How to avoid disputes in the franchisor-franchisee partnership
Anyone entering into a business partnership knows there are likely to be at least a few obstacles and disputes on what's expected to happen once a deal is signed. That's especially true when it comes to the franchisor-franchisee agreement.
The key to avoiding potential legal battles, according to Brian Schnell, a partner at Faegre Baker Daniels LLP, is knowing the common disputes that typically arise with a franchise agreement and working hard to solve a dispute before it becomes a court battle. Minnesota based Faegre Baker Daniels LLP, also known as FaegreBD, is a full-service international law firm and one of the 75 largest law firms.
"Oftentimes little ones [disputes] become big ones, and if they end up in court, the only ones who win are the lawyers," Schnell stated during his session, "How to effectively avoid the most common franchise disputes that can arise in every franchise system," at the International Franchise Expo (IFE) held last week at the Jacob K. Javits Convention Center in New York City. Schnell represents franchisors, but his discussion encompassed insight for both franchisors and new franchisees.
The session was one of dozens expo visitors could attend for free during the three-day event that brought potential franchisees, franchisors and vendors serving the industry. There are about 3,000 different unique franchises operating in the U.S.
During his one-hour presentation Schell outlined "to-do's" and provided advice on how potential or new franchise operators should approach disputes, and why identifying a dispute and addressing it "effectively and efficiently" is a critical step.
"Entering a franchise agreement brings lots of nuances and emotions, and how you deal with those can make a difference in how you succeed," he said.
One big potential step for new franchisees, before signing a final deal, is to learn as much as they can about the franchise and the franchisor, and that requires lots of conversations.
"Focus on the system management as that is as important as the business focus," said Schnell. "Don't fall in love with a product or service. Yes, you have to be passionate about the product and service, but you have to ask questions."
Potential franchisees should be looking for a collaborative leadership style from a franchisor and not a management style that treats a franchisee like an employee, he said.
They also need to have fact-based expectations when it comes to revenue, growth potential and franchise support. Many times it is unrealistic expectations that ignite a dispute, said Schnell. And many times unrealistic expectations are created when a potential franchisee does not conduct due diligence on a franchisor's financial disclosure document.
"You need a franchise lawyer to review the FDD as there is no chance at changing the FDD, though there may be possible negotiation," Schnell said, noting negotiations typically only come into play with the first franchisee of a new franchise business.
"Do your due diligence, do the research. The more you think beyond the product and service, the better potential and opportunity you have," he said.
During his talk, Schnell mapped out a substantial series of rules for potential franchisees and franchisors to follow. Here are a few:
- Display and instill in others (employees, franchisees) a passion for franchising in general and your system in particular.
- Never use the "D-word" (discretion) in legal documents as a franchisee may view that as a right to do whatever they want.
- Be clear on your rights.
- Beware of the implied covenant of good faith and fair dealing.
- Use airtight and specific disclaimers.
- Keep your destiny in your control – once a dispute hits a court or mediator, it's no longer in control of the franchisor or franchisee.
- Don't state "in good faith" but rather "reasonable business judgment," as the definition is very different for franchisors and franchisees.
In addition, Schnell said, both parties need to understand there is a compelling reason to foster a collaborative relationship and that such an approach will avoid a lot of disputes.
"When it's a small dispute and dealt with right away, we can get through it. But if it gets bigger and the gap of trying to solve it grows, that just means lawyers," he said.
"You need to know what you signed up for. Franchises are hard work, but can be really rewarding," he said.
And if a dispute isn't dealt with in quick fashion and a potential court battle looms, both parties should strive to steer clear of the court and head into mediation, he advised. In that scenario a franchisor can avoid class action potential and control location, meaning having mediation conducted in the franchisor's home state, he explained. For the franchisee it will save huge legal costs.
Schnell noted the biggest culprits when it comes to disputes are a lack of communication and unrealistic expectations on both sides of the partnership.
"Both lead to disputes that may lead to court," he said. "You want a contract that is clear and is not ambiguous."
Looking for more great insight and expert discussion on franchising? Attend the upcoming Restaurant Franchising & Innovation Summit taking place July 18-20 in London. This event will feature innovative chains and their strategies in growth, from menu innovation and beyond. The Restaurant Franchising & Innovation Summit will help franchisors be more progressive in many areas of their business to attract both investors and customers.
Judy Mottl / Judy Mottl is an experienced editor, reporter and blogger who has worked for top media including AOL, InformationWeek and InternetNews. She’s written everything from breaking news to in-depth trends. She loves a great pitch so email here, follow on Twitter and connect on LinkedIn.