I recently sat on a panel to discuss disputes in franchising and when they may arise. I have for years analogized the franchise relationship to the stages of marriage; starting with the pre-marital courtship, the marriage and at times divorce. Given the length of most franchise arrangements, this is a very appropriate likening.
The reason firms such as mine exist, is to prepare, advise and protect franchisees during those stages. I am forever advising people who are preparing to entire franchising, to seek legal counsel and understand their rights and obligations, so surprises are minimized. Discussed below are the more common speed bumps that may occur;
“Courtship” - Purchasing a Franchise
Characterized by the information and sales process. It is imperative a prospective franchisee learn about the system they are intending to join. Understand the disclosure document, which is the family history, and whether the franchisor has disclosed and registered (if required) properly to allow you to gauge what you are getting involved in. There is homework to be done, not only by the attorney reviewing the opportunity, but also by the prospective franchisee. It is crucial they speak with existing franchisees, visit locations and see if the brand, system, and existing franchisees are satisfied and profitable. The attorney doing your initial review should have some suggested topics for discussion with existing franchisees.
“Marriage” - Fulfilling Contracts
After the signing of the franchise and other agreements the focus shifts to performance and whether the agreement terms are being lived up to. Is the franchisor performing as agreed to and promised. Problems may creep up; franchisors that do not perform as agreed, do not follow through with training, products, place units close to yours and other concerns that may hamper your existing business and it's profitability. This phase is heavily dependent on the terms of your agreement or the lack of terms covering the issue.
“Divorce” - Termination and Non-Renewal
Issues such as non-renewal, non-competes and early termination damages may need to be addressed. Pre-planning is essential, it is not as easy as just closing your doors and walking away.
At any given point one or several of these issues can erupt into legal action. I would stress knowing the system, and the terms of the agreements, prior to moving forward with any business venture is imperative, especially one that has a 10 to 20 year attachment. Don't let the glow and excitement of the new prospective opportunity mask the need to understand and investigate that opportunity fully.
One last point, I believe franchising, given its long contractual relationship, is a natural for mediation when problems arise. Even though a franchise agreement may not call for mediation, I have yet to be turned down by a franchisor when it is suggested as a pre-litigation tool. Like a marriage, there are issues that may need resolution, but at the same time, it is best to do so in a way that preserves the relationship of the parties, allowing both sides to continue to work towards a common goal of profitable results for all. Mediation allows for a neutral to work with the parties to clarify the issues, open up larger more meaningful resolutions, and assist and guide the parties in crafting resolutions that addresses all their interests, instead of a judgment that always leaves one party a loser.