The franchise world can be complicated. Think of it as a massive machine — regardless of the industry you are in or you are investigating, all franchise concepts have similar cogs and gears that have to move smoothly for the company’s franchisees to be successful. In most cases where the relationship between franchisor and franchisee has soured and the machine isn’t functioning properly, it is because there has been a misunderstanding about whose responsibility it was to oil and maintain certain parts of the machine. In other cases it is because the machine has been misused. And in some cases, it is because the machine never worked in the first place.
If you are investigating a franchise opportunity, there are concrete things you can do to ensure that your franchise will run smoothly and that you are protected if it doesn’t. If you own a franchise and the franchise is having problems, there are specific steps you can take with the franchisor to fix it.
1. Contact existing franchisees (and former ones, if possible).
These names can be found in Item 20 of the Franchise Disclosure Document (FDD) or on the franchisor’s Web site. When talking to franchisees, there are some rules of thumb:
- Contact franchisees until you find three who are dissatisfied. If the first three you contact are dissatisfied, this should be a big red flag. If you contact 30 and cannot find three dissatisfied franchisees, take this as a good sign.
- Don’t be afraid to ask the hard questions: “How long did it take you break even?”; “How good is the franchisor training and support?”; “If you had to do it all over again, would you?”
- Be discerning. If you talk to a franchisee who is dissatisfied, figure out why. Try to assess if this is an issue with the franchise system or simply with this particular person.
2. Conduct an independent investigation.
Don’t take anyone else’s word about the market size or potential in your area. Use the Internet to research the market, conduct your own local focus groups, compare franchise systems to each other, and complete all of your due diligence.
3. Review the entire FDD, the Franchise Agreement, and relevant franchise relationship laws with a franchise attorney (experienced in drafting and reviewing FDDs and FAs).
Know your rights and obligations, as well as those of the franchisor. If there is room to negotiate, in addition to financial aspects, focus on issues that affect the franchisee/franchisor relationship (transfer, renewal, default and termination, dispute resolution, etc.) That being said, you should understand that there may be little room for negotiation, especially if you’re dealing with a well-established franchisor.
What specific steps should a franchisee take to resolve an issue with a defaulting franchisor?
- Diagnose the problem, then review the FDD and franchise agreement objectively. This is a hard step for most because it requires you to be brutally honest. If a franchisor hasn’t fulfilled its side of the contract — for example, by not providing promised support or by changing its pricing in an unfair way — you might be justified in taking the next steps. On the other hand, if your franchise is suffering because its industry has taken a huge hit in the global recession, you might be justified in your concern but there won’t be any legal steps you can take.
- If your franchisor is defaulting, talk to a franchise attorney. The franchise world is unique, so make sure your counsel is a franchise attorney and not just a friend with a legal degree.
- Review the franchise agreement to see if you have any legal claims.
- Determine whether any state-specific franchise relationship laws apply. State franchise relationship laws can dictate notice, default, and termination procedures; they can protect franchisee associations and give franchisees rights that may not be in the franchise agreement. Where appropriate, the franchisee’s counsel should notify the franchisor of the alleged default, in accordance with the franchise agreement and relevant laws.
- Look for a win-win. Remember that your goal should be to get the franchise machine working at top capacity, not to junk it. Look for win-win resolutions/settlements that not only protect and benefit you, but also give you additional rights or benefits (reduced or waived fees or obligations, waived non-competes, expanded territory, additional franchises, etc.)
Yes, a franchise is like a complicated machine, but the same can be said of any business. The difference is that with a franchise partner, you have someone to help you build it and maintain it, and when the partnership works well, the machine runs faster and better than it ever could if you were on your own.
The Franchise Foundry is a strategic investment and development partner that helps franchise concepts in all aspects of franchising including funding, marketing and sales, and legal compliance. Their client portfolio includes SpoonMe, Fairway Divorce Solutions, and Five Star Painting. Visit the Franchise Foundry online at www.franchisefoundry.com.