In a recent article on the Franchise Direct blog entitled, “Litigation and Complaints Shouldn’t Always Stop You from Buying a Franchise,” the author makes the case for digging deeper if you have concerns about a franchisor’s public reputation or private litigation. While this is sound advice, it is important not to discount the risks of getting into a business relationship with a franchisor that is dealing with lawsuits, as national franchise attorney Jeffrey M. Goldstein explains below.
Understanding the Risks of Buying a Franchise When the Franchisor is in Litigation
As a prospective franchisee, you have (or should have) two main concerns when you see that a franchisor has litigation disclosures in Item 3 of its Franchise Disclosure Document (FDD). These are:
- Could you be at risk for litigation if you buy a franchise? If a franchisor’s Item 3 disclosures show that it frequently litigates with its franchisees, this means that you need to be concerned about the possibility of facing litigation as well.
- Is the franchisor at risk of going under due to litigation? If a pending lawsuit could bankrupt the franchisor, the system could shut down and you could lose your franchise due to factors beyond your control.
While these may seem like unlikely scenarios, they do happen. In fact, franchisor-franchisee litigation is common, and we have seen multiple franchise systems go under as the result of facing substantial judgments in litigation.
So, while litigation disclosures in Item 3 shouldn’t necessarily be a non-starter during your search for a franchise, you shouldn’t ignore them, either. Instead, you should dig deeper. A franchise attorney can help you understand what past or pending litigation might mean for you if you sign a franchise agreement, and you can use these insights to make an informed decision about buying a franchise.
Why Not Consider Other Franchise Opportunities?
If you are asking the question of whether it is safe to purchase a particular franchise, it is also worth asking the question: Why not consider other franchise opportunities?
These days, there is no shortage of franchise opportunities available. Virtually all segments of the franchise industry are now highly competitive; and, if you have concerns about your potential franchisor being embroiled in litigation, you may simply want to move on to one of its competitors.
With that said, professional help is available to you as well. If you have particular interest in a certain franchise opportunity but have concerns about the risks involved, you can—and should—seek advice from an experienced franchise attorney.
Schedule an Appointment with National Franchise Attorney Jeffrey M. Goldstein
Do you have questions about a particular franchise opportunity? If so, we encourage you to get in touch. We offer four tiers of fixed-fee franchise business reviews for prospective franchisees. To get started with a free and confidential consultation with national franchise attorney Jeffrey M. Goldstein, call us at 202-293-3947 or tell us how we can reach you online today.
