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Posts tagged "franchisee"

Can My Franchisor Make Me Participate in Groupon?

A recent client came to me with the issue that their Franchisor is "forcing them" to participate in a network wide Groupon ad, which will in effect cost my client $5000 in lost revenue, and in which she absolutely does not want to participate. Further, the Franchisor claims he (the CEO) can sign for my client if she refuses to sign. She (and many of the other franchisees) are up in arms about this. After reviewing her Franchise agreement and the Franchise Disclosure Document, I confirmed that there is nothing in either document which states this obligation. The Franchisor's position is that this is "marketing method" that they have every right to require. Not so fast. Contractual obligations must be in the contract I.e. the franchise agreement, or at a minimum disclosed in the Franchise Disclosure document as being something the franchisor may require. Furthermore, signing the franchisee's name to something which the franchisee is (allegedly) required to sign, must also be authorized in the franchise agreement. In this situation the franchisor is way out of line in both its position and its claim for authority to sign on behalf of the franchisee. Unless there is a specified contractual obligation, any discounted programs or promotions in a franchise system MUST be optional and for "participating locations only." Franchisees may not be "forced" to participate in a discount or promotional program without their agreement, or if part of a cooperative advertising group, in accordance with the rules of that cooperative. And the Franchisor simply can NOT sign a franchisees name to something, without an express power of attorney or other authorization. Do not be intimidated by a franchisor's insistence they are correct. Seek counsel from an experienced franchise attorney to determine your rights.

What is a First Right of Refusal and When would a Franchisor exercise a First Right of Refusal?

A first right of refusal is an option retained by the franchisor, to meet the purchase price and terms of a potential sale that a franchisee enters into with a potential buyer. In other words, say a franchisee negotiates to sell his franchised business at a certain price on certain terms, the franchisor can choose to exercise it's option and become the buyer, effectively knocking out the original buyer. Why would a franchisor do this? Generally for 2 reasons. Unlike the previous blog on an overpriced sale, the situation where the price agreed to is so under market and so low as not supported by any stretch of the imagination given the sales of the company and the asset to debt position, and the franchisor simply does not want the franchisee to "give away" the business, and will choose to meet the price and terms, to either retain the unit as a company owned, or to re-sell it at market price. The other reason would be that the franchisor is simply trying to build up its company owned set of units with already existing base of sales. It is also possible that the franchisor does not want a particular buyer as an owner in its system, such as someone related to a competitor. In general franchisors do not frequently exercise this option although it is in virtually all franchise agreements, just in case. Usually there is a time period allowed for the franchisor to make this decision. If the franchisee and buyer seek to close the transaction sooner, they can ask that the franchisor waive its right of first refusal right away. It is important to consult a franchisee attorney to assist in the sale of a franchise in order to avoid any surprises which the franchisor may have the right to insist upon. I am a California Franchise attorney with over 25 years experience in the purchase and sale of franchises and will protect YOUR interests.

Can a Franchisor NOT Approve a Franchisee's Qualified Buyer Based on Too High of Price?

Recently I answered the question from a franchisee looking to sell his franchise, can a Franchisor's not approve a qualified buyer on the basis that the franchisee's price was "too high"? The franchisee was virtually dumbfounded that a franchisor would nix a sale based on a too high price when the buyer was very qualified. While this seems at first to be shocking and unreasonable-how can a franchisor dictate what price a buyer and seller agree on, I went through the scenario as I believe was the franchisor's position. First, all franchise agreements do require the franchisor's consent to any proposed sale. The franchisor wants to be sure the buyer has the financial qualifications and resources to not only complete the purchase but to operate the business as a new owner taking time to get up to speed. The franchisor is aware that the new owner will likely lose a percentage of customers who had personal relationships with the departing owner, so there could be an initial dip in sales which may not recover right away. In the situation of this franchisee, the Franchisor may have been more aware of the financial strain the monthly debt financing of a very above market price could have on the cash flow of the day to day operations. Additionally the Franchisor would likely have been concerned with liability from the BUYER down the road when cash flow could not be improved fast enough, for approving the sale knowing the price was so much higher than it should have been, and how that debt financing would impact the buyer's probability of failure. Franchisor's will very rarely deny a sale of a qualified buyer since it is in everyone's best interests to have a sale proceed with a new, eager franchisee. But when the price is so far out of "reasonableness" the Franchisor has to take a step back and make that difficult decision, since if it approves such a sale, the chances of failure are too high. On the other hand, if the price were just a bit high or a "top price" that is probably not enough to justify a Franchisor denial, absent other facts that would support the denial. If you are a franchisee needing to sell and have a buyer that your franchisor is denying for what may be an unreasonable basis call an experienced franchise attorney, such as my self, right away to go over your specific situation.

Litigation Involving Franchise Earnings Estimates or Earnings Claims in California

One of the largest areas of disputes between the franchisor and franchisee relates to what are known as "earnings claims" - the estimate of what the franchisee will earn by purchasing the franchise. When things don't go quite according to plan the relationship between the franchisor and franchisee becomes strained. Franchisees will often point to claims made by the franchisor or their representation during the time of their initial discussions prior to the purchase of the franchise itself. They may claim that the franchisor or their representative(s) overpromised or exaggerated earnings estimates, and attempt to use this as the basis for a lawsuit.

Do I have to go to arbitration in my franchisor's home state, across the country?

Will an arbitration case be in the home state of the franchisor instead of California?  Not always. Many state's laws trump what's in the franchise agreement. Depending on the state the franchisee is located, that state law may overrule arbitration required locations outside the franchisee's state, regardless of the franchise agreement says. It is imperative that you have an experienced franchise arbitration attorney review both your franchise agreement and your states franchise laws once you are notified of a new arbitration against you. If the franchisor has to come across the country because of your state's laws, they may not want to do that, particularly if they have to drag 3 corporate witness and stay for 2 nights. If your state favors local arbitration and you have defenses and claims perhaps YOU as the franchisee may want to initiate an arbitration rather than having to react to a franchisor's demand for arbitration in an inconvenient location. If your state law is not in your favor, there are still potential solutions that may allow you to stay put such as determining if the franchisor potentially violated registration or disclosure laws Franchise law is highly regulatory and attention to detail is necessary. Sometimes those details are missed. This gives you the franchisee alternative arguments, for example where the franchisor has not given you a proper Franchise Disclosure Document with some state required extra language, or contains the required audited financial statements, or other current information which may contain errors. You may have more alternatives that you think on your side. Call me today for a review of your situation.

What is arbitration anyway?

Arbitration is an expedited and less expensive process for a dispute to get resolved. Mandatory arbitration is used in many industries and becoming the norm for franchise agreements. Franchisors utilize arbitration as a quick and easy way to perhaps collect its past due royalties. A franchisee may also seek to use arbitration to resolve a dispute with a franchisor. Many times the franchise relationship does continue even though there is an arbitration preceding in process. Depending on the arbitration tribunal indicated in the arbitrate clause, your dispute will be heard before an experienced attorney or a judge or retired judge. There may be more than 1 arbitrator required by your agreement. In general, the matter will be scheduled for hearing in about 4-6 months after the initial case is filed, much quicker than traditional litigation. In addition arbitration is much more informal, no courtroom, no jury no bailiff, no court reporter, just a conference room everyone sits around. Both sides call their witnesses and present their exhibits, and there is cross examination. However the atmosphere is less formal, the rules of evidence are less formal, and generally witnesses can say what they want, without objection. The arbitrator hears the evidence and testimony and makes a ruling, generally within 14-30 days after the end of the hearing, and the ruling is binding, unless there was some kind of provable arbitration misconduct or bias. Arbitration is an efficient method of resolving disputes. And the disputes many times resolve themselves before the hearing. If you are contemplating arbitration or have been given a demand for arbitration call me today to discuss your situation and strategy.

If my franchise agreement is terminated can I stay in the same business?

Most franchise agreements have some sort of post termination non-competition clauses. This is where a franchisee's particular state laws, most notably California laws, favor franchisees (ex-franchisees). California Business and Professions Code §16600 voids any provision in a contract which is a restraint on trade meaning, If you are a California ex-franchisee, the franchisor can not enforce the non-competition clause in your franchise agreement. They should not even be threatening to do so, and certainly can not bring an action against you for being in a similar business. So you are free to engage in the same or similar and competing business after the term of your franchise agreement. Be aware however, other prohibitions such as prohibition against soliciting clients of the former franchise, or against soliciting employees of the former franchise or of another franchisee, or against using any proprietary information gained by being a franchise, are very much enforceable. If you are intending to be in a competing business or are in one after your franchise agreement is terminated, it is wise to seek legal counsel to be sure you stay within the laws and not buy yourself a lawsuit which can potentially put you out of business for good. Caution is also recommended that you do not start up the competing business while your franchise agreement is still in effect.

How can I get out of my franchise agreement?

Many franchisees come to me asking for a way to get out of their franchise agreement. They generally owe money and just want out of the franchise, and have not had any meaningful help from their franchisor or their franchisor has thwarted any recovery by its own failures. This is where I am pretty good at what I do, having been an in-house counsel for 2 decades. The first thing I do is compare the FDD the franchisee received with the FDD and exhibits on file with the California Office of Business Oversight. You would be surprised at how often franchisors mess up on dates, exhibits or just plain give out the wrong disclosure or the wrong California Addendum. Generally neither party knows this until and experienced franchise registration attorney scours the documents. Many times, there are technical violations which in the scheme of things may not seem like a big deal, but a violation of California law is a violation of California law, and depending on the timing, severity, and potential damages caused, remedies include everything up to and including full rescission of the franchise agreement. At a minimum it is the basis for negotiating out of your debt. The point is there are possible solutions that a grieving franchisee may not even know exist without an experienced California franchise attorney on your side.

I Can Not Afford to Pay My California Franchise Fees Anymore

Running out of money is an unfortunate common situation among franchisees whether new or existing many years. The obvious solution for the franchisee is to pay the most important creditors first (payroll, vendors, rent, etc) and generally the franchisor takes a back seat when the franchisee is in financial strain. The key is work out a solution to the underlying business problem before the debt to the franchisor becomes insurmountable. Most franchisors will work with a struggling franchisee, even offering additional resources earmarked for such situations, like additional marketing assistance. Communication is the key. You need to stay in constant contact with the franchisor, and keep requesting specific assistance, and don't ignore the franchisor's collection calls. That will be seen as being non-cooperative. I have negotiated debt settlement agreements that reduce the franchisees debt over time based on other performances by the franchisee, showing that the franchisee is willing to implement the franchisors recommendations. It takes a creative attorney to fashion a creative solution to the issue at hand. If you are at the point where you believe all hope is lost, we can negotiate a mutual termination to the franchise agreement. In any case, do not clay in calling me to assist you in resolving your problems.

Does a Franchisee Need Audited Financial Statements?

In a word, No. There is no franchise law requiring California franchisees to have audited financial statements (unless they are also selling franchises). However I have seen Franchise Agreements which do require this from franchisees, but this is not common. Since audited financial statements is a significant additional expense for a franchisee, the franchisee must factor this into the annual cost of operating the franchised business if it is required. Or factor this into the decision whether or not to even purchase a franchise which required audited financial statements. However, Franchisors will generally require some kind of financial statements in the franchise agreement, to identify the performance of the franchise and to verify the sales reported. It is critical for franchisees to have financial statements regardless of the Franchisor's need, in order to make effective business decisions about the health of the business. These statements provide a lot of important information, especially when conducted on a monthly basis. They show trends both good and bad which the owner can manage early before problems become insurmountable.

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