If You Purchase the Wrong Franchise Your Legal Remedies May Be Limited

Comment from BBP:

The following article points out a number of reasons buyers need to complete their due diligence and choose wisely when selecting a franchise. This is important information for business brokers to be able to share with their buyers.

Current franchise agreements and judicial decisions can provide obstacles to franchisees who take legal action against their franchisor. The result is that prospective franchisees had better make the right decision when choosing and purchasing a franchise.

Individuals that decide to purchase a franchise should do an exhaustive evaluation of the franchise to confirm the following:

• The franchise fits your financial, business and personal resources and profile
• What the franchisor staff tells you can be confirmed by current and former franchisees
• The franchise is not flawed and has a proven track record of success

If your evaluation reveals any of these items are a problem then you should be careful about purchasing a particular franchise. For a resource to assist you in your evaluation process click here.

The downside of making the wrong franchise choice can be costly and devastating. One of the mistakes individuals can make when purchasing a franchise is to have the mistaken belief that if things don’t work out there is always the opportunity to seek recourse through the courts. This is not to say that people have this thought firmly implanted in their mind, however, most of us feel that if we don’t receive what we’ve paid for than we have a right of recovery through the legal system.

However, in the case of a franchise dispute there are certain provisions of the franchise agreement that can limit your legal options. This reinforces the need to select the right franchise.

Here are some examples of why successfully litigating against a franchisor can be difficult:

• Franchise agreements have a provision that basically states; if it’s not in writing it doesn’t count. This is called an Integration clause. For example, if the franchisor staff states if you need any assistance they will always be there to support you, but they don’t, if it’s not in writing you’ll have a hard time proving your case.
• There are sections that set forth the duties and obligations of the franchisee and franchisor. The franchisor section lists the services and support the franchisor provides. If it’s not listed here, then don’t expect to hold the franchisor accountable for something that is not in the agreement.
• The Franchisee Acknowledgement is common in today’s franchise agreements. This document signed by the franchisee includes an acknowledgment that there were no representations or disclosures that were not included in the Franchise Disclosure Document and Franchise Agreement. An example would be sales or profit projections. A franchisee that has signed this document would have a hard time convincing a judge or jury that someone made unauthorized financial disclosures.
• Venue Provisions requires that franchise disputes be litigated or arbitrated in the franchisors home state. This can increases costs for a franchisee.
• Most franchise agreements require the franchisee to pay all of the franchisors legal expenses in the event of litigation between the parties and the franchisor prevails. However, if the franchisee prevails these agreements do not allow the recovery of legal fees by the franchisee.

These are some examples of why it can be difficult for a franchisee to prevail in a lawsuit against their franchisor, unless the franchisor commits provable fraud or other egregious acts.

The bottom line is, choose your franchise wisely.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com