Delays Have Dangerous Ends (or Denial Never Works)

A successful franchise usually (but not always) means there is a successful relationship with the franchisor as well. As an attorney, I consider it successful when, once signed, the franchise agreement is filed away and never looked at again, except to replace it with the renewal agreement.

When business is good and the franchisor-franchisee relationship is positive, the contract doesn’t matter. If things go south, it’s all you have. Too often franchisees are so caught up in the struggle to make their business profitable and keep it going, that they put off addressing core problems involving the franchise. They just cannot seem to find enough time to deal with difficult underlying issues.

Procrastination does not solve problems. Or turn a business around. Too often the clock is ticking on the remedies available to franchisees in trouble. While not perfect or always applicable, there are laws and contract provisions that can sometimes help. But sooner rather than later. Problems in a franchise relationship take action, not procrastination to solve positively, before the situation becomes irreconcilable.

The dynamics of each franchise relationship are unique: Franchisor leadership, fundamental viability of the business concept, situational viability of an individual franchise unit, new versus established franchise system. All these factors and more will affect how any given situation should be addressed.

Not everyone is suited to be a franchisee. Some are not naturally followers and will chafe at the restrictions of uniformity and control imposed by a franchise system. Where that is the case, then inevitably constant problems and disagreements will develop, if not outright disputes. In those situations, usually the best hope for a positive result is either find a way to negotiate a mutually agreeable parting of the ways, or sell the franchise to a suitable buyer. The franchisor should be highly motivated to help.

For the typical franchisee, however, who looks to the franchisor for guidance and support, problems where a franchisee will — at some point — seek legal advice generally fall into the following categories:

  1. The franchisor does something that either affects the franchisee’s bottom line or is perceived to narrow or otherwise eliminate rights the franchisee has.
    Example: reducing or in some way infringing on territorial or customer rights
  2. The franchisor refuses to take action that the franchisee believes it should take.
    Example: other franchisee sells inside another’s exclusive territory and only franchisor entitled to enforce exclusivity
  3. The franchised business stops being profitable after some period of time, and the franchisee wants the franchisor to help or let it out.
    Example: Core product or service either goes out of style or is superseded by new technology and cannot generate revenue necessary to support royalties;
  4. The franchised business never makes money, perhaps has not achieved breakeven and doesn’t appear likely to do so.
    Example: Start-up franchise with insufficient time in the marketplace to identify how to drive business in other regions of the country, poor location

Let’s take the worse case scenario, and the franchisee finally decides to seek legal advice.

A close review of the franchise agreement and read all the exhibits and any other agreements and forms that have been signed with the franchisor may present a few surprises.

What is the franchise agreement likely to say? Typical provisions are:

  1. Waiver: franchise agreements usually provide that just because a franchisor hasn’t enforced a requirement previously doesn’t mean it can’t start.
  2. Venue: Generally means what it says. Litigation or arbitration will be where dictated in the in the agreement. (There are some exceptions, but usually involving unique facts.)
  3. Dispute Resolution: Before you get to a binding forum for litigation or arbitration, most require you to mediate and split the costs. (Not necessarily a bad thing.)
    Arbitration: Afterwards, binding arbitration is required and the initial complainant pays a large filing fee, determined by the amount claimed as damages.
    Litigation: Jury trial has usually been waived.
  4. Statute of Limitations: Claims do not last forever, whatever they might be. The cut-off is created under various types of statutes of limitations that fall into two categories:
    By law: 4 years for breach of contract, 2 years for typical tort claims (e.g. interference with business relations, fraud, misrepresentation, 2 years for the typical deceptive trade practices violations; 2 years for violations of any applicable state franchise or business opportunity law.
    By contract: Many franchise agreements, especially those in recent years, create their own statute of limitations, typically two years, sometimes even one year for any claims ‘arising out of or in any way connected to’ the franchise or the franchise agreement.
  5. Default and Termination. If a dispute reaches crisis point, these are the provisions that count. On a closing reading of the wording, franchisees are often unpleasantly surprised to learn how broadly the franchisor may interpret certain terms. These terms give the franchisor the power to terminate the franchise, resulting in the franchisee’s loss of its investment.

Obviously ‘boilerplate’ matters, when things go wrong. When a franchisee delays understanding and addressing problems fundamental to the success of their business, or their relationship with the franchisor, they will invariably be left with fewer options and less likelihood of a favorable result.

If you have signed a franchise agreement, do yourself a favor, sit down with a strong cup of coffee and read it again. Unclear? Talk it over with your lawyer, your franchisor, your business advisor. Know where you stand and you will be better able to choose a direction that can lead to success.

–© Kat Tidd, 2005