Answer: Traps, Pitfalls, Summons and a Lawsuit on a Sesame Seed Bun
Introduction
Any franchise relationship has the potential of turning bitter, and ultimately going sour. For some Franchisees, separating themselves from the Franchisor and the franchise system, is a very appetizing idea. Escaping the Franchisor’s bountiful table, however, may not be a cakewalk. However, in cases wherein a Franchisee truly hungers for freedom, no price may be too high to pay to exit the system. Set forth below is an imaginative, yet illustrative “Franchise Menu” which leads, inexorably, to intra-franchise fighting. Here’s a toast to those bold and daring Franchisees willing to clear their palates, and plates, and order something completely different.
Franchise Menu
Starters
Failure to study the relevant marketplace.
Failure to study the relevant industry.
Failure to review the potential business site (i.e., or, as the old adage warns: “location, location, location”).
Failure to monitor vehicular and pedestrian traffic at the potential business site.
Failure to review actual financial information (as opposed to projections).
Failure to review actual statistics (as opposed to projections).
Failure to review the old Uniform Offering Circulars, (UFOC), if applicable.
Failure to review the current Federal Disclosure Document (FDD).
Failure to review specific State business opportunity filings, if applicable.
Failure to read the Franchise Agreement at all, or to read it carefully.
Failure to review the Franchisor’s business development plan; if one exists.
Failure to review the Franchisor’s marketing plan, if one exists.
Failure to have an accountant or tax advisor look at the deal before the Franchisee signs the contract.
Failure to look at the actual rate of franchisee turnover in the system.
Failure to do the Franchisee homework, in advance.
Failure objectively and candidly to take into consideration Franchisee’s educational background.
Failure objectively and candidly to take into consideration Franchisee’s prior business experience.
Failure objectively and candidly to take into consideration Franchisee’s ability to manage money.
Failure objectively and candidly to take into consideration Franchisee’s prior employment history.
Failure objectively and candidly to take into consideration Franchisee’s prior debt history.
Failure objectively and candidly to take into consideration Franchisee’s prior earnings.
Failure objectively and candidly to take into consideration Franchisee’s prior savings.
Failure of Franchisee to research and compare the deals with non-franchise business opportunities such as: independent start-ups, distributorships, or dealerships.
Failure to adequately consider and plan for sources of capital to harvest (i.e., own, family, bank, or Franchisor).
Failure to adequately consider need for, and amount of loan(s) (i.e., from family, bank, or Franchisor).
Failure to adequately assess need to refinance own house, if necessary, in order to make Franchise investment.
Failure to adequately consider selling shares to investors in order to pay for Franchise investment.
Failure to adequately consider the duration of any loan(s) and the interest rate(s) therefor.
Failure to adequately consider potential build-out or construction costs.
Failure to adequately consider costs for professional service providers, such as lawyers, accounts, and/or business/franchise consultants or experts.
Failure to have accountant or business consultant prepare an Income and Expense Statement, utilizing available data.
Failure to conduct adequate research into the history and timeline of the franchise system.
Failure to adequately check media stories and/or press releases relating to the Franchisor and/or the franchise system.
Failure to consider the cost of buying or leasing a property in which to conduct business.
Failure to adequately consider buying or leasing equipment in order to run the franchise business.
Failure to adequately consider the need to hire, and amount of hiring, staff and paying the payroll for the franchise business.
Failure to research previous complaints filed against Franchisor with the Federal Trade Commission.
Failure to research previous complaints filed against Franchisor before any administrative or regulatory boards or agencies.
Failure to research past complaints filed against Franchisor in the courts of the state in which Franchisee resides and does business.
Failure to have an attorney, accountant, or expert evaluate the Franchisor’s business plan, if any.
Failure to contact present Franchisees of the franchise system.
Failure to contact former Franchisees of the franchise system.
Failure to determine whether advertising, marketing and/or promotional fund(s) of the Franchisor are audited or not.
Failure to properly estimate the total amount of time and effort realistically needed in order to run the franchise business.
Failure to properly estimate the necessary and/or desirable amount of equipment or machinery and supplies, as well as the cost thereof.
Failure of prospective Franchisee to recognize that merely because a product is a good one does not, translate, ipso facto, into a good Franchise system.
Failure to inquire into the actual profits (if any) of other Franchisees.
Failure to recognize that merely because a franchise system appears to be growing fast does not necessarily translate into profitability for the Franchisee.
Failure to differentiate between a Franchisor’s growth (or increased number of units) internationally, as opposed to growth here in the U.S.A.
Failure to make sure that the Franchisee’s territory or area will be protected and is inviolable and immutable.
Failure to select a Franchisor with a proven profit-making formula.
Failure to recognize the difficulties inherent in selling the franchise business if necessary and/or desirable.
Failure to recognize that the Franchisor must approve of any sale of the business.
Failing to be cheerleader for, and a marketer of, your own business (i.e., venture forth out into the world and, be ready, willing, and able to “sell, sell, sell”).
Failure to detect a bogus, scam, or unethical “franchise” system.
Failure to read the franchise contract, from cover to cover, page by page, and paragraph by paragraph or, in the alternative, to have an attorney, or expert consultant read and analyze it for you.
Traps
Capital investment required.
Monthly franchise fees required.
Monthly marketing and advertising royalties or fees required.
Construction and build-out costs required.
Rent(s) for business site/premises required.
Other, miscellaneous startup costs required.
Monthly payroll, and payroll taxes required.
National advertising and marketing program which does not extend to the Franchisee’s area or territory.
Inadequate franchisee training program and/or insufficient personnel to administer the program.
Unprotected area or territory (thus allowing encroachment by the Franchisor and/or other, competing Franchisees in the same system).
All profits must be shared with the Franchisor.
All suppliers and vendors are dictated by the Franchisor.
Bankruptcy of Franchisee.
Franchisees which go out of business (or which leave the system), thus, reducing the available pool of advertising and marketing fees for all of the remaining franchisees.
Franchisor must approve any sale of business by the Franchisee.
Franchise system depends, and Franchisor insists, upon absolute uniformity.
No changes as to products or services will be tolerated by Franchisor.
Pitfalls
Franchisor will interfere with Franchisee’s business.
Franchisor will monitor Franchisee’s sales and set sales targets for Franchisee.
Franchisor will not tolerate any use, by Franchisee, of any unauthorized or inferior equipment, materials, products, or supplies.
Signing the franchise contract before the Franchisee has retained or consulted legal counsel or an expert consultant.
Advertising and marketing money which is not actually spent by the Franchisor on advertising and/or marketing.
Franchisor does not have any business development plan.
Franchisor does not have any marketing plan.
Letting Franchisor or Franchisor’s representatives pressure the Franchisee into quickly signing the franchise agreement, so as to avoid legal or expert consultant review.
Signing on with a franchise system before it has had time to mature and become well-developed system.
Signing on with a franchise system that has an untested or unproved financial model.
Signing on with a franchise system before the current Franchisees actually (and verifiably) are making profits or, at least, breaking even.
Franchise Agreement without an automatic renewal clause.
Sides
Heavy competition in the industry.
Exposure, headaches, and stresses associated with any franchise business ownership.
Dubious privilege of “leasing” trademark(s), service mark(s), logo(s) and/or slogan(s) from the Franchisor.
Franchisee is not the “boss” and does not have real control over the business.
High failure rate of new Franchisees.
High bankruptcy rate of other Franchisees.
Other Franchisees whose conduct lends franchise system a bad name or reputation.
Franchisor whose conduct lends franchise system a bad name or reputation.
Administrative tasks and compulsory reporting to Franchisor.
Investing in a business in which Franchise does not know anything about, or in which it knows little about.
Franchisor fails to properly enforce, monitor and police intellectual property (i.e., trademarks, service-marks, logos, slogans, copyrights, and patents.)
Franchisor fails to properly protect the franchise system’s trade secret(s).
Prices
Loss of Franchisee’s 401K money.
Loss of Franchisee’s life savings.
Loss of Franchisee’s pension monies.
Lawsuit(s) by Franchisor vs. Franchisee.
Lawsuit(s) by Supplier(s) vs. Franchisee.
Lawsuit(s) by Vendor(s) vs. Franchisee.
Loss of reputation of Franchisee.
Loss of Franchisee’s family and free time.
Just Desserts
If current Franchisees, or prospective Franchisees, find the Franchise “Menu,” above to be unappealing, or to cause indigestion, heartburn or other gastrointestinal upset, rest assured there is a remedy. As they say, there is always room for dessert; in this case, we are referring, of course, to serving up the Franchisor’s “just desserts.”
Franchisees should talk to an experienced franchise attorney, preferably before they sign any franchise agreement. However, even for current Franchisees, it is never too late to attempt to escape, or to exit, the franchise system.
For a prospective Franchisee, the earlier the better to speak with a franchise lawyer. It may well be the Franchisee’s best and last opportunity to seek the benefit of an experienced franchise lawyer… before they sign off on any franchise agreement. An attorney can review and analyze the Franchise agreement, research the Franchisor and the Franchise system, and conduct a host of other tasks designed to protect the Franchisee’s rights and business and legal interests. The prospective Franchisee may well decide to travel down a different path, and select a non-franchise option, such as an independent start-up business, a dealership, or a distributorship. In the alternative, the putative Franchisee may decide, after all, to become a Franchisee, but at least he/she/it/they will have done so as a matter of informed consent and under the protective wing of competent legal representation.
Current Franchisees should note that the franchise agreement may contain provisions for the parties to resort solely to Alternative Dispute Resolution (“ADR”), instead of litigation. ADR modalities, such as mediation and/or arbitration, in some cases, can be very beneficial. Your franchise lawyer will guide you through the ADR process. Informal settlement negotiations with the Franchisor’s counsel (and through your franchise lawyer) may be possible, as well. Thus, there are ways to exit the Franchise system, other than bankruptcy, or termination by Franchisor. Furthermore, there do exist means to compel the Franchisor to renew the Franchise, with or without resort to judicial litigation.
Above all, it is quite important to recognize that in the appropriate circumstances, and given the right pattern of underlying facts, a Franchisee may be well-justified in bringing a lawsuit against a Franchisor. Among a panoply of potential legal theories and causes of action that can be asserted by Franchisee against the Franchisor in Court, the Franchisee may have one or more of the following tactical weapons at his/her/its/their disposal in the lawyer’s legal arsenal:
Antitrust Law Violations (Price Fixing)
Breach of Contract
Breach of Franchise Agreement
Criminal Conspiracy (anti-racketeering laws) (franchise scams)
Encroachment of Territory
Fraud
Improper Refusal to Renew Franchise Relationship
Intellectual Property Causes of Action
(involving copyrights, trademarks, service marks, and patents)
Misrepresentation
Predatory Pricing
Theft of Advertising and Marking Funds by Franchisor
Unfair Trade Practices
Violation of Franchise Statutes
Violation of the FTC Rule
Violation of State Franchise, Disclosure or Business Opportunity Law
Wrongful Termination
Whether one is a current Franchisee, or a prospective Franchisee, experienced franchise counsel can assist in understanding, and vindicating, a host of legal rights. The Franchisor has its legal eagles; so, too, the Franchisee ought to have its own school of sharks. The franchise system may be strong, but it certainly is neither invulnerable, nor invincible.
For more information, Franchisees should make today the day that they call to make an appointment with their franchise lawyer in order to discuss how they may be of service to the Franchisee.