Franchise Encroachment, Part 1

Encroachment Solution

What's the solution?

Kaufmann: As always, the solution to franchisee unhappiness over claimed franchisor "encroachment" is for the franchisee to truly understand-with the assistance of competent franchise counsel-the nature and extent of the territorial protections, if [there are] any. These provisions should be reviewed three times by every prospective franchisee-first in the UFOC, second in the specimen franchise agreement appended to the UFOC and third in the actual franchise agreement executed by the parties. All too often, franchisees later complain of encroachment and suggest they really didn't pay attention to the franchise agreement's territorial provisions before signing the contract. This is truly unfortunate, as realistic expectations-framed by fully and thoroughly understanding the franchise agreement before it's signed-will almost always militate against subsequent franchisee unhappiness over contractual terms.

Zarco: The franchisor that will benefit from additional locations should share in the existing franchisee's decrease of profits. It can do this by making a direct financial contribution, reducing the royalty rates or requiring the new franchisee to pay a portion of its royalties to the affected franchisee. The franchisee nearest the new unit should have the right of first refusal to obtain the new unit based on objective criteria established by the franchisor.

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