What is a franchise breakaway?
As a franchise lawyer, I try a lot of cases where I am required to argue one side of an issue in one case and the other side of the same issue in another. Being on both sides of the same crisis event, however, is not as frequent. I guess the crisis event where I have the most experience representing both antagonists’ positions is the “franchise breakaway.” That particularly excruciating crisis arises when a large group of franchisees decide that they have had enough of the relationship and that, no matter what the cost, they are going to leave.
There is usually a trigger to franchise breakaways. To be sure, the grievances have mounted for years, but one event opens the floodgate of opportunity. That event is the immediate perception of vulnerability when a franchisor loses a major case to a franchisee.
Franchise agreements are very strictly drafted to optimize the ability of the franchisor to deal effectively with almost any situation. For that reason, franchisee victories in conflicts are seen as highly unlikely. When it does happen there is a rush of the disgruntled to the lawyers who won that first case, and the ensuing trauma can, if not handled with exquisite capability, bring down a franchise company.
If there is a very large damage claim and a lot of franchisee plaintiffs, the franchisor’s auditors may have difficulty dealing with the potential financial impact of another loss in the context of continuing to opine that the franchisor company has “going concern” value. That alone can trigger financing agreement acceleration decisions by the franchisor’s lenders. Lenders can be very opportunistic. If the current financing arrangements are favorable to the franchisor, the lenders love any opportunity to rewrite the deal at higher rates and on better terms. Any false step in the beginning by a franchisor can wreck a salvageable company. There are more options available to a franchise company that is privately held, but the first misstep can lead to ruin just as easily.
Franchise companies are not unaware of the accrual of disputatious circumstances. But they have been led to believe that their contract is so “ironclad” that they discount the need to accommodate change. The fact that they get away with it most of the time because of franchisee lack of resolve to do anything about it reinforces that sentiment. Breakaways rarely happen, but when they do, they are really knock down and drag out affairs.
For more about the legal aspects of franchising, visit Richard Solomon at his website www.franchiseremedies.com.