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Existing Franchisee Issues

My Franchisor Won't Listen to Me!

Ok, every Franchisee feels this way from time to time. Sometimes it's justified, sometimes not. Generally, Franchisees who are in this situation want 1 of 3 things from their franchisor: 1-Help me market by paying for extra services; 2-Reduce or waive my royalties because I can't afford it; 3-Let me out of my franchise agreement completely. Any Franchisee-exclusive practice attorney will tell you that you have a great litigation case and collect a big retainer, but probably not give you an objective view of the entire picture. I have spent many years as in house general counsel for several franchisors, and I know how they operate, how they treat those requests, and I will give you the straight scoop on what you can expect and what you should not expect.  I know that you have a lot of questions about California franchises, and I'm here to help.

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If you are an existing franchisee with concerns about the 3 issues above, here are some general observations you must keep in mind.

I Want My Franchisor To Help Me Market By Paying For Extra Services

Actually, this isn't as outlandish as it seems of a request. Franchisors may actually be receptive to this, or even have a program in place for this kind of support. However this kind of request would likely only be granted after you have met several times with your corporate representative(s) and implemented his or her recommendations. Also, cooperative communication is a must. Franchisors are more than willing to help struggling Franchisees who have been open and upfront with their communication and cooperation. The Franchisor wants nothing more than to see you turn your business around if there are some easily addressed problems which are temporary. Please schedule a Strategic Planning Session if you are in this situation and need more customized strategic advice.

I Want My Franchisor To Reduce Or Waive My Royalties

This request is much more difficult for a Franchisor to give you because then they will have set a precedent for other Franchisees. It is with this hopeful outcome in mind that Franchisees go to a Franchisee-exclusive attorney to hear them tell them what a perfect litigation case they have for lack of services. Be VERY careful here. Once you become an adversary to your Franchisor, it is very unlikely you will see anything close to what you were told would happen, particularly if your "case" is just for intimidation purposes to try and get your Franchisor to settle. Remember Franchisors are wiling to help a struggling Franchisee when there is open and honest communication. If cash flow is your only problem, Franchisors will likely be wiling to restructure your debt and defer payments. Rarely will a Franchisor waive or reduce any royalties. And, if your case is a good litigation case, you'll need to set aside well more than your royalties amount for about a 2 year period to pay your litigation attorney. And the Franchisor will likely have attorneys on staff to deal with you. Also, remember protracted litigation significantly takes away from running your business, with major distractions, in addition to the cash strain. Litigation is never the answer and only costs both sides. The better course is to seek out a good negotiation of the salient points and come to a fair resolution. Franchisors are more than willing to meet and work out any failure on their part by offering other, more substantial services in exchange. This type of resolution is the best outcome for both parties, as you will get a better deal than any litigation would get you, and at a much lower cost. A Franchisee-exclusive attorney will not do this, he or she will simply write a nasty letter accusing the Franchisor of a bunch of unsupportable claims, with threats of litigation, in an attempt to intimidate the Franchisor to come to the table with overly unreasonable demands. This will only get a reply from the Franchisor's in house counsel pointing out all the inaccuracies in the Franchisee-attorney's letter, and then demanding the Franchisee immediately cure his own defaults. Of course every situation is unique and a Strategic Planning Session will give you a VERY objective viewpoint of your situation and options.

I Want My Franchisor to Let Me Out of My Franchise Agreement

All of the comments on the point about waiving royalties apply here. This request is again usually the ultimate demand in the Franchisee-exclusive attorney's promise to you. Rarely will this request be granted, absent some serious violation on the Franchisor's part. And you will more likely be able to negotiate this without an attorney writing nasty letters accusing the Franchisor of unsupported claims. This request has frequently been made in connection with a franchisee who wants to sell his business but the buyer doesn't want the franchise. By just making this demand, claiming there is no choice, is not a viable strategy. The Franchisor should have an opportunity to meet with the buyer to go over the franchise program and work through the buyer's objections, that you can not. Again, open and upfront communication. The Franchisor might even be wiling to make some concessions to you and/or the buyer at this point if it looks promising. If you just want out of your Franchise Agreement because you can not make money with the royalty obligation, again Franchisors understand the cash flow issue and will be more than willing to find ways that work for you both. The last thing your Franchisor wants is to have you close up shop. The Franchisor may be wiling to divert additional resources to your store to help you get more profitable. Be careful about trying to invoke your Franchisor to just terminate the Franchise Agreement as there are generally post term non-competition prohibitions or other obligations enforceable in a lot of states, which you will not be able to live with upon termination if you want to stay in the same business. Caution about the Do-It-Yourself solution of closing up shop and re-opening in another name: Franchisors are generally vehement about going after Franchisees who simply purport to close, yet open up an independent shop, in a relative's name or similar attempt to circumvent the Franchise Agreement. This action will most likely buy you the litigation you wanted to avoid.

In general, the best way to work out any deal with your Franchisor, is to be straight forward. You have heard, you'll attract more flies with honey than vinegar. This is true in the Franchisor-Franchisee relationship. The best advice to remember is that Franchisors will deal with you fairly and to your advantage as long as you have been open with them about your situation and sincere in your requests for help. A Strategic Planning Session with me can give you significant guidance on your real options, and ramifications of different courses of action.

What if My Franchisor has Materially Defaulted but Won't Admit it or Work With Me?

If your Franchise Agreement contains a mandatory arbitration clause (requiring arbitration to settle all disputes), by all means utilize the arbitration process to vet out and resolve all the issues. If your Franchise Agreement does not have a mandatory arbitration clause, you can see if the Franchisor is amenable to nevertheless submitting the dispute to be settled by mandatory arbitration. Generally, arbitration is quicker and cheaper, and doesn't use formal litigation rules. You can present the case yourself if you want, without an attorney. Or work out a set price with an attorney so you are not on the hourly clock. If the Franchisor does not agree to arbitration, request the Franchisor to participate in formal mediation, which is generally even less costly than arbitration. If the Franchisor still refuses, then you have various options. Simply stop paying your fees (pay the fees into an escrow to maintain your appearance of no default) should get their attention, which would result in some dispute resolution process. If the problem is system wide, get together with other franchisees to exchange ideas and potentially share in costs for your potential litigation. However, if the Franchisor problem is serious and system wide and the Franchisor just ignores the situation, the system will likely implode at some point so funding litigation will be a waste of money if the Franchisor files bankruptcy. Instead, look at ways you will be able to maintain your business without Franchisor support. If a Franchisor filed bankruptcy, there are numerous options depending on the type of bankruptcy case. Please schedule a Strategic Planning Session immediately if you believe you are in this situation.

New California Franchisees

If you are a new Franchisee based in California or considering a California franchise you will need the guidance of an experienced and proven franchise law lawyer who has more than 30 years experience. I will help you to understand the Franchise Disclosure Document or FDD, answer any questions you have about forming your new company, and help you to negotiate your new franchise agreement. You are planning a business that will provide for your foreseeable future, isn't it important to ensure that you start out on the best possible footing?

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When you need a franchise attorney, contact me online or call 949-415-2677 to arrange a consultation.

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