Franchise partnerships are ever-changing.
Unfortunately, it is not uncommon for disagreements to arise in a franchise relationship due to unexpected, unilateral changes imposed by your franchisor.
Sometimes these changes can hit you hard. Sometimes they are confusing. These changes can often involve things like menu changes, complete system changes, renovations, logo or signage changes, franchise manuals revisions, etc.
These changes can be costly and time-consuming for new franchisees.
Often, the language within your franchise agreement leaves you wondering whether you must comply with these specific demands or not. At times you wonder if they are even necessary.
What can you do when costly and significant changes need to be implemented?
First, let’s discuss your franchisee vs franchisor rights within a franchise agreement, and then address some of the things you should consider before you sign a franchise agreement or when misunderstandings occur with the franchisor.
Franchise Agreements and Trust
Franchise agreements are a unique business arrangement. In a franchise model, you are buying the rights to use a franchisor’s business model, including its logo and name. This is also referred to as “marketing rights.”
There are many benefits to owning a franchise, such as potential growth with less risk. Less experience may be necessary for the franchisee. However, the toss-up is that you are trusting the business decisions, market/industry knowledge, and control of the franchisor.
The franchisor seems to have the upper hand regarding this ongoing arrangement – and some franchises can be renewed for several terms lasting years!
The franchisee is in a position of trusting the always-changing operations manual, while the franchisor must trust the franchisee’s performance and day-to-day operations.
Franchise Agreement Basics
Franchise law basics: Your franchise agreement is a legally binding contract that is set up to protect the interests of both the franchisee and the franchisor. What information is included in a franchise agreement is critical.
Ideally, franchise contracts clearly lay out the business model, responsibilities of both the franchisor and franchisee, length of the agreement, etc. However, as a franchisee, you are accepting a certain degree of good faith from your franchisor.
When you are buying an existing franchise, you are signing an agreement that implies that the franchisor will utilize “fair and just dealings” in their business practices, in a manner that benefits both parties.
“Every (franchise) contract contains an implied duty of good faith
and fair dealing in the performance
and enforcement of the contract. This duty requires
that neither party will do anything that will
destroy or injure the right of the other
party to receive the benefits of the contract.”
This legal principle means the use of honesty and proper business conduct (and business judgment) by both parties. The franchisee and the franchisor must make every reasonable effort for the successful completion of their franchise requirements and business contract duties.
Consider this Before you Sign
All franchise agreements need to include specific elements, such as clearly laid out territory rights, expected performance standards, and the expected obligations of the franchisor.
Be aware of terms and implied language that permit a franchisor the ability to implement unilateral changes. Specifically, what rights has the franchisor reserved for itself, which may be implemented during the term of the agreement? Is the franchisor overstepping and attempting to make a material change to the terms of the franchise agreement? If so, the franchisor may be breaching the agreement.
Understand that state franchise laws may prevent the franchisor from exercising certain contract rights, as a means of protecting you, the investor.
Protecting the Franchisee
Franchisees need to guard their rights, and not simply and dismissively sign off on an agreement they do not understand. So how can they do this?
Steps to protect yourself as a franchisee:
- Know the Agreement and Manual: A franchisee must understand the terms of the franchise agreement, together with your obligations and that of the franchisor in this governing document; moreover, study the operation manuals to avoid pitfalls.
- Act Quickly: If you feel that your rights have been violated in some manner under the franchise agreement, take quick action. Your right to raise claims will likely be time-barred if not diligently pursued.
- Exercise Your Legal Rights: Reach out to your legal team to discuss any unreasonable franchisor actions or material changes to your franchising model.
- Educate Yourself: Do your due diligence before you commit and spend your money and time! Do everything you can to understand your chosen franchise industry/market, applicable state franchise laws and regulations, and of course, the franchise terms in the agreement.
Protection from the Start
The best means of protecting yourself and your rights as a franchisee is to have your Franchise Disclosure Document (Circular) and Franchise Agreement evaluated by a professional proficient in the area of franchise law.
The legal team at Kilcommons Law is here to ensure that your rights and responsibilities are clear to you from the starting point because ultimately, your success is our success.
- An initial client conference;
- A review of the FDD (including the FA and ADA, if applicable);
- A second conference to advise you on the meaning and import of the documents
- A follow-up with a written bullet list of flagged items.
Kilcommons Law will advise you of any unnecessary restrictions or waiver of rights found in the FDD/ADA, so that you may decide whether to walk away or execute the documents in full awareness of the franchise’s risks.
© Kilcommons Law, P.C. 2023