Franchise lawsuits: what do they really mean?

A franchisor must disclose legal actions within their UFOC, but is that necessarily cause for concern?

All franchisors must provide prospective franchisees with a considerable disclosure document, called the Uniform Franchise Offering Circular (UFOC), which contains an abundance of information concerning many areas of the franchise company. Among the document’s items is a brief history of any material lawsuits or other litigation that either the business or its executives have already been involved in.

Prospective franchisees frequently have several questions about these disclosures. Are they relevant and material? For anyone who is concerned about these disclosures? What is it possible to discern about the franchise company by reviewing these disclosures? To answer these questions, you must understand the truth behind most legal conflicts in the franchise industry.

The franchise agreement contract is carefully used by the franchise company attorneys and governs the partnership between your parties. Franchisees often usually do not utilize the same care to be sure they completely understand certain requirements of the contract as the franchisor did through the drafting process. This may result in confusion and future conflict.

When litigation is instigated by the franchisor, it will always be due to the failure of the franchisee to meet up the obligations within the contract. These obligations are often spelled out pretty clearly. The most frequent regions of "default" for a franchisee aren’t paying fees when due or not meeting the terms of a development schedule.

When litigation is instigated by franchisees, it will always be because the franchisees aren’t pleased with their franchise business anymore. This may mean they don’t just like the franchisor, they don’t just like the business or they are financially failing available. In fact, it is each of the above.

The task franchisees have in litigation is that a lot of franchisors have become careful to be sure they meet almost all their obligations beneath the terms of the contract and there is normally no contractual obligation to be sure the franchisee is happy or financially successful. Therefore, most franchisee litigation alleges that the franchisor violated the guidelines pertaining to the original sales process, since prevailing upon this point is probably the few strategies that could allow the franchisee to secure a right of rescission to undo the contract they signed with the franchisor.

When evaluating litigation disclosed in the UFOC, there are a few clear deductions you possibly can make about the franchisor. That is typically the case whatever the allegations within the specific disclosures. The main of the are:

  • Invest the the full total number of franchisees in the machine and divide by the amount of litigations listed for days gone by year (or for every of the past 2 yrs), you’ll have a concept of the percentage of franchisees who result in litigation with the franchisor every year. In most cases, you want this percentage to be really small, irrespective of who instigated the litigation or that which was alleged to took place. Remember, they are your own future odds we’re discussing.
  • If the full total percentage is less than 1 percent (for instance, if indeed they have about one litigation event each year with 500 franchisees), you almost certainly don’t possess much to worry about. These exact things happen running a business occasionally, but if you are an acceptable person, these odds suggest it will most likely not eventually you.
  • If the percentage is higher than 4 to 5 percent, my advice is to hightail it from this franchise as fast as you possbly can. You don’t even have to know what the precise problem is, since this percentage lets you know there exists a significant problem somewhere in this technique.
  • When there is a share of system litigation previously 2 yrs is in the 1 to 3 percent range, consider the cases to see who’s instigating it. Don’t worry in what is being alleged at this time; just see who started it for clues about where you can do more research.

If the litigation is predominately instigated by franchisees, you have to research the financial performance of the franchisee business meticulously, since that is a red flag that something is wrong when it comes to the moneymaking potential of the business enterprise. Franchisees who are making good money don’t usually file plenty of lawsuits against the franchisor-if they’re unhappy, they are able to probably just sell their profitable business and get to something else.

If it’s predominately instigated by the franchisor, that is an indication that they might be litigious and susceptible to solving problems by calling in the lawyers. While some would argue there is nothing wrong with this process, I’d personally just send them a copy of How exactly to Win Friends and Influence People and go find another opportunity with people whose values were nearer to mine.

It isn’t uncommon for franchise companies which have been around for some time to involve some litigation disclosures, but anything greater bit should raise questions in your thoughts about either the financial performance of the chance or the values of the people behind it. The very best advice is to stay away from any franchise with excessive litigation whether it’s vital that you you personally in order to avoid such events later on.

Although above analysis ignores the substance of the allegations within the disclosure, if a company passes the tests mentioned previously, you nevertheless still need to consider the specifics of the litigation history. Ask the franchisor for his or her explanation of whatever happened and make an effort to contact the franchisees to obtain side of the story. Even if this is a fairly rare event, this research can provide you information that’s highly relevant to your decision about whether this franchise may be the right one for you personally.

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