It takes time and an enormous amount of money to open a franchise business.
Smart franchisee investors take years searching for the right franchise industry and best Franchisors in that industry, then pare them down to one or two which are most appealing to them and fit within their investment budget. Once the vetting process with the Franchisor is completed (and I would hope this process includes a review of your FDD by an experienced franchise attorney – hint, hint [shameless]), and the Franchise Agreement is signed, you then have the start-up issues to address. If you are opening a brick-and-mortar site or need an office, then you will have the land to purchase or lease. Then the contractors, etc. The process involves months and months of work until you open the business and begin generating revenue.
Now, what happens if after all that investment in time and money you run into serious problems with the Franchisor? How do you deal with this without losing your shirt in the process – and your sanity? Yes, the Franchise Agreement will list resolution options: mediation, arbitration and/or franchise litigation. But a critically important question is when to pull the lever on dispute resolution options – or whether to do so at all. When the Franchisee/Franchisor relationship reaches the point where formal dispute resolution is required, then there is a very good likelihood that the whole venture with this Franchisor is over. This means you, the Franchisee, have lost valuable time and money. Such a loss could be difficult to survive, financially.
In certain disputes, it may be possible to recover some or all of your investment, but it would be necessary to make a convincing argument that the Franchisor clearly breached the agreement or committed fraud by misrepresenting material aspects of the transaction to you. These can be, and often are difficult situations, and there is no guarantee that once you spend the money on dispute resolution, you will be better off – or even back in the position where you started before the Franchise Agreement (FA) was inked.
The take-away here — avoid disputes in the first place! Yes, franchise investments all involve risk, as does any business venture, but it is critical that you minimize the risks as much as possible. You can minimize the risks by following these steps:
Can you run a business? Be honest with yourself. Do you have the skills to do so, which includes knowing how to manage employees and money? Don’t expect the Franchisor to back fill these skills gaps. Also, any good Franchisor will want to vet you to ensure that you possess basic business skills to run the best franchise business, and that you have a good work/life ethic. If the answer to the question is no, you do not have these skills, then start at square-one and build-up the skills and gain the necessary experience. You need a solid business foundation before you begin this franchise journey.
Determine which franchise industry best suits you. It should be a product or service with which you really enjoy working. Consider this – you will be signing-on for a 5, 10 or possibly even a 20-year contract term, so you had better enjoy what you are doing, as well as the people you will be working with.
Do your due diligence!! (See item 1 re: basic business skills.) Know the franchise industry inside and out and learn as much about the Franchisor as you possibly can before you make contact with them. Because, as you can see, there can be franchise risk!
Talk with the Franchisor’s representatives (ask to speak with the founder, too) about the franchise operations for as long as you need in order to address your questions/concerns. Be wary of the sales people whom pressure you to sign the FA using some arbitrary deadline, or employ the tactic involving an unnamed potential franchisee who’s looking at the same territory as you. Perhaps they will use the winter season favorite — hurry and sign the current FA and pay the Initial Franchise Fee before the new FDD is released (which will include higher fees); or, lastly, they’ll urge you to sign and pay now to get into the Franchisor’s next training session, etc., etc. You get the point.”Boiler room” sales tactics like this are clear red flags to you. Be cautious and take your time. There are thousands of franchise opportunities to choose from and you do have leverage with many Franchisors, so maintain control of the negotiations to ensure you make the best franchise investment.
What is the Franchisor’s culture like? Is it still run by the founder or have professional managers/investors bought the franchise? These two ownership classes can lead to very different experiences for the Franchisee. My sense is that most Franchisees prefer to work with the founding entrepreneurs, who often keep the big picture in mind (What is best for the customer, they ask? As opposed to maximizing profits for the shareholders of the investment group) and are good leaders and communicators.
Learn the franchise system. Talk to as many current Franchisees in the system as possible to learn what franchising involves – before you sign the FA. (Again, due diligence.)
More about communications, if you run into serious problems once you open the franchise unit, communicate with the Franchisor ASAP. Put your concerns in writing (I am surprised by how far down the rocky road parties will go when having a disagreement, before either party puts the issues in writing.) A written communication lessens the possibility of misunderstanding, and compels the need to consider the concerns and then respond in kind. So, if your phone conferences are not working to resolve the problem, write to the Franchisor by email, and, if necessary, then by regular mail (and if really serious, registered with a returned receipt).
Getting to the heart of the issue, you need to be proactive in addressing problems with the Franchisor. Be firm and direct, but respectful. You have invested way too much to have it all burn-down before you have made the business a success by recovering your investment and making a profit. In other words, do not be quick to threaten or pursue formal dispute resolution. Once you have reached that level of rancor with the Franchisor, the bridge between you is pretty much burnt.
Case study (a lesson in Caution):
Here is a brief account of a Franchisee that nearly lost its substantial investment, which started with unacceptable conduct by one of the Franchisor’s employees, along with the aggressive, yet understandable, response by the Franchisee in reaction to the regrettable conduct. Add to this mix, poor legal advice, which had the effect of pouring gasoline on the fire.
The industry: Fast food.
The Franchisee: Owned more than one franchise unit within the franchise system for several years.
Location: This is confidential, but necessary to understand that the territory was in a semi-urban area near a thriving US metropolis.
Issue: Franchise was having difficulty finding a location for a new franchise unit. More than once, sites fell-through after initial negotiations to purchase/lease. The Franchisee was anxious and concerned that the Franchisor might have been favoring a long-time, successful franchisee, as that franchisee had scooped-up one of the prime sites in the same area the Franchisee had been searching.
So what blew this up into a full dispute? Unacceptable conduct by a Franchisor employee who offended the Franchisee in a racial-based context and in the presence of one of the principals of the Franchisee and other Franchisor employees. Franchisee was concerned that the offending employee was projecting an attitude reflective of Franchisor’s corporate culture, and further, that this was resulting in a restriction of the Franchisee’s ability to grow its holdings within the franchise system. Added to this concern, an already poor relationship between the Franchisee and the Franchisor-approved realtor.
And now for the gas on the fire. An attorney specializing in discrimination law – rather than franchise law — advised the Franchisee that it had a civil rights claim against the Franchisor. Subsequently, the parties went to mediation (preceded by long briefs), where the discrimination issue overshadowed the negotiations. The mediation was not successful. The Franchisor was incensed by the allegations, which they firmly denied. Furthermore, at the time of mediation, the Franchisee was not aware that the Civil Rights Act protections and remedies did not apply to corporations – only individuals within the identified protected class. The Franchisee was a corporation, which was not a protected class. This negligent legal advice cost the Franchisee thousands of dollars in legal fees and travel expenses to the state where the Franchisor was headquartered. Worse still, the allegations and mediation nearly ruined the relationship with the Franchisor. However, the true cost of such a failure would have been exponentially worse than merely the mediation costs, given the time and money invested by the Franchisee in the franchise system up to that point in time.
Fortunately, with a change of legal counsel and many hours of negotiations between that attorney and the Franchisor’s counsel, the parties were able to resolve the dispute and mend their bridge. Today, the Franchisee remains in the franchise system and is expanding its holdings.
This dispute is an example of why Franchisor-Franchisee disputes need to be avoided, first thorough due diligence and thorough contract review; and second, by effective communication between the parties. Any disputed issues need to be clearly framed and addressed as soon as possible to avoid greater problems, which often happens when issues fester. Moreover, Franchisors need to timely respond to Franchisees’ concerns and not allow the bureaucracy of its system prevent these concerns from reaching those with authority to solve the issues.
Best wishes for a smooth, enjoyable and profitable franchise investment!
© Kilcommons Law, P.C. 2024