Choosing the Right Franchise

Is Your Favorite Franchise Being Sued?

It wouldn’t be surprising if you discovered that one of the franchises on your short list is being sued by its franchisees. Cold Stone Creamery, Burger King, Edible Arrangements, Quiznos, Dunkin’ Donuts, and McDonald’s are just a few of the companies that have been sued by franchisees, and there are many, many more.

If a franchise has been sued by its franchisees, does that mean that you should cross them off your list of possible franchise investments?

Maybe not. One franchise lawyer explains that franchises usually sue franchisees for clear violations of the franchise agreement. For example, a franchise might sue a franchisee for cutting corners on ingredients or buying from a vendor who is not approved to provide the raw materials used at the franchise.

When franchisees sue a franchisor, however, the claims are often, in the lawyer’s words, “creative.” The United States today is a litigious society, and people can sue for anything. Some of the things franchisees give as reasons for a suit:

  • changes in the franchise agreement
  • misrepresentation of likely earnings
  • misstatement of the costs involved in starting up the franchise
  • selling another franchise too close to the first location
  • competing with franchisees
  • fees that don’t provide value
  • failure to provide sufficient support
  • termination without sufficient reason
  • poor quality training or marketing
  • promotions that cut into franchisees’ profits

These may be reasonable complaints, but in some cases there are clearly two sides to the story.

We spoke with one franchisee who was planning a suit because the franchisor had begun selling directly to consumers over the internet, rather than sending all leads to brick and mortar franchises. While e-commerce is certainly a new source of competition for brick and mortar businesses, it’s also true that things have changed in the real world. Expecting a franchisor not to make changes in the corporate business model in response to changes in the world seems unrealistic.

What’s more, a company which can sell its products online and doesn’t do so will lose business to competitors that sell online. Weakening the brand doesn’t benefit the franchisees in the long run.

A researcher quoted in the Wall Street Journal  says it all comes down to profits. If franchisees aren’t as successful as they hope to be, their frustration can lead to lawsuits.

Franchise businesses are less likely to fail than a start-from-scratch independent business, but all businesses can fail. The infographic at the beginning of this post shows the overall failure rates for small businesses. Common reasons for failure include not having enough capital to make it through the first few years while the business is getting established, poor management, and poor locations. Any of these problems can occur with a franchise. Are they the fault of the franchisor, who didn’t provide enough training or was optimistic about the costs of starting up, or are the fault of the franchisee? With a from-scratch startup, there’s no one else to blame, but an unsuccessful franchisee can easily blame the franchisor.

When you’re considering which franchise business opportunity is best for you, you will see any recent lawsuits in the FDD, the disclosure document franchisors are required to provide to potential franchisees. Seeing no lawsuits is a positive sign.

However, having been sued may not be a deal breaker. Look into the details of the lawsuit, including the outcome, and see whether the franchisor was truly at fault. Ask for their side of the story. Then go into the deal — if you still want to — with your eyes open to possible problems. Forewarned is forearmed.

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