Can You Predict How a Franchisor Will Handle Disputes with You (and Whether or Not a Dispute is Likely)?

By: Doug Smith, Franchise Lawyer
 
It is well established that the pre-purchase relationship between a franchisor and the prospective franchise purchaser is a "courtship". Generally, each exhibits good behavior, applies plenty of make-up to hide or minimize warts and carefully parades one's best side, virtue and charm. And, like a courtship, the resulting marriage can put the parties at the end of their troubles; they just don't realize which end. Usually the franchise relationship never gets any better than those initial, pre-purchase moments. Hopefully, it does not get worse, but rarely does it improve.
 
A well ordered franchisor, working with a thoughtfully cooperative and well prepared franchisee, can create a lasting and mutually beneficial relationship. However, like any other marriage, either or both parties may find it difficult to weather the storms that inevitably will come.
 
How then is one to tell what the future holds in store, especially whether debilitating disputes may arise and how they will be handled? For a franchisor, the answers are difficult to find, apart from careful interviews of the prospect, perhaps some professional psychological testing, and full review of the prospective franchisee's references and personal and business history. On the other hand, in addition to those available to the franchisor, a prospective franchisee has some additional tools at hand:
 
1. The Franchise Disclosure Document. State and federal franchise laws require prior disclosure of information to prospective franchisees in a manner similar to that required under securities laws. A Federal Trade Commission rule requires franchisors to prepare a written Franchise Disclosure Document (FDD) and to deliver it to prospective franchisees in compliance with specified methods and time frames. Among the required information are disclosures related to:
 
a. The franchisor's litigation history and certain currently pending cases filed by and against the franchisor. They help a prospective franchise analyze:
i. Is the franchisor litigious?
ii. Have franchisees filed claims against the franchisor? And how has the franchisor responded?
iii. Has the franchisor violated state or federal laws or rules related to the franchise offering?
 
b. The contact information for the franchisor's current and former franchisees. They can help a prospective franchisee analyze:
i. How the franchisees feel about the he franchisor's relationship attitudes and abilities.
ii. How the franchisees feel about the franchisor and its programs.
iii. How has the franchise system grown, or decreased, over the past few years. How many franchises have closed, been terminated and transferred.
 
These tools help a prospective franchisee know how current franchisees in the system have enjoyed their experiences with the franchisor, discern how well each franchisee's business operations have faired and recognize potential problems in how disputes will be resolved.

Remember, a savvy franchise attorney can help in every step of the process.