How to Manage Franchise Disputes

Legal Advice

 “Franchising is one long conversation, chequered by disputes”. If Robert Louis Stevenson had pursued a career in the franchising industry, rather than becoming a poet and novelist, he may have penned these words. Stevenson was, in fact, referring to “marriage” but there are numerous similarities between the two relationships. Marriage is a long term relationship based on trust and commitment, in much the same way that Franchising should be.

However, all too often we hear of this relationship turning sour and of disputes occurring. This article points out the common areas of dispute and provides some advice on how to avoid or resolve them.

Some of the most common areas of franchise dispute are:

  • The Franchisee believes there is a lack of support from the Franchisor.
  • The Franchisor believes that the Franchisee is not following the system.
  • The Franchisee believes he is not making the level of profit that the Franchisor had promised.
  • The Franchisor believes that the Franchisee is underperforming.

In each of these situations, the Franchisor will have one opinion and the Franchisee will have another. So how do you resolve disputes?

  1. Understand what you are buying

I never cease to be amazed by the number of franchisees who have bought a franchise and invested a considerable amount of money without first making sure they understand what it is that they are investing in.

The best way to avoid a dispute is to research the opportunity thoroughly before investing and making sure you understand what is being offered and the obligations on both parties under the Franchise Agreement. One of the most effective ways of doing so is to speak to existing franchisees of the business to get a good understanding of the level of support which you can expect from the Franchisor, how much money you can expect to make and whether the other franchisees are satisfied with their investment.

In addition to seeking advice from existing franchisees, you should also seek advice from a solicitor. Franchisors will often tell potential franchisees that their franchise agreement is “non-negotiable”, which simply means that the franchisor is not willing to alter the agreement. Do not be put off by this. You should always take your franchise agreement to a British Franchise Association accredited solicitor and ask them to look over it. The solicitor will be able to provide you with a report which explains the Franchise Agreement and lets you know if it contains anything unusual or unnecessarily onerous. The solicitor would also be able to suggest amendments or relaxations which would be fair and equitable. These amendments can and will often be adopted by the Franchisor in a document known as a “Side Letter” rather than altering their standard “non-negotiable” franchise agreement.

  • Communicate with the Franchisor

I mentioned that “Franchising is one long conversation”. The majority of disputes occur as a result of a lack of communication between the Franchisor and the Franchisee. It may be that the Franchisee has pursued a course of action without obtaining the Franchisor’s consent. Alternatively, the Franchisor may have taken decisions on behalf of the network without effectively communicating the reasons for doing so. Such disputes can be avoided if the Franchisor and the Franchisee maintain an open dialogue without fear of recrimination (from the Franchisor) or revolt (from the Franchisee).  

My advice to Franchisees is to be open and up-front with the Franchisor. If you discover a new approach to the business which may differ from the Franchisor’s method you should discuss this with the Franchisor and get his consent before implementing it. The Franchisor may support you with trialling your idea and, if successful, they may adopt it into the system (Legend has it that the ‘Big Mac’ burger was created by a McDonalds franchisee who made it for his franchise manager). Alternatively, the Franchisor may be able to discuss why the idea may not work, perhaps the Franchisor has attempted the same idea previously. You will not know if you do not ask, the Franchisor may be able to save you time, money and effort.

  • Attempt to resolve disputes amicably

If a dispute does occur it is important to resolve it quickly and as amicably as possible.

Franchisors can often be considered heavy-handed in their approach to disputes and this is often with very good reason. The Franchisor not only represents himself in a dispute but also the other franchisees in the network. If one franchisee steps out of line and damages the brand, the Franchisor will want to stop this immediately to protect the interests of all the other franchise owners. Similarly, a Franchisor does not want to be seen as a soft-touch by his other franchisees. If one franchisee gets special treatment, the message will soon spread and the rest will want to be treated similarly. Given this, Franchisors can be quick to involve solicitors and instruct them to terminate or seek termination of the Franchisee’s Agreement by serving notice.

However, this heavy-handed approach will generally only be used in response to more serious breaches of the Franchise Agreement. For lesser breaches, the Franchisor will usually prefer that the breach be remedied within a time period, resulting in a swift resolution rather than resorting to litigation. It is therefore in both parties interests to consider alternative forms of dispute resolution, including mediation and, if necessary, arbitration. Both of these processes can be very effective in reaching a positive outcome and the British Franchise Association have established mediation and arbitration schemes which can be used to assist in this process.

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