Existing Franchisee Issues
My Franchisor Won’t Listen to Me! My Franchisor Has Materially Defaulted But Won’t Admit it or Work with Me and I Want Out of My Franchise Agreement.
I get this from a lot of franchisees who are exasperated at trying to get their franchisor to work with them on things the franchisor has promised but not delivered, or has misrepresented either at the beginning of the franchisee’s purchase, or sometime during the early years and/or has outright breached the franchise agreement. This type of franchisee is usually done trying to make a flawed concept or misrepresented concept work, and is not willing to keep feeding the negative with no light at the end of the tunnel. Yet the franchisee is trapped in a 10 year contract with 7-8 years left.
I have seen more and more of this lately and I approach the matter the same way every time-I look for franchise law violations. Did the Franchisor comply with all the requirements in selling the franchise at the beginning, for example:
- Was the franchisor properly registered to sell in the particular state;
- Did the Franchisor give the client the correct version of the FDD on file with the state;
- Did the Franchisor wait the appropriate amount of time before the client signed or paid any money;
- Did the franchisor make any illegal earnings claims (representations about how much money client can make, or anything to this effect-BEFORE the client signed the Franchise Agreement);
- Did the FDD contain the required disclosures in ALL the required categories;
- Did the FDD misrepresent any material item.
- Did the client receive the Training as outlined in the FDD;
- Did the client receive all the Franchisor services (in Item 11) on a timely bases;
These are just a few of the major violations of state AND federal franchise laws. You would be surprised at how often I find a major violation-there are so many regulations it is easy for franchisors to mess up in some of the requirements.
I do this research even not knowing the specific complaints the client is having with the franchisor, because if a franchisor has violated a serious franchise law, it is much easier to negotiate a mutual termination of the franchise agreement. Adding franchisor contract violations, if legitimate, of course strengthens the franchisee’s position.
This is how I approach all franchisee related conflict cases. I conduct the research, and advice the client very pragmatically what their options are depending on what I find or don’t find. If there are no franchise violations yet the franchisor has other misrepresentations of contract violations, I then advise the client accordingly with the next steps process-to demand the dispute resolution process according to the Franchise Agreement, such as mediation or arbitration; This may in and of itself bring about a negotiated settlement, once the franchisor sees the client has retained a franchise attorney expert pointing out the deficiencies of the franchisor’s actions or inactions.
—In this regard it should be noted that California Laws (and several other states) many times invalidate an out of state venue provision for mediation or arbitration/litigation. Don’t think just because your franchise agreement requires you to go out of state that such provision is valid-most of the time it is not. There is a required disclosure in California that points out this inconsistency with CA laws and the provision in the Franchise Agreement and generally indicates the CA law will apply—this disclosure is hidden among the hundreds of pages in the FDD but it’s always there and the language is important.
Finally-I will be totally upfront with a client if their Franchisor has disclosed everything properly and the client’s grievances are not a (legal) breach of contract, and why. I will not tell anyone they have a great case just to hire me (which franchisees must look out for if they simply go see a litigation attorney.
My goal is to educate clients on their realistic efficient and pragmatic options and solutions to their issues. Some of the below are examples of what to do to instead maintain your franchise business with the help of the franchisor.
Ask your Franchisor to Help You Market With Extra Support Services or re-drawing Territory Boundaries
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. The Franchisor wants nothing more than to see you turn your business around if there are some easily addressed problems, which can be addressed-they will. AND, Franchisors are more than willing to meet and work out any failure on their part by offering other, more substantial services.
Ask Your Franchisor to Restructure Reduce or Waive Past or Future Debt
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 and sometimes even waive or reduce royalties based on your timely payment or active performance. And if there is some issue on the Franchisor’s part, again the Franchisor will be more active in avoiding any legal path; this type of resolution is the best outcome for both parties, as you will both get a better deal than any litigation would get you, and at a much lower cost.
Look Into Selling the Business
This is usually what the Franchisor will tell a franchisee that is not operating the business as profitably as both want. While this may sound like an easy out it is not easy to sell a business when it has a negative cash flow. Potentially a deal can be negotiated whereby a combination of the solutions above are put into place for the benefit of a sale to the benefit of both sides.