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In the national debate surrounding the minimum wage, advocates on both sides of the issue use small franchised businesses like sandwich shops as example of small businesses that will be affected by an increased minimum wage. Opponents argue that these businesses are operating on thin margins and claim any increase in the minimum wage would be disastrous.  Proponents point out that in most large cities, the minimum wage is barely more than half of what a living wage should be.  What gets left out of the debate, is that in many franchised businesses there is at least one employee who not only isn’t making a living wage but likely isn’t making the minimum wage or receiving any wages at all—the franchisee.

A large majority of franchisees open their franchise assuming that they will live on their savings or a spouse’s income until the franchise takes off and they can start taking a reasonable wage for their work.  Unfortunately for a significant percentage of franchisees that day never comes.  Instead they find themselves working 40-60 hours a week in their franchise with no compensation or compensation that is well below minimum wage.   Overtime, sick leave and vacation time are fantasies.

Franchisees who cannot afford to take adequate compensation often find themselves making bad choices simply to keep afloat.  They may tap into (and drain) savings and retirement to put food on the table or to recklessly invest in additional franchises in hopes of achieving economies of scale.  Each bad choice only compounds their losses and pushes them deeper into debt.

Unscrupulous franchisors may also take advantage of unpaid or under paid franchisees to present their system as being more successful than it really is.  An FDD may provide information such as the average labor cost and profits of a franchise outlet.  However if those labor cost are based on the franchisee providing extensive unpaid labor, then they are fundamentally misleading and are not disclosing the real risks of the investment.

The only way a potential franchisee can protect themselves is by carefully and thoroughly interviewing existing and former franchisees about how many hours they work in the franchise and what their compensation is.  Ask for specifics.  An existing franchisee may say that they take compensation for their work but if their compensation is $16,000 annually for sixty hour work weeks, then that franchise may not be a good choice.  Assume that evasions and non-answers mean that the franchisee isn’t taking any compensation.  If you discover that a significant percentage of experienced franchisees (open more than six months) are not taking sufficient compensation, walk away from the franchise.  A franchise system that is not profitable enough to compensate franchisees for their labor is unworthy of your labor and your investment.

Caroline is an associate with the Bundy Law Firm in Kirkland, Washington. She represents franchisors, franchisees and other small business owners in "cradle to grave" business matters, including franchising, real estate, business entity , and litigation. Prior to joining the Bundy Law Firm, Caroline worked for several years as a prosecutor.

This article was republished with permission from Blue MauMau.