Publications

Franchise disputes: When things do not go to plan

By Daniel Shore - November 2012

Purchasing a franchise usually provides the comfort of an established brand and structured business system. It does however come at a cost, both to buy into the system and with on-going marketing levies and royalties. 

Like any business however, there is uncertainty and risk and when things do not go to plan, often the Franchisor is the first port of call. 

What goes wrong?

As with any business, you can be impacted by the economic climate, but there are also a number of other complications which can occur between a Franchisor and Franchisee. Common issues which may arise include: 

• The business does not meet the projections provided by the Franchisor at the outset; 
• The marketing fund does not provide any real benefit; 
• The impact of another Franchisee opening nearby; 
• The Franchisor refusing to renew for a further term;
• The Franchisor issuing one or more default/breach notices. 

What can be achieved?

The difficulty which invariably exists is that the Franchise Agreement is heavily weighted in favour of the Franchisor. The vast majority of Franchise Agreements will have disclaimers to try and avoid any potential liability, particularly in relation to financial projections. 

Despite this, we can often negotiate on behalf of our clients to ensure their investments are protected and/or their losses are minimised. What can be achieved often depends on: 

• The wording of the Franchise Agreement (including obligations of “good faith”); 
• The paper trail with the Franchisor; 
• Whether other Franchisees will support the position; 
• How concerned the Franchisor is about public relations. 

What should you do?

The starting point is to talk to your Franchisor. Ultimately the Franchisor wants you to do well as it is a reflection on their business model and your success results in a financial return to them. Depending on their response, there are a number of strategies to escalate the issues if necessary. Things to bear in mind from the outset: 

• Take legal advice sooner rather than later. It is important from an early point that you have an understanding of your legal position and the potential consequences if you get the process wrong; 
• Remember it is a relationship business. Once damaged, the relationship between the Franchisee and Franchisor is difficult to repair; 
• Manage the paper trail and assume anything put in writing could be relied upon later; 
• Be mindful of how you may have contributed to the issues. Have you complied with procedures. Have you accepted feedback from the Franchisor? 
• Determine whether other Franchisees are facing the same issue/s. There is power in numbers and also the ability to share costs. 

Summary

Overall, your Franchisor should be there to help. Regardless of the reasons, the failure or success of a Franchisee reflects on the brand and, in turn, the ability of the Franchisor to sell more franchises and maintain a sustainable and profitable model.

Daniel is an Associate in our Dispute Resolution Team, specialising in Franchise Disputes, and can be contacted on
07 958 7477.