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Remember, the corporation selling franchises does not necessarily have your best interest at heart. The franchisor makes money — from fees and royalties based on gross income, not net — whether you do or not. A dose of caution and homework will help protect you from unscrupulous or poorly managed franchisors.

Are you feeling stuck? Has your franchisor failed to honor its contract? Is the advertising support what you expected? Has the corporation allowed another franchisee to encroach on your territory? These can all be difficult issues that need expert care and handling.

Franchise agreements can be terminated for a number of reasons, but if the franchisor has not followed the law or honored the original franchise agreement, you may have a cause of action. If the corporation has misrepresented its claims to you, you may have been defrauded. Only competent legal counsel can help you protect your rights.

If you are interested in purchasing a franchise, you should seek competent assistance. It is essential that you conduct a thorough "due diligence" on the prospective franchise. Due diligence means doing your homework.

Before signing a contract, securing a loan and cutting a check, you should:

1. Review the litigation record of the franchisor contained in the franchise offering circular (FOC -- a document required by law to be given to you at least ten days prior to signing the franchise agreement);
2. Scrutinize the promotional marketing materials provided by the franchisor and compare them with the representations made in the FOC;
3. Contact current franchisees listed in the FOC and inquire if they could do it all over again, would they purchase their franchise [Remember, current franchisees will be reluctant to speak negatively about the franchise.];
4. Ferret out former franchisees (sometimes a difficult task) and inquire how many left and why they left the system [Keep in mind, former franchisees may be inclined to speak negatively about the franchise.];
5. Independently research the franchisor and franchise concept to determine the strength of the trademark, the financial performance of company-owned stores and whether the franchisor is a "professional franchisor," or a verifiable expert in the concept he/she is franchising;
6. Call the Federal Trade Commission (FTC) in Washington, D.C. to determine if there have been any complaints filed against the franchisor;
7. Call franchisee associations such as the Franchise Equity Group (619-593-6553) and the American Association of Franchisees and Dealers (800-733-9858) to get additional information; and
8. Determine which attorneys in the past have represented franchisees in the network, and inquire with them about their client's problems with the franchise.

Above all, do not take the franchisor's word as gospel, especially if he or she is unwilling to incorporate his or her representations into the franchise agreement. Remember, the franchisor's interests are not necessarily consonant with yours -- the franchisor makes money whether you do or not. A franchisor earns up-front fees and gets paid royalties based on gross revenue and not net (i.e., after expenses are deducted).

Have a competent franchise attorney review the proposed franchise agreement including provisions such as surrender of premises upon termination, covenant not to compete, venue and choice of law, exclusive territory and disclaimers.

 
The franchisor-franchisee relationship is an arms-length business relationship governed by contract and is not considered "fiduciary."

Franchise agreements are customarily drafted by franchisors and tend to be one-sided.

If you own a franchise, you may be experiencing certain problems relating to over-saturation of your trade area. The technical term for this is "encroachment." Some franchise agreements may provide for a protected area, but frequently franchisors will place another franchise on the border of a protected area and the two franchises will end up competing for the same customer base. This type of encroachment is usually not a breach of the franchise agreement and is a difficult situation to remedy.

Many franchisees see their profits decline as more franchised units are established.

Other issues affecting current franchises include advertising fund expenditures and lack of support. Many franchisors collect advertising fees from franchisees, but have complete discretion as to how the funds are expended. Franchisees may disagree with the type of advertising chosen, but may be powerless to remedy the situation.

In terms of lack of support, many franchise agreements do not obligate franchisors to perform on-going support once the franchisee has had initial training.

If you are a franchisee whose franchise has been terminated, or is about to be terminated, you should seek competent legal assistance.

Various states have statutes protecting a franchisee from wrongful termination, insisting that a franchisor have "good cause" for terminating a franchise. Franchises usually are terminated for breach of the franchise agreement (e.g., non-payment of royalties, quality control concerns, or abandonment).

Franchisees whose franchises have been terminated may have legal grounds to sue their franchisor for breach of contract or fraud.

Contract actions tend to focus on issues involving lack of support (sometimes referred to as "continuing assistance"), improper site selection and misuse of advertising or marketing funds. Fraud in this context is defined as a material misrepresentation of fact by a franchisor that a franchisee relied on to his or her detriment and was damaged thereby.

Fraud actions usually focus on unsubstantiated:

1. "Earnings claims" (representations or revenues and/or profits that a franchisor has attained or that a franchisee can expect to attain);
2. "Success" or "failure" rate claims;
3. Start-up and working capital claims (costs associated with achieving profitability); and
4. Misrepresentations regarding the nature of the business to be franchised (e.g., the need for specialized training or misrepresenting that certain industry leaders are affiliated with the business).

Oral misrepresentations are difficult to prove and frequently fail in the courts due to language in a franchise agreement that calls for understandings to be in writing and "disclaims" representations not contained in the agreement. This is especially true when the oral representations involve promises of future earnings directly at variance with the agreement.

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