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Issues to Consider for Prospective Franchise Owners




by:
Vincent T. Cieslik
Capehart & Scatchard, P.A. - Philadelphia Office

 
May 14, 2014

Previously published on May 2, 2014

Our firm and attorneys have represented franchisees in litigation with their franchisors for years. The franchise style of business, from the franchisor’s point of view, is all about standardization in contracts, services, and products. The franchisor wants and needs uniformity across the board.

Before singing a franchise agreement you should consult with a lawyer. Franchise agreements are typically lengthy, boilerplate agreements, which are slanted heavily in favor of the franchise and against the franchisee. Does the agreement leave you susceptible to lost market share or profits down the road due to new technology or service/product innovations that the franchise may impose without your input or consent? You should find out early in the process how the system works, how pricing is handled, whether the franchisor will assist you in obtaining the best possible price or terms for goods and services, and whether the franchisor makes money in other parts of the system that may create a situation in which their interests are not aligned with yours.

While the franchisor wants standardization and uniformity, from the franchisee’s perspective, it often requires flexibility to meet the demands of the local market, to adjust to swings in the economy, and to take advantage of new trends in business and the industry. Rigid adherence to boilerplate language in a standard agreement is often simply unrealistic. Considering that most franchise agreements are signed without any actual negotiation, and are provided to small business people on a “take it or leave it basis,” the franchisee has to do all they can to protect their own interests on a regular basis.

For starters, communication is key. The franchisee needs to communicate with the home office about issues that arise in business that are affecting operations and profitability. Informing the franchisor after you have already incurred large losses, or after you have failed to meet established standards, is dealing from a position of weakness. Identifying a problem up front so that you can allow the home office to assist you with an issue puts you in a position of strength, because your proactive approach may build good will with the franchise, and even if the franchise refuses to assist you, you have contemporaneously documented their failure to do so.

Communication with other franchisees is also important. You and your counsel may have relationships with other franchisees in neighboring markets. Communicating with them to see if they share the same issues and concerns may give you the ability to approach the franchise as a group. You may be able to press for changes or oppose new changes in the franchise system through a unified voice, charging that the corporate issues unfairly or severely affect your franchises. Open lines of communication allow you to learn what is going on in nearby markets, to ascertain whether other franchises are treated similarly, and to take advantage of concessions that are possibly being made for others.

The phrase “it’s easier to apologize than ask for permission” often comes to mind. Franchisees need to remember that they need to look out for themselves, and must make decisions that serve their own best interests. If they have crucial decisions to make that will impact their franchise agreement, they will likely need to consult with counsel to see if the rewards outweigh the risks of a potential franchise agreement violation. Conferring with counsel also allows you to leverage your position efficiently, particularly if you are a good producer, by facilitating negotiation if you must ask for permission, or by pushing back against an angry franchise representative if you need to act first and ask for forgiveness later.

Documentation, documentation, documentation. You absolutely need to document your conversations with your franchise representative, and given the ubiquity of email, this is easier than ever. You don’t know what conversation or discussion you have today, may impact a dispute with the franchise later. Emails regarding unfavorable market news, thanking a representative for listening to you talk about an issue, or even asking for additional meetings if problems are not being addressed are all important to document.

Once a case heads to court, such emails often assist your counsel in explaining what was happening months or years ago. They may help your counsel “tell the tale” of how you brought legitimate concerns to your franchise representative, and demonstrate whether they did all they could to assist you with your problem. A judge may be more sympathetic to your plight if he or she understands that you raised your concerns and the franchise either ignored you, or acted in its own self-interest to harm your business or profitability. Emails and letters will help verify your side of the story.

Franchisees also need to be wary of the impact of new and competing business lines offered by the franchisor. Do these new lines impact sales and/or territorial rights? Complaints and concerns need to be raised in a timely fashion, well before the new and competing business lines actually and substantially impact profitability. You may have the ability to oppose the entry of these new lines and products into your territory. You may need to go to court to protect yourself and your rights. You should be aware of a trend in the courts which allows the franchisee to assert that the franchisor’s business decisions wronged them, under the “implied covenant of good faith and fair dealing.” These decisions provide that the franchisee can collect damages, even if the letter of the agreement allowed the franchisor to make these decisions, because the franchisor’s decisions adversely impacted the profits that the franchisee reasonably expected, or drastically changed the business model from what the franchisee expected when he or she got involved.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Author
 
Vincent T. Cieslik
Practice Area
 
Franchises
Litigation
 
Capehart & Scatchard, P.A. Overview