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FRANCHISE DISPUTES – HOW TO AVOID THEM!
Disputes with franchisees are almost inevitable because franchising uses legally complex, lengthy (fifty page agreements are not uncommon) and long term contracts which are entered into by a substantial number of franchisees. This is a recipe for a dispute! Unfortunately very few franchisors plan for this and the very substantial costs involved in dealing with disputes. Often franchisors are dragged reluctantly to Court simply because they cannot allow an individual franchisee - to do (or not do) something which, if followed by other franchisees, could jeopardise the whole system. In other words, franchisors unlike most businesses sometimes find themselves in a situation where they simply have to litigate. This article sets out the “top tips” for preparing yourself for, and reducing the risks of litigation.
First, investigate legal expenses insurance. Litigation is eye wateringly expensive so if legal expenses insurance is available make sure that you have it and make sure that it covers franchise disputes because many policies do not. Insurance brokers who are affiliates of the BFA will be able to help.
Secondly, do everything to avoid disputes arising. The starting point is to be aware of the reasons why generally franchisees are unhappy with their franchisor. The Natwest/BFA Survey lists the reasons (in decreasing order of importance) as follows:-
- Lack of direct support from franchisor;
- Franchisor not keeping initial promises;
- Lack of franchise brand marketing/promotions;
- Personal reasons;
- Lack of communication with franchisor.
It is surprising the number of disputes that arise from one or more of the issues set out above Whilst disputes often revolve around non payment of fees, under reporting or a failure to provide reports often the true reason for a dispute relates to relationship issues with the franchisor.
Thirdly you should recognise that eventually most franchisees will resent paying the continuing fees. If your continuing fees are simply there to reward you for assistance with the initial set up of the franchise, this will not be enough. You have to work hard to find ways to justify the continuing initial fee by, for instance:-
- building up the brand so as to enable franchisees to increase their customer base/margins;
- pass on advantageous deals with suppliers which individual franchisees simply would not be able to obtain themselves;
- continue your research and development programme and provide training and assistance on new products, services and changes to the system.
Fourthly and perhaps most important of all is to ensure that when selling a franchise to a prospective franchisee you do not oversell your franchise by painting too rosey a picture. All of the information that you provide to a prospective franchisee must be factual. So if you help franchisees with their forecasts and business plans you must base the information as to start up costs, likely turnover and profitability on the actual average performance of your franchisees and not the top performing franchisees. Relying on disclaimers may protect you from claims but will do nothing for the franchise relationship.