Management Case Study; Franchisor Temporary Assignment of Outlet to Transfer as Existing Unit
Due to issues with renewals of franchise applications for registration to sell franchises in a registration state some Franchisor's are between sales and a registration deadlines are delay by regulators. This causes a severe issue and it is happening more and more often. Why is this happening? Well, one reason is there are fewer accounting agencies willing to do audits due to the over regulation in the accounting industry, yours and all missions insurance, as well as issues with peer-reviews.
Due to the Sarbaines Oxley laws fewer accounting companies wish to do audits and to the accounting costs have skyrocketed. This is causing a ripple effect in the franchising industry for registration renewals on a timely basis. When a franchising company is in the middle of a sale or transfer to a new franchisee this puts them into a gray area of law. If they are not registered in the state at the time of the sale then they are supposedly to go dark. But you can not simply turn off a sale in the middle of the process otherwise the franchisee might sue you.
Some Franchisors have temporarily assigned franchised units to third parties, family members or company employees to avoid this issue and take advantage of a gray area of law. If a particular outlet is being terminated for cause, abandoned, in non-renewal, probate, transferring or being sold as new during the lapse in the renewal process with the state register then the Franchisor has to scramble in order to keep the deal alive, the outlet open and the new franchisee to take over.
Unfortunately, this is a result of the law of unintended consequences and it is putting Franchisors at legal and financial risk. It seems that the more laws, rules and regulations, which are made the more it in hurts the franchising model, which really does not need any rules and regulations anyway because it self regulates due to the business model structure.
For instance if a Franchisor sells businesses that do not work those businesses and outlets will go out of business and there before the Franchisor will go out of business because no one will buy the franchises anymore and there will be no royalty stream coming in.
Neverheless, regulators keep making a mess out of the franchising industry and then more cases end up in court and it is a self-fulfilling prophecy that Franchisors need to be regulated because they broke a gray area of law, which they were forced into by onerous regulations in the first place. Please consider this in 2006.