But with such swift growth comes an even faster learning curve and the probability of gaining some valuable insight and lessons in the world of franchise ownership — albeit the hard way.
Leonard A. Bellavia is a Senior Partner with Bellavia Blatt Andron & Crossett, PC. A leading national authority on all aspects of franchise law, Mr. Bellavia’s firm is currently involved in a mass action lawsuit against a well-known yogurt chain. Increasingly, he is witnessing franchisees in dispute and/or litigation with their franchisors.
“There are so many factors that can lead to fallout between the two parties in a franchise agreement,” states Mr. Bellavia. “Understanding what the contract should entail is only half the battle. Franchisees are frequently being taken advantage of when it comes to issues related to disclosure as well.”
When dealing with contracts, some red flags to be aware of, according to Mr. Bellavia, include:
· Matters of encroachment
· Clauses that dictate which state’s laws apply and where the franchisee can initiate litigation
· Binding arbitration
· Strict operating guidelines
· Calling the arrangement something it is not, like a sub-license
· Restrictions on where the franchisee may obtain equipment, supplies and other resources
“Normally, franchisors are required to state in the contract what constitutes default and breach of the agreement rising to termination of the franchise,” adds Mr. Bellavia. “Problems can sometimes occur when the franchisor drafts the contract broadly enough to give him or her virtual carte blanche to terminate a franchise. This is actually very common.”
Outside of the contract, some disclosure issues that may come up include failure of the franchisor to provide the requisite disclosure documents that are required by the Federal Trade Commission (FTC) Act and/or false representations of the following:
· Potential profitability of the franchise
· Anticipated sales during the first year of the franchise (this is crucial, as low sales in Year One typically mean the franchise is doomed)
· Sales of various products or limited-edition products during peak holiday seasons
· Existing store profitability
· Profit margins and daily average sales of other franchisees
· Price of supplies and support fees
“Aside from support fees typically being exorbitant, some franchisees complain of a lack of support from franchisors entirely,” says Mr. Bellavia. “Either scenario obviously puts the individual business in jeopardy.”
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