IFA Convention & Franchisor's E&O

February 22, 2012

IFA Convention Observation: Franchisor's E&O Insurance Important to Growing Franchise Systems

At the recent IFA Annual Convention I was encouraged by the amount of optimism I heard from franchisors. Financing is improving, same store sales are increasing, unit level economics are getting stronger, and more new and exciting concepts are getting started. This was a strong theme from the Convention and as an industry veteran I was enthused by what I heard.

Another theme that was prevalent was the continued need to manage the issues and challenges that franchisors face as their system grows. I remember sitting at a roundtable and listening as the CEO of an emerging growth franchise concept spoke about the pains they had going from 0-10 locations, and then from 10 up to 60+ locations and everyone else nodding in agreement and support.

Maintaining compliance standards, effectively communicating to a larger geographic group, franchisee selection, operational support and guidance are just a few of the big issues that must be managed carefully, especially during periods of growth. Too often exceptions are made early on, while infrastructure is still being built, that can lead to some corners being cut in the name of progress. By any measure it is important to establish and maintain brand standards from the get go, as trying to put the genie back in the bottle after you have multiple franchisees is far more difficult.

It is for these reasons, and more, that we regularly talk to our clients about the need for Franchisor’s Errors & Omissions insurance coverage (E&O). Franchisor’s E&O is your insurance “backstop” coverage for many of those items you will face as your system grows. The core purpose of this coverage is to protect the franchisor from representations they make in the FDD and the franchise development process. It also provides coverage for alleged errors, omissions or negligence in your professional services to the franchisees. Additionally, we’re often able to broaden this coverage to include items such as vicarious liability as a result of the activities of the franchisees, cyber liability and media coverage. If written properly, with the help of an insurance broker who understands the franchise industry, this becomes invaluable coverage that will help protect your balance sheet as you grow.