How to Get Started Managing Risk in your Franchise System

December 13, 2011

The world of a growing franchisor is a busy, hectic one. You get started with a great concept that validates and you start offering franchises. The good times are here: You have 5, then 10, then 50, then 100 locations and so on. You now have more people and locations representing your brand. However, while that's exciting and good, it often brings with it many issues that should be managed.

One of the issues you will need to address is risk management. Risk management is not simply insurance, and insurance does not equal risk management. Oftentimes I hear from frustrated franchisors after an issue happens. Sadly, many times these issues could have been avoided in the first place or insurance could have been purchased in advance to protect the company. It is important that you, as a growing franchise system, understand where risk is within your system and how you can prevent or reduce risk to protect you and your franchisees. That is risk management in a nutshell.

For example:

  • Based on your concept, do you understand the risk to the franchisees from their business operations? Are you aware of your vicarious liability exposure as a result of your business concept?
  • Do your FDD insurance requirements contemplate this risk, or are they the same standard FDD insurance language seen in 90% of agreements?
  • Are your franchisees in compliance with the FDD insurance requirements? When did you last check?
  • Have you thoroughly reviewed the "moving parts" of your system, like the use of independent contractors, delivery, in-home help, network security/data privacy issues, etc?
  • What is that issue, or issues, that could put your franchisees out of business, and by extension, affect you, as the franchisor, financially and legally? What are you doing about that? (besides hoping and praying)

Franchisors often tell me they can't control the franchisees. As a former franchisee myself, I understand the control issue and will address that in another article. However, you're not exerting control just by knowing where the risks are in your system, how your business concept can impact your brand and what type of risk prevention and insurance program could be put in place to reduce risk and lower costs to your franchisees. That's just good business acumen, and will serve you well for years to come.