Franchising continues to be a popular path to business success but managing the risk can be difficult and unnerving. Understanding your exposures and procuring the right insurance coverage is key to franchisee success.
The franchise business model continues to be popular and often times very successful model across the country. While the industry presents significant opportunities for budding entrepreneurs and investors, risk remains. Franchisees that proactively take steps to understand their exposures and manage that risk will position themselves to succeed. One of the most critical challenges is properly understanding and maintaining federally mandated franchise disclosure documents (FDDs) and using those documents to inform risk management.
- About 80% of hotels in the U.S. are franchise operations,1and the overall number of franchise establishments reached 790,000 in 2022 and is expected to grow nearly 2% by the end of 2023.2
- Quick-serve brands are setting the pace and projected to increase 2.5% in 2023 to 192,057 units globally, while full-service restaurants are expected to top 33,000 locations in 2023.3
A franchisee’s success is often dependent on the strength of its partnership with the franchisor, and numerous franchise rules and regulations that vary by state can make compliance a challenge. Unlike sole proprietors, franchise owners must adhere to specific requirements and business operations that are set up with the franchisor. These distinctions, such as monthly financial reports, data analysis, franchise fees and royalties, can lead to incompliance, thus creating risk within the franchise agreement.
With a wide range of exposures involved in running a franchise, franchisees need to ensure they’re adequately protected from a number of risks. The starting place for managing exposures is a thorough review of the FDD, which outlines all required business activities. While most of these activities will be covered under the required franchise insurance policies, some will not — and those will need to be considered in your overall risk management strategy.
To position your franchise for success, you should:
- Check your coverages.Most franchises will need insurance that covers risks related to protecting the building, inviting customers to the premise, employing workers and providing products. Make sure you have coverage through either the franchise insurance policy or supplemental policies for public liability, workers’ safety, product liability, property and auto. Review insurance policies against the FDD to ensure they plug any coverage gaps and list the franchisor as an additional insured on franchisee policies.
- Develop a timeline for FDD review and compliance.With renewals required annually, this timeline should outline deadlines for insurance certificate tracking and compliance and franchisee registration renewals. Include the time required to fulfill those renewal and tracking requirements, and designate hours for compiling franchise program changes for the FDD.
- Strategically review the FDD and make sure any legal or legislative changes are addressed. Areas that could be affected by state or municipal law changes or court decisions include wage and hour policies, noncompete and arbitration agreements, tax reporting obligations and digital marketing restrictions.
- Use the FDD to create a risk management plan. Consider not only commercial risk but also issues such as recruiting, training and support, performance monitoring and a formal franchise dispute management process.
- Implement technology to help manage the process. New products are being introduced every year to help franchisees easily manage their FDD and risk management programs. A knowledgeable broker can point you to solutions to help track the many obligations franchisees face each year.
It’s important to speak with an experienced hospitality insurance specialist to learn more about franchise risk and the coverage required to make your franchise a success.