Tips on Preventing Franchise Disputes

If businesses don’t work out as expected, stakeholders have the tendency to look for someone to blame – this scenario is common when it comes to franchising.  Catching and addressing the dispute early on will prevent a full-blown litigation.  Andrew Caffey provides tips on how to prevent franchisor-franchisee disputes in the following article.

One of the most intimidating aspects of franchising is the prospect of litigation. Franchising has a well-earned reputation for being litigious, and the franchisor-franchisee relationship is in many ways a breeding ground for disputes. Consider: An individual invests a large amount of money in operating an unfamiliar business; the franchisor business undertakes the responsibility of training the new owner and helping him or her make the business a success. If the business doesn’t work out, fingers are pointed and lawsuits fly. And while litigation is expensive and disruptive for everyone, the franchisor pays an extra price: All lawsuits must be disclosed in the franchise disclosure document for 10 years.

Franchisors have been watching this movie unfold for a few decades now, and have developed a variety of innovative techniques to help them manage or head off serious disputes with franchise owners. Here are some tools that franchisors should have in their arsenal.

Prompt action. The best approach to franchise dispute management is to catch and address problems before they develop into something more expensive and end up disrupting the relationship. If, for instance, a franchisee misses a royalty payment, or a loan installment is late, the franchisor must take immediate steps to (1) respond and (2) understand what is going on. The franchisor needs to talk directly to the franchise owner and address the situation.

Use mediation. Mediation seems almost uniquely designed to help franchisors and franchisees. It is a professionally assisted negotiation; it is nonbinding; it is not confrontational; it is not all-out war, as is said of litigation; it is confidential; it is far less expensive than either litigation or arbitration; and it is successful at resolving disputes nearly 80 percent of the time.

One of mediation’s principal advantages is that it allows the parties to address and resolve a problem while also preserving the business relationship in which both parties have heavily invested. A mediator is free to work with the franchisor and franchisee to fashion a resolution that makes business sense, and that may be creative or innovative in addressing the interests of the parties to determine a solution.

More and more franchise agreements now include mediation as an early step that must be taken to resolve a dispute, before either party can take a more expensive route, such as filing for litigation or arbitration.

Arbitration. Think of arbitration as a private courtroom process. The parties select one arbitrator, and sometimes a panel of three arbitrators, who will serve as fact finder and ultimate decision maker in a legally binding process that carries the weight of a courtroom decision. The parties are represented by legal counsel, they exchange limited pre-hearing discovery by way of documents and often depositions, and the arbitrator conducts an evidentiary hearing that follows many of the traditions of a courtroom hearing.

Arbitration is generally faster to resolution and less expensive than courtroom litigation, but it is certainly closer to litigation in expense than is mediation.

Ombudsman programs. An ombudsman is an appointed problem solver in an organization who is “independent,” has access to senior management, and can move the organization to address problems that come to the ombudsman in complete confidence. These programs are not unique to franchising, of course, but they have been adapted to franchise systems precisely because an ombudsman is so often in a position to hear about a problem when it is small and can be managed easily.

Suspension/probation/rehabilitation/repayment programs. Franchisors are hobbled by a traditional feature of the franchise agreement: the only tool at their disposal to address a financially troubled franchisee – termination of the relationship – is one-dimensional and devastating. Many franchisors develop their own approach to assist franchisees who need financial or operational assistance by taking an interim step to focus their assistance before deciding on termination. Creating a “suspended” category for franchisees recovering from a shaky financial patch, or putting a stumbling store on “probation” while providing additional training, or simply reducing unpaid royalties to a promissory note with a manageable payment schedule, can go a long way toward reducing the disputes that can devolve into litigation or arbitration.

With careful management and an understanding of the tools above, most serious franchise disputes can be avoided. But it calls for franchising skill of the highest order: the ability to recognize and the willingness to address difficult situations as soon as they arise.

Photo by Joe Gratz

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