What To Do When a Franchising Deal Goes Bad

    By Stephen E. Story, Franchising

    Unfortunately, with some regularity, a franchisee’s relationship with his franchisor goes bad. The franchise may be losing money, the franchisee may not be receiving support promised by the franchisor, or the franchisee may have learned that the franchisor failed to properly register the franchise or disclose key facts material to investment in the franchise. Regardless of the circumstances, you should consider certain steps when a franchise goes bad.

    Contact the franchisor directly.

    First, call the franchisor, reasonably and rationally address your concern and see whether they can offer any proposed solutions. You do not want to escalate a minor dispute into a major disagreement that can bring an end to your franchise relationship unless such escalation is truly necessary.

    Consult your franchisee association or ombudsman.

    Some franchisee associations are officially created by the franchisor, and some are independent of the franchisor. By inquiring with these franchisee associations, you may learn that other franchisees are experiencing problems similar to yours. You may strengthen your bargaining position by having multiple franchisees approach the franchisor jointly, as opposed to individually, about a common problem. Also, many larger franchise systems have ombudsmen to troubleshoot disputes within the franchise system. These ombudsmen can help communicate with your franchisor and resolve disputes.

    Review the dispute resolution clauses in the franchise agreement.

    Virtually every franchise agreement contains dispute resolution clauses that will specify in-person meetings, mediation, arbitration or litigation — or sometimes a combination of these approaches. A franchisee should carefully review his franchise agreement to know and understand the timing and sequence of the contractual dispute resolution procedures under the franchise agreement.

    Complain to the franchise regulators in your state.

    If the dispute is major, you should consider complaining to the regulatory agency governing the sale of franchises in your state. Some major issues could be: failure to register the franchise offering in a state where it was required to be registered, or material fraudulent omissions or disclosures — such as failure to disclose prior bankruptcies or material litigation, or improperly representing, without the required disclosures, the amount you can expect to earn from the franchise. Most states will actively investigate every complaint. One caution: Once this step is taken, it may be difficult or impossible to stop the resulting investigation, even if you resolve your disagreement with your franchisor. For that reason, franchisees may find they have more leverage to negotiate a solution with their franchisor before they complain to the state regulators.

    Consult an experienced franchise lawyer.

    Attorneys specializing in franchising typically are members of the International Franchise Association Supplier Forum and The American Bar Association Forum on Franchising.

    Depending on the strength of the franchisee’s claims, franchisors are sometimes willing to negotiate an amicable agreement under which the franchisee exits the system. Both franchisor and franchisee may have to be creative to craft an agreement that meets both parties’ objectives.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.