As a franchisee, you are responsible for building a successful business with the support—and within the confines—of the franchise model. This means that while you have the opportunity to leverage your franchisor’s experience and investment in its branding and systems, you are also required to play by the rules. So, what happens when you have a better idea than your franchisor? National franchise attorney Jeffrey M. Goldstein explains.
When (If Ever) Can Franchisees Depart from the Franchise System?
Let’s say you are a franchisee, and let’s say you have an idea for how to improve your business’s profitability. You want to pursue your idea, but there’s just one problem: It doesn’t align with what your franchisor requires.
What can (and should) you do?
The answer to this question depends on the specific circumstances at hand. To answer it, you will need to carefully consider additional questions such as:
1. Can You Execute Your Idea Within the Confines of the Franchisor’s System?
In some circumstances, it will be possible to execute new ideas while still operating within the confines of the franchisor’s system. For example, if you have an idea for a new product or service and your franchisor does not expressly restrict the products or services you are allowed to sell, you may be able to move forward.
On the other hand, if your franchisor has room to argue that your new idea devalues the system or dilutes the brand, then moving forward could be risky. Likewise, in most cases, franchise agreements are drafted broadly enough to allow franchisors to impose new system standards and restrictions over time. As a result, if your franchisor gets wind of what you are doing and disapproves, you could find yourself forced to revert to the old way of doing business—and potentially facing allegations of breach or default.
2. Does Your Idea Conflict with the Franchisor’s System Standards?
If your idea conflicts with the franchisor’s system standards, then moving forward is probably a non-starter. For example, let’s say you want to start purchasing products from a new and less-expensive vendor, but your franchise agreement includes a designated supplier provision. In this scenario, even if executing on your idea is in your franchise’s best interests, you may be prohibited from doing so under the terms of your agreement.
If you pursue an idea, innovation or opportunity that conflicts with your obligations as a franchisee, doing so can provide clear grounds for your franchisor to pursue termination—and all of the remedies that come with it. As a result, if you are thinking about doing something that your franchise agreement prohibits, you will need to be very careful to ensure that you are making informed decisions about your next steps.
3. Can You (and Do You Want to) Seek the Franchisor’s Approval?
If moving forward without your franchisor’s approval is risky, then seeking your franchisor’s approval could be the best approach. But, here too, there are several important factors to consider.
One of these factors is the likelihood that your franchisor will approve. If your franchisor is unlikely to approve any changes to its system standards, then seeking its approval could be a waste of time. Not only that, but if your request raises eyebrows, it could lead to scrutiny of your franchise’s system compliance. If your franchise is not in compliance, your efforts to help improve the franchise system could potentially lead to adverse consequences.
Another factor you may want to consider is what you plan to do once your franchise is over. In other words, should you save your idea, innovation or opportunity for yourself? Here, you need to be careful about relying on the franchisor’s system and resources to come up with competitive ideas (and you will need to consider your franchise agreement’s post-termination competitive restrictions as well), but it may be worth considering whether you want to try to help your franchisor under the circumstances at hand.
What Are the Risks of Pursuing a Profitable Idea Without Your Franchisor’s Approval?
Let’s say you decide to pursue a profitable idea without your franchisor’s approval. What risks will you be taking in this scenario?
As discussed above, the primary risk in this scenario is that your franchisor will declare you in default. Noncompliance with system standards almost always constitutes grounds for default, as franchisors typically reserve broad rights to enforce compliance. Franchisors invest heavily in their systems, and protecting their system standards is typically among their top priorities.
If your franchisor declares you in default, it can pursue termination. If your franchisor terminates your franchise for noncompliance, it can pursue all remedies available under the terms of your franchise agreement. In many cases, this includes not only recovery of any amounts you currently owe, but recovery of “lost future royalties” as well.
Making Informed Decisions About Your Next Steps
In short, if you are interested in pursuing a new idea as a franchisee, you will need to decide what makes the most sense in light of your individual circumstances. If pursuing your idea does not raise any compliance concerns, then you may simply be able to move forward. On the other hand, if pursuing your idea does raise compliance concerns, you will need to be careful to avoid inviting unnecessary scrutiny and facing the risk of default and termination.
If you decide to approach your franchisor for approval, you will want to take a strategic approach. You should have a clear plan in place, and it may make sense to see if you can get other franchisees on board. Franchisees can often find strength in numbers, and coming forward as a group could help improve their chances of success.
Schedule a Free and Confidential Consultation with National Franchise Attorney Jeffrey M. Goldstein
National franchise attorney Jeffrey M. Goldstein has decades of experience advising and representing franchisees. If you would like to schedule a free and confidential consultation with Mr. Goldstein, please call 202-293-3947 or tell us how we can get in touch online today.
