Franchising harbors its share of misconceptions; for example, that franchising is a legal minefield simply waiting to explode on some unsuspecting franchisor.
The fact of the matter is that franchising need not be any more litigious than any other endeavor and, in fact, may be considerably less so.
Let’s start with the disclaimer. Anyone can sue anyone else for seemingly anything—including the coffee spilled on one’s lap—so there is no absolute proof against litigation.
That said, it is important to understand a few reasons why franchising is actually less prone to litigation.
First of all, the typical franchise contract is a very one-sided document. And, if written by an attorney who specializes in franchise law, it is likely to afford you a great deal of protection.
Over the years, the litigation centering on franchising seems to have come in waves. Some years ago, there were a number of cases involving the proper use of advertising funds. As decisions were reached and case law established, we saw fewer and fewer such lawsuits. Later, we saw several lawsuits on the issue of territorial encroachment. And again, as decisions were reached and case law established, fewer such lawsuits occurred. Why have these wavers subsided? Because the lawyers who specialize in franchising have followed these cases closely and have learned how to write clauses in their contracts that allow franchisors to avoid such litigation.
The two issues that always remain ripe for litigation, of course, are violations of franchise law and fraud in the inducement of selling a franchise. But even these issues can be largely inoculated against. First and foremost, train all your people on franchise law and, of course, hire a good franchise attorney. Be sure everyone on your staff is scrupulous in their honesty. Mystery shop your sales force. And, of course, ask each and every franchisee in their closing interview about the sales process and any representations that were made. Many franchisors will use a written “closing checklist,” and some have gone as far as videotaping those interviews. And, lastly, institute a no tolerance policy if you do find any infractions.
On the upside, franchising affords you a significant “liability tradeoff.” In other words, when making a decision about franchising versus company-operations, you need to consider the litigation exposure you are avoiding as a part of this same equation.
Yes, as a franchisor, you gain some potential contractual liability with each franchise agreement you sign. But consider the alternative of company-owned operations.
With company-owned operations, you have the liability for every lease you execute—whether it’s for equipment, a vehicle or a building. In franchising, that liability is the franchisee’s. With company-owned operations, you have the liability for every employee you hire—personal injury, sexual harassment, discrimination, employment law, crime in the workplace … the list goes on and on. Again, with franchising, that employment liability is largely that of the franchisee. The same holds largely true for customer liability—everything from breach of contract to personal injury.
To be clear, franchising may not stop someone from suing you, but if you have a well-written contract and a well-written operations manual (allowing you to avoid claims of negligence and inadvertent agency), the liability will likely be limited to the franchisee. Add to that other protections (such as the requirement of the franchisee to obtain insurance coverage and name the franchisor as the co-insured), and it becomes readily apparent that significantly more liability is associated with the growth of an equal number of company operations.
The second big myth in franchising involves control and the improved unit-level performance that some argue comes with it.
Both independent studies and our own observations of franchisors have repeatedly shown that similarly-situated franchisee-operated sites typically outperform their company-owned counterparts in almost every imaginable category—from revenue to perceived cleanliness to customer satisfaction.
Two reasons: First, franchisees are highly motivated and take a pride of ownership that is difficult to instill in someone with nothing on the line. Secondly, franchisees, by their nature, are often “lifers,” staying with the company sometimes for generations. Instead of constantly training and retraining and hoping for the best, franchisees develop a depth of knowledge and experience that is virtually impossible to replicate in a company-owned operation at the unit level.