Q:
I've been looking into a number of franchise companies. I'm
finding that most of them have had lawsuits with some of their
franchisees. Is there a common denominator for why these suits
occur, and what can I do to avoid this if I become a
franchisee?
A: The
sad fact of life is that we live in a litigious society. Many
Americans believe lawsuits are a fine method to solve disputes. I
know a number of very good franchise attorneys, and they all say
litigation should always be a last resort to conflict resolution.
They also point out that, in most franchise lawsuits, no one really
emerges as a winner. One party may prevail, but the price of
litigation, economic and otherwise, is usually much higher than
either party anticipated.
There are two common reasons litigation occurs in
franchising:
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1. When one party to the franchise agreement believes the
other is not doing whatever they agreed to do under the terms of
the agreement. For instance, the franchisor may initiate
litigation for failure to operate the business under the terms and
conditions of the franchise agreement, for failing to pay ongoing
fees or royalties as specified, for violating the territorial
operating provisions of the agreement or for violating noncompete
provisions.
A franchisee may initiate litigation alleging that the
franchisor has failed to provide the agreed upon support in
relation to any aspect of the initial business setup or has failed
to live up to the terms of the agreement in relation to ongoing
commitments. Franchisee lawsuits often allege that the franchisee
was promised something verbally during the investigation of the
opportunity that later did not materialize.
2. When either party believes the other is conducting itself
in some unanticipated manner that is injurious to its business.
For example, franchisees might initiate litigation if they believe
the franchisor is opening additional units so close to their unit
that the new one will encroach on their business and harm it.
Franchisors may initiate litigation to stop an unanticipated
action of franchisees that they consider injurious to their brand,
such as hiring topless employees to help draw more customers into
the business.
The second half of your question, regarding what you can do to
avoid ending up in litigation, is much more important than the
first. There are three parts to this answer:
- Research. First, make sure you conduct a complete and
thorough investigation of any franchise opportunity before you
invest. This sounds so simple as to be trite, but it is vital. Make
sure you carefully review all disclosure documents and other
material the franchisor delivers to you. Pay special attention to
any disclosed litigation history, and discuss the matters with both
sides if they're willing to talk to you. Call the existing
franchisees and ask them about their experiences resolving conflict
with the franchisor. The really good franchise companies all want
to avoid litigation if at all possible, and you should get a great
sense of their attitude in this area through these calls.
- Get it in writing. Most good franchise companies make
you sign a compliance questionnaire before being accepted as a
franchisee. One issue this questionnaire always addresses is if
anyone promised you anything that varies in any way from the
contract you are about to sign. If the answer is yes, do not
execute the franchise agreement until you have that promise in
writing. This is critical to ensuring you don't end up in
litigation later over whether any such promise existed or what
exactly the promise was.
- Accept responsibility. An absolute truth of franchising
is that your success is not guaranteed. All good franchise systems
have very low failure rates (another factor you'll discover in
your research). If you get into a system where virtually everyone
else is succeeding except you, before you consider litigation, look
in the mirror. Many people who start experiencing difficulty fall
into the trap of looking for someone else to blame. Instead of
doing this, get humble, ask for help and follow the advice of the
franchisor to the letter.
I can guarantee you that no good franchisor wants to be involved
with you on the basis of either failure or litigation and will do
everything it can to avoid both events. This has to be your
attitude as well.
Make sure you do your research, so you know you're getting
into business with people who have these values. This is your best
protection against ending up in litigation as a franchisee.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.