5 ways to avoid franchise disputes

14-07-2021


It goes without saying that when parties enter into a franchise relationship, they (almost always) are doing so with the best of intentions. The franchisor, for example, wants the franchisee to make a success of their franchise business in order to strengthen the franchise’s brand and reputation, while the franchisee obviously wants their franchise business to be as profitable as possible.

So when a franchise dispute does arise, no one wins. Regardless of who is “right” or “wrong”, the franchisee could be facing significant financial consequences as a result of a breakdown in the franchise relationship, while the franchisor could have to deal with substantial disruption to its entire franchise network.

But it’s worth remembering that a lot of the issues which commonly give rise to franchise disputes are issues which could potentially have been avoided, if the parties had followed the following five simply tips at the start of the franchise relationship.

1 – Make sure everyone understands what a “franchise” is

This first tip may sound obvious, but you’d be surprised how many people (both franchisors and franchisees) attempt to enter into a “franchise” relationship without actually having a clear understanding of what a franchise is (and what it is not).

For example, some potential franchisors think that they want to franchise their business, when what they actually want is to set up regional/subsidiary branches, while still retaining overall control over the day-to-day running of those satellite businesses. This is not “franchising”, as a franchise business is an independent business in its own right.

Equally, some potential franchisees may prefer the security and financial protection afforded by managing a “satellite” branch of the main business (rather than taking on the burden of running their own independent franchise business), but if that’s what they want, they need to know that this is not a “franchise”.

Making sure that each party properly understands the unique nature of the franchisor/franchisee relationship is therefore an important first step towards avoiding future potential disputes.

2 – Manage expectations and be realistic

Poor communication during the initial franchise discussions is perhaps the biggest cause of franchise disputes, as this often results in the franchisee and franchisor having very different understandings of how the franchise relationship will work in practice.

This is perhaps most dangerous in relation to any financial projections being discussed before the franchise agreement is signed, because if the franchisor “oversells” the franchise opportunity (for example, by providing financial projections that are misleading or overly optimistic) then this will often result in the franchisee bringing a claim for misrepresentation if the franchise business doesn’t perform “as advertised”. It is therefore always better to be open and upfront about the basis on which of any financial projections have been prepared.

But it’s not just misunderstandings over financial projections that can arise from poor communication, and subsequent disputes can also often arise where the parties’ expectations are misaligned in relation to (for example) how the franchise business will operate on a day-to-day basis, what level of ongoing training and support will be provided by the franchisor, and how new business is going to be generated.

While it may feel awkward discussing these issues at the outset of the relationship, it is always better to adopt an approach of “hope for the best but prepare for the worst” to ensure that everyone understands how the franchise relationship will work in practice, through the bad times as well as through the good.

3 – Don’t “do it yourself”

This next tip will no doubt sound self-serving, but honestly, the number of franchise disputes that arise because the parties did not obtain specialist professional advice when setting up the franchise shows that trying to save costs by “doing it yourself” will often prove to be a false economy.

Franchisors should always obtain specialist legal advice to ensure they have a properly drafted franchise agreement that provides them with all of the necessary protections for their brand and business model, while franchisees should always obtain independent legal advice from a suitable specialist on the proposed franchise agreement, so that they know precisely what they are signing up to.

Equally, both parties may benefit from instructing specialist financial advisors to prepare or analyse the relevant financial projections, or specialist lenders to advise on available funding options. Franchisors, meanwhile, may also find that specialist recruiters can help them to find suitable franchisees, and there are even specialists that can analyse the relevant geographic areas and advise on the best way to structure the franchise territories.

All of the above specialist advice may very well increase the initial costs incurred by both parties, but the long-term benefits of adopting a “stitch in time, saves nine” approach will far outweigh the short-term cost.

4 – Don’t rush

Another tip that may, in hindsight, seem obvious, but many franchise disputes arise because either the franchisee or franchisor tried to rush into the franchising process.

For example, a franchisee should always take the time to carry out adequate due diligence on the potential franchise opportunity, so that they have a clear understanding of how the franchise network operates in practice.

Equally, many franchise disputes arise because the franchisor tries to run before they can walk, without first ensuring that they have the required infrastructure in place to support their growing franchise network. Often, especially with “start-up” franchises, the franchisor should first run a “pilot scheme” to test the viability of the franchise concept before actively starting to offer franchise opportunities.

It’s important to remember that even the most successful franchising business was not franchised overnight, and rushing to franchise a business concept before the necessary support structures are in place is a common cause of franchise disputes.

5 – Be selective

Before signing the franchise agreement on the dotted line, it’s important that both parties take a moment to objectively consider whether this particular franchise relationship is right for them.

For example, many franchisors make the mistake of assuming that if a potential franchisee is keen and has the required funding then they will make a good franchisee, without also considering other factors, such as whether the potential franchisee has the necessary experience, temperament or technical skills needed to successfully run the franchise business.

Equally, franchisees should take a moment to step back from looking at the franchisor’s promotional materials and to consider (ideally with the aid of independent advice) whether or not they fully understand the nature of the commitment they are about to make.

The signing of the franchise agreement effectively marks the point of no return, meaning that if an issue arises after the agreement is signed, then a formal franchise dispute may become unavoidable. But until then, the parties can still potentially agree to go their separate ways on an amicable basis if either of them decide that the opportunity is simply not “the right fit” for them.

Summary

There are, of course, a number of other (more technical) tips for avoiding potential franchise disputes that become relevant once you start getting into the detail of the franchise agreement itself (for example, in relation to the terms governing terminations, renewals, resales and restrictive covenants), but the five top tips above are ones which all potential franchisees and franchisors can easily and immediately apply (for free) in order to minimise their risks of becoming involved in a dispute later on in the franchise relationship.

If you do require any further advice on franchising your business or on becoming a franchisee, or you are involved in a potential franchise dispute, our specialist franchising team is able to assist you.

For more information on this or any other issue relating to franchise disputes, please contact Michael Axe by emailing Michael or by calling him on +44 (0)1628 502448.

This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.


Michael Axe

Senior Associate
Commercial Disputes

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