau recently reported that franchisor Famous Dave’s of America disclosed three different numbers for the count of franchised units in its system.
While such errors may seem harmless, the erroneous reporting of unit growth means that some franchisors are providing a confusing picture of the health and growth of their systems.
Did you decide to invest in your franchise system based on information you think was inaccurate?
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Imagine your franchisor fails to counter a challenge from a major competitor, and you go from being a leader to an also-ran in your market. You might wish your franchisor would compensate you for your lost business, but you know that would never happen. Yet on April 15 an appeals court awarded $18 million to 21 former Dunkin’ Donuts franchisees in Quebec for Dunkin’s failure to “protect and enhance” the Dunkin’ Donuts brand in the Canadian province. Some experts think the decision could ultimately improve franchisee rights in the United States as well.
The former Dunkin’ franchisees sued after Dunkin’ lost almost two thirds of its Quebec market share to Tim Hortons. They claimed they had urged Dunkin’ management to do something about the “Tim Hortons phenomenon” as the rival coffee-and-donuts chain grew from 60 stores to over 300 in the province, but that Dunkin’ was unsupportive and unresponsive.
The Quebec Court of Appeal upheld a lower court ruling that the franchise agreements between Dunkin’ and the franchisees required the franchisor to take “reasonable efforts to protect the brand.” This makes sense, since franchisees pay royalties partly for access to the franchisor’s brand,
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