Counseling Franchisees

• Author: Rupert M. Barkoff, Andrew C. Selden
• Pages: 289-312

289

Counseling Franchisees

CHAPTER 7

Andrew C. Selden and Rupert M. Barkoff

Contents

The challenges of legal counseling of franchisees are often underappreciated.

Many start-up franchisees don’t want to pay substantial legal fees for a thorough

analysis and renegotiation of lengthy form documents. Counseling of different

kinds will be needed at different stages of the franchise relationship. The lawyer

will be called on as a business counselor as well as a legal advisor.

There are four stages of franchisee counseling. The first stage occurs at the

time of purchase. At this point, the franchisee needs a professional advisor who is

I. Counseling the Prospective Franchisee . . . . . . . . . . . . . . . . . . . . . 291

A. The Role of the Lawyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

B. The Counseling Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

C. Deconstructing the Franchise Disclosure Document (FDD) . . . 295

D. Alternatives: Nobody Has to Buy a Franchise . . . . . . . . . . . . . 300

II. The Negotiability of Franchise Agreements . . . . . . . . . . . . . . . . . . 300

A. Is a Franchise Agreement Negotiable? . . . . . . . . . . . . . . . . . . . 30 0

B. What May Be Negotiable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 02

III. Franchisee Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

A. The Evolution of Franchisee Associations . . . . . . . . . . . . . . . . 303

B. Structuring an Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5

IV. Litigation and Arbitration: When All Else Fails . . . . . . . . . . . . . . 30 7

A. The Imbalance in Judicial Remedies . . . . . . . . . . . . . . . . . . . . . 307

B. Legislative Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

V. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312

290 Fundamentals of Franchising

familiar with investments in business but who also has some knowledge of the

idiosyncrasies of franchising. Advice should be offered on whether a franchise is

actually an appropriate investment vehicle and, if so, on comparatively evaluat-

ing different offerings.

During the ownership stage, business-related counseling is often required.

If important franchisee-franchisor disputes arise, more traditional legal counsel-

ing is called for regarding the franchisee’s legal rights to protect his or her busi-

ness interests and if, when, and where it is appropriate to turn to the courts or to

alternative dispute resolution for issue resolution. Negotiating skills are always a

plus.

Problems may surface in a franchise system that are not peculiar to a

particular franchisee but, instead, are systemwide. In these instances, the coun-

selor must be familiar with the business arrangements within the system and

understand what the bargaining positions of franchisees may be. In addition,

the counselor must have an understanding of how to organize the affected fran-

chisees and to channel those collective efforts in an effective manner. In part,

the counselor will not only be playing the role of a traditional business lawyer

but will to some degree be acting as a diplomat. That is, the counselor will be

trying to take a diverse group (the franchisees), often with different individual

needs, but some shared or common issues with other franchisees, and find com-

mon ground on which to negotiate a mutually agreeable solution to a common

problem. Once that task has been achieved, the counselor will frequently play a

role in negotiating a collective agreement with the franchisor.

Lastly, when a dispute has arisen and diplomacy has failed, the counselor

must be skilled in dispute resolution. The dispute might be a traditional one before

a court, or it might be resolved through various alternative dispute resolution

procedures. Arbitration in particular has made a strong impression on the fran-

chise scene in recent years, although it has recently been viewed more suspi-

ciously.

This chapter addresses the problems encountered in each of these situa-

tions. This focus does not lend itself to detailed discussions of legal principles,

with case and statutory citations, for little on this subject exists in the cases or

statutes. Rather, most of what follows is based on experience. While common fact

patterns often appear, franchising is sufficiently complicated, diverse, and fluid

that sound but inherently subjective judgment is called for, rather than a “right”

answer. Needs, circumstances, personalities, and resources differ from one system

to another, sometimes substantially. For example, as noted later, negotiating a

franchise agreement with an industry leader will be a markedly different experi-

ence from negotiating with a start-up organization.