Becoming a franchisee helps aspiring business owners gain invaluable experience and a unique introduction to entrepreneurship. Many of the world’s most recognizable brands are primarily operated by individual franchisees, who also benefit from an established business model. In return, franchisors receive upfront investments and regular fees from franchisees.
As with any business relationship, franchisors and franchisees are vulnerable to a number of disputes. Many disputes between these two parties stem from poor expectation setting and/or insufficient due diligence. Below are some common manifestations of franchisee-franchisor disputes.
Lack of Resources By Franchisee
Healthy franchises are selective about franchisees and have several measures in place to ensure locations are in capable hands. If, however, the supply of qualified franchisees is low, franchisors might agree to terms with franchisees who don’t have the cash for the initial investment or general management acumen. Occasionally, this disconnect is just a symptom of larger communication issues. At any rate, franchisors move to terminate the relationship in these situations, which inevitably leads to resentment.
Failure to Disclose (on the Franchisor’s Part)
The Franchise Disclosure Document (FDD) is the written gospel for potential franchisees. State and federal laws require certain information to be disclosed in the document, which can be hundreds of pages long. For instance, franchisors are generally required to disclose past, pending, and potential litigation involving the franchise. Franchisees who financially suffer due to undisclosed lawsuits could have a cause of action for non-disclosure.
Disputes Over Franchisee Competition
Franchisors are incentivized not to cannibalize their customer base by opening new ones too closely to existing ones. However, savvy franchisors will not hesitate to encourage a reasonable amount of friendly competition to reach as many customers as possible. Franchisees occasionally feel the pendulum swings too far to the latter, which easily causes friction with franchisors.
Many FDDs require that disputes be handled in mediation or arbitration. Some agreements stipulate that the decision made by the arbitrator is legally binding, while others may give parties the option to escalate the dispute to litigation. Mandatory arbitration is not uncommon in various types of business agreements. Mediation, which is a step below arbitration on the formality scale, could be an effective way to work through disagreements while preserving the business relationship. Nevertheless, many franchisees feel handcuffed when they find out about forced arbitration in their FDDs.
Stave Off a Devastating Franchise Dispute With Proactive Counsel
The best way to avoid franchise litigation or disputes is by engaging with legal counsel as early as possible. Experienced representation, which Trembly Law Firm provides, can comb through Franchise Disclosure Documents and other contracts for objectionable provisions and potential red flags. If desired, we can negotiate with the franchisor for more favorable terms. We can even help you resolve disputes in and out of court.
Call the team at Trembly Law Firm today to discuss your legal needs and build a solid foundation as a franchisee or franchisor.
Trembly Law Firm
9700 South Dixie Hwy Penthouse 1100
Miami, Florida 33156