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With the novel coronavirus pandemic affecting businesses across the United States in unprecedented ways, franchisors’ responses have largely fallen into two categories: There are franchisors that have stepped up to help their franchisees survive, and there are those that have chosen to aggressively enforce franchisees’ standard contractual obligations—even knowing that their inability to meet their financial obligations is a direct result of the COVID-19 crisis. Franchisors Need to Support Their Franchisees During the Novel Coronavirus Pandemic In a recent blog article, the International Franchise Association (IFA) writes that it is now more important than ever for franchisors to support their franchisees. As the author, Lauren Moorman, writes: “[M]any of the most vulnerable franchise systems will be looking to mitigate those losses by scaling back spending and imposing new austerity measures for franchisees. “This is a mistake. “While budget-tightening will be unavoidable for most franchise systems, franchisors should be careful not to create new burdens or restrictions on franchisees. . . . Instead, franchisors in every segment should focus on fortifying their front lines, ensuring that franchisees have everything they need to stay afloat now and recover quickly later . . . .” In order to help their franchisees weather the storm and ensure that their brands remain as strong as possible, the article recommends that franchisors take several steps during the COVID-19 crisis. Some of these steps include: Listening to Franchisees’ Concerns – Franchisees are on the front lines; and, while franchisors are feeling the effects of the COVID-19 crisis […]

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As discussed in a recent article published by Nation’s Restaurant News (NLN), some franchisors have begun offering financial relief packages to their franchisees during the COVID-19 crisis. According to NLN, major restaurant franchisors including Yum Brands (KFC, Pizza Hut and Taco Bell), Subway, McDonald’s, Chick-fil-A and Qdoba are offering relief ranging from, “deferring all 2020 capital obligations for remodels and new unit development through the end of this year,” to deferral of royalty and rent payment obligations. These relief packages come as these (and other) franchisors are requiring franchisors to severely limit their operations in order to help combat the spread of the novel coronavirus. In many franchise systems, franchisees have the option to implement social distancing and other safety protocols consistent with local practices as well. Regardless of the impetus, many franchisees are struggling as a result of the economic impacts of COVID-19, and this makes financial relief packages an attractive option for franchisees to whom they are available. Do Franchisor Relief Packages Come with Strings Attached? Before accepting financial relief packages from their franchisors, however, franchisees need to make sure that the relief being offered does not come with strings attached. Or, if it does come with strings attached, then franchisees need to know what these strings are, and they need to decide if the associated costs and risks are worth it. If royalty payments are being deferred, are they being deferred with interest? Will past-due royalties eventually be due in a lump sum; and, if so, when? […]

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While buying a franchise is generally considered to be less risky than starting an independent business in the same industry with the same start-up costs, many franchisees still fail. There are several reasons why, and these reasons are not necessarily consistent across industries or franchise systems, or even within individual franchisors’ ranks. The risk of failure is one of the primary reasons why all prospective franchisees need to work with an experienced franchise attorney before buying, and it is why active franchisees should engage legal counsel promptly if they run into issues or have a dispute with their franchisor. While the question, “Why do franchisees fail?” does not have one single straightforward answer, there are a number of possible reasons for franchisee failure. Some of these reasons include: 1. The Franchise System Isn’t Sound Like anything else, some franchise systems are simply better than others. If a franchise system isn’t sound – if the brand doesn’t resonate with customers, if the products or services are subpar, or if the marketing plan just doesn’t work – then franchisees are going to struggle. If Item 20 of the Franchise Disclosure Document (FDD) shows a high volume of franchisee turnover (including a large number of franchisees leaving the system “for other reasons”), this may be a sign that there issues with the system as a whole. 2. The Franchisor Doesn’t Provide Adequate Training or Support Lack of training can be an issue in systems where (i) there are a significant number of complex […]

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When researching franchise opportunities online, you will come across several lists with names like, “Top Franchises Under $30,000” and “Cheap Franchises Under $10k”. While these make for good headlines, does it really make sense to shop for a franchise by price point? Here, national franchise lawyer Jeffrey M. Goldstein shares his thoughts. 1. What is the “Price Point”? When talking about franchise price points, it is important to ask: What “price point” are we talking about? Generally speaking, there are three options: The Initial Investment Fee disclosed in Item 5 of the Franchise Disclosure Document (FDD) The total estimated initial investment disclosed in Item 7 of the FDD The total cost of ownership over the lifetime of the franchise Most online lists focus only on the Initial Investment Fee. There are a couple of reasons why. First, this number is easy to find, and this makes it easy to compile a list. Second, this is the lowest number that can reasonably be characterized as the “price point” for a franchise. So, while this number ultimately only reflects a small fraction of the cost of franchise ownership, it is a good choice for marketers seeking to get clicks from prospective franchisees. 2. Price Point is Only One of Several Factors to Be Considered While the amount of money you have available to invest in a franchise is certainly a factor to be considered, it is not the only factor that should drive your franchise buying decision. From brand recognition and franchisor […]

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Buying a franchise is not a simple process. There are several steps involved, and you need to do everything you can to make sure you feel as confident as possible that you will be able to succeed as a franchisee. Too often, prospective franchisees rush the buying process—either because they are excited about the franchise opportunity, or because the franchisor’s sales reps encourage them to sign quickly without doing their full due diligence. When buying a franchise, there is no substitute for hiring an experienced franchise attorney to guide you through the process. With that said, as a prospective franchisee, there are several steps you can take on your own, and it is important to be aware of the overall timeline of the franchise buying process. Here is a checklist you can follow: 10 Steps in the Franchise Buying Process 1. Compare Franchise Opportunities Before settling on one particular franchise opportunity to pursue, it is important to consider the competition. How are the franchised brands similar? How are they different? 2. Choose a Franchise Opportunity to Pursue Next, it is time to choose the franchise opportunity you are going to target. From this point forward, you will be devoting a lot of time and effort to your chosen opportunity, so you will want to choose wisely. 3. Meet with the Franchisor Once you choose a franchise opportunity to target, it is time to meet with the franchisor. Schedule an appointment via videoconference or in person, and be prepared with a […]

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What Can You Expect in Mediation, Arbitration or Litigation? In Parts 1 and 2 of our Ultimate Guide to Franchise Litigation for Franchisees, we covered common issues in franchise litigation and common franchise agreement provisions that can impact franchisees’ rights during the dispute resolution process. In Part 3, we are covering what you can expect when you hire a franchise attorney to represent you in mediation, arbitration or litigation against your franchisor. Mediation and Arbitration: Two Very Different Forms of ADR While mediation and arbitration are often lumped together as forms of alternative dispute resolution (ADR), the reality is that these are very different proceedings. With mediation, there is no guarantee that the process will lead to a resolution. Instead, the parties negotiate with the help of a neutral third-party mediator, and they try to find a way to come to terms. In arbitration, however, the arbitrator’s role is to hear the parties’ evidence and then render a final decision. This decision is usually binding (as stipulated in the parties’ franchise agreement), although it may be possible to challenge the arbitrator’s decision in court in some cases. Mediation and arbitration both involve scheduled sessions at which the parties appear with their legal counsel. In mediation, these are essentially guided negotiation sessions, with the mediator serving to help keep the parties’ negotiations focused and offer potential compromise solutions. In arbitration, the parties will engage in some form of limited discovery beforehand, and then they will take turns presenting their evidence to […]

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What are the Relevant Provisions of Your Franchise Agreement? As with virtually all aspects of franchise ownership, when facing a dispute with your franchisor, one of the first things you need to do is review the relevant terms of your franchise agreement. Franchise agreements almost universally contain several terms that apply specifically to litigation and dispute resolution, and you will want to work closely with a franchise lawyer to make sure you understand how your franchise agreement impacts the options you have available. Does Your Franchise Agreement Contain a Mandatory ADR Clause? Many franchise agreements contain clauses that require the parties to submit most (but not all) disputes to mediation or arbitration. When franchisors include these provisions in their franchise agreements, they do so not because alternative dispute resolution (ADR) offers a level playing field, but because they believe that they can benefit from the process. Generally, mandatory ADR clauses apply to all franchisee-initiated disputes, and they apply to some disputes initiated by franchisors. Typically, disputes regarding franchisees’ payment obligations, unauthorized use of the franchisor’s trademarks and proprietary information, and other similar types of disputes are excepted. When mediation or arbitration is required, then pursuing mediation or arbitration will be a necessary precursor to pursuing litigation—assuming the mandatory ADR clause is enforceable. Where Does Your Franchise Agreement Require Disputes to Be Resolved? Franchise agreements also generally include jurisdiction and venue clauses that specify where mediation and arbitration must take place and where lawsuits need to be filed. Typically, this is […]

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What are the Grounds for Initiating Franchise Litigation? When you bought your franchise, you did not expect to end up with litigation with your franchisor. But, an issue has come up and there does not seem to be any other alternative, and you need to consider all of your options for protecting your investment. In this Ultimate Guide to Franchise Litigation for Franchisees, attorney Jeffrey M. Goldstein provides an overview of what franchisees need to know when facing contentious disputes with their franchisors. Here in Part 1, Mr. Goldstein covers the types of issues that tend to lead to litigation, with insights based on his 30-plus years of experience as a franchise litigation attorney exclusively representing franchisees. Common Issues in Franchise Litigation While there are numerous issues that can lead to litigation between franchisors and franchisees, some issues tend to come up more frequently than others. This includes issues that cause franchisors to initiate litigation against their franchisees, as well as issues that force franchisees to take action in order to try to save their franchises—or at least recoup as much of their initial investment as possible. On the franchisor side, some of the issues that most-commonly trigger the decision to take legal action against franchisees include: Non-payment of royalties or advertising fund contributions Non-payment of liquidated damages or “lost future royalties” post-termination Repeatedly operating outside of a franchisee’s designated territory Failing to adhere to system standards (either repeatedly or in a manner that represents a significant departure from the […]

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Buying a franchise is a big decision that requires a substantial investment, and there is a significant amount of risk involved. As a result, regardless of your background and experience, you are going to want help along the way. You know that you need to hire a franchise attorney to review the Franchise Disclosure Document (FDD) and help you negotiate the franchise agreement, but should you hire a franchise consultant as well? What Should You Look for in a Franchise Consultant? For many prospective franchisees, hiring a franchise consultant will be a good option. If you need help with things like budgeting and site selection, an experienced franchise consultant will be able to provide a lot of value as you work toward opening your franchise. If you believe that you could benefit from working with a franchise consultant, here are some factors to consider when choosing someone to advise you: Franchise Industry Experience – The franchise industry is unique in many respects; and, in order to advise you effectively, a franchise consultant will need to have deep industry experience. Ideally, he or she will have past experience as a successful franchisee or as a franchisor executive. Objectivity – When working with a franchise consultant, you need to be confident that he or she is providing objective advice. If it feels like a consultant is steering you toward a particular franchise opportunity, you will want to make sure this is based on an assessment of your best interests and not other […]

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The novel coronavirus pandemic is having unprecedented effects on our nation’s economy, and many companies are being forced to lay off their employees due to mandatory closures of “non-essential” businesses. Certain industries, such as the restaurant and fitness industries, have been hit particularly hard; and, in order to avoid the risk of being laid off again, some individuals may be considering the possibility of becoming their own boss by buying a franchise. If you fall into this category, should you think seriously about getting into the world of franchising? Here are some important considerations to keep in mind: 1. You Should Not Make a Long-Term Decision Based on Your Short-Term Circumstances While the novel coronavirus pandemic is (hopefully) a once-in-a-lifetime event, things will eventually return to normal. So, while you may be out of work for now, the job market will bounce back, and employers in certain industries are actually hiring aggressively during the pandemic. If you understand the franchise model and are serious about becoming a franchise owner, it may be an option worth considering. However, if you are simply focused on weathering the storm, there are likely better (and less risky) alternatives available. 2. You Will Need to Have Sufficient Cash Reserves to Build a Profitable Business When you buy a franchise, your business will not be profitable immediately. It takes time to build a profitable business, and most franchisors recommend that their franchisees have anywhere from three to twelve months of capital reserves on hand when they […]

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