The franchisor-franchisee relationship is the bedrock of a successful franchise business. The last thing you want is to become embroiled in a lengthy, costly legal dispute with your franchisees, which could threaten the business you’ve worked so hard to create.
In this article, I explain how to prevent franchise disputes to protect your business and maintain strong relationships with franchisees.
Why Franchise Disputes Happen
Every franchise dispute is different and will have a unique set of circumstances. However, common causes of franchise disputes include:
● Misrepresentation of services (by the franchisor)
● Breach of Franchise Agreement terms (by either party)
● Failure by the franchisor to provide promised training and support
● Misuse of the franchisor’s Intellectual Property
● Disputes over territory
● Breach of non-compete clauses (when a franchisee seeks to set up an independent business in direct competition with the franchisor’s model)
Understanding why franchise disputes happen means you can put suitable preventative measures in place.
6 Tips to Help You Avoid Legal Disputes with Franchisees
1. Don’t Oversell
It may be tempting to promise prospective franchisees huge success and big profits. But be careful not to oversell the opportunity. Misrepresentation of your franchise’s potential (intentional or otherwise) could lead to legal disputes later.
For example, if a franchisee relied on inaccurate information from the franchisor when purchasing the franchise, they can make claims of misrepresentation, under the UK Misrepresentation Act 1967.
Avoid this by being upfront and clear with prospective franchisees about their potential for success. Always ensure any information you provide is accurate.
2. A Well-Drafted Franchise Agreement
The Franchise Agreement is key to building a strong franchise business and protecting your brand. It details the rights and obligations of you and your franchisees.
Key features of the contract should include:
● The duration of the franchise
● Fees structure
● Any support and training provided to franchisees
● How the business should be marketed
● Renewal rights
● Sale of business terms (franchise resales)
● Rights to terminate the contract
● Non-compete clauses
Contract templates rarely provide the protection you need because every business is different. Make sure your Franchise Agreement is tailored to address your specific commercial needs.
Appoint a bfa-affiliated franchise lawyer to draft the Franchise Agreement for you. They will be familiar with the franchising model and can draft a robust Agreement that protects your business interests, and meets the bfa’s ethical standards.
3. Franchisees Should Seek Independent Legal Advice
Your franchisees shouldn’t simply read and sign the Franchise Agreement (never to look at it again!). They need to fully understand the terms they’re agreeing to.
Encourage prospective franchisees to get their Franchise Agreement reviewed by a specialist franchise lawyer, before signing. A franchise lawyer will explain the contract in clear, jargon-free language and help them understand their legal obligations to you.
If your franchisees don’t understand your expectations, it could lead to legal disputes. For example, say a franchisee fails to meet their performance targets and you act to terminate their contract. The franchisee could claim they weren’t made aware of the performance targets and may have grounds to bring a legal case against you.
4. Clear Operations Manual
This is a vital resource which clarifies your expectations, reinforces your brand and helps prevent franchise disputes. It should leave little room for ambiguity.
The most effective operations manuals include everything franchisees need to know about how to successfully run their franchise (e.g. Intellectual Property rights, pricing recommendations, policies, business templates and required equipment purchases).
It’s worth having an accessible digital version of the manual which you can update to reflect any changes to the Franchise Agreement or business ‘know-how’. This ensures your franchisees always have up-to-date, accurate information to help them excel.
5. Regular Reviews
Regular franchise reviews help you ensure franchisees are sticking to their Franchise Agreement terms and are on track to meet performance targets.
Regular reviews can also help you resolve franchise disputes before they escalate – they offer opportunities to build strong relationships with franchisees. It’s a chance to meet in-person, encourage open communication and provide vital support which could help a floundering franchise transform into a success.
6. Adhere to bfa Code of Conduct
Many franchise disputes occur due to a breakdown in trust between the franchisor and franchisee. You can avoid this by following the principles of the bfa Code of Ethics. This acts as a guide to help franchisors navigate their relationship with franchisees in a transparent and fair manner, which supports sustainable business.
Litigation should always be a last resort for bfa-member franchisors. First, try to settle any disagreements yourself through direct negotiation with franchisees, before turning to alternative resolution methods.
When it comes to franchise disputes, prevention is always better than a cure. However, sometimes disputes can’t be prevented. In this instance, there are three options you should consider perusing (before litigation):
Letter from your Lawyer – A simple letter from your lawyer is often enough to quell bubbling franchise disputes. The letter will set out breaches of the Franchise Agreement and encourage franchisees to keep to the terms. This is often one of the fastest resolution methods.
bfa Informal Conciliation – This is a non-legally binding dispute resolution service, available to all bfa members. It brings involved parties together and supports them to find a commercial solution. Find out more here.
Mediation – This is a structured process of negotiation between the franchisor and franchisee/s, overseen by an independent mediator. Lawyers are also usually present to represent each party. The mediator is there simply to mediate and won’t provide an award or final decision. Mediation offers an affordable, often quick resolution method that can be used alongside arbitration and litigation.
Arbitration – An independent third party arbitrator will review the franchise dispute and hear each party’s case. The arbitrator will then award a decision which is final. Their decision is legally-binding and enforceable. This is often a more resolute option but is usually more costly than informal consolidation or mediation.
These options are usually preferable to litigation as they offer a relatively faster, cheaper and less destructive solution to franchise disputes.
Always seek legal advice from a bfa-affiliated franchise lawyer when dealing with franchise disputes and any ensuing litigation. A specialist lawyer will understand the dispute within the context of franchising. Their expertise means they can provide the right legal advice to suit your commercial needs. They can help you achieve an outcome that protects your business and franchise network, now and in the future.