BUYING A FRANCHISE – WATCH THE STATUTE OF LIMITATIONS
June 1, 2012
Every franchisee, at the beginning, goes through a “honeymoon” period that can last a few years. That phase can have a very dangerous side-effect of causing you to be unable to successfully make a claim if the franchisor did something wrong. It is very important when buying a franchise that you watch the statute of limitations.
I have recently had to tell two franchisees that they had waited too long to call-that the statute of limitations had run on very serious fraud claims they had against their franchisors. In each case, the franchisor had failed to comply with the Federal Trade Commission Franchise rule by either not disclosing required facts or by telling outright lies to get the franchisees to invest. The franchisees finally realized that there might be a connection between the original fraud and the fact that they have never made a single dollar of profit (or even a minimum wage for themselves) over a five year period. It was too late. The statute of limitations ran on some of their claims two years after they signed. Their other claims expired three years after they discovered the facts constituting the fraud. They both discovered it within weeks after opening their franchise. Both franchisees sat on their rights for four or five years and are without remedies. In one case, the franchisee may have to continue another five years or file bankruptcy.
How do you avoid this bad outcome? You should ask an experienced franchisee lawyer to do an annual review of how your franchise business is going. You need to make sure your attorney knew what your financial expectations for the business were when you signed and what those expectations were based on. You need to have the attorney review your Franchise Disclosure Document and franchise agreement for technical compliance with all relevant laws. You need to candidly open your books to your attorney and talk about how your business is doing. Your franchise attorney may not find any wrongdoing on the part of the franchisor. However, if your franchisor has committed fraud or violated the disclosure laws, you need to know about it before the statute of limitations blocks you from any remedy.
Taking care of yourself and your business by consulting with a qualified franchise lawyer is not an act of disloyalty to your franchisor. It is a responsible business action. You can be absolutely sure that your franchisor consults with its attorneys on a regular basis. You should too. So, if you are buying a franchise, put a note on your calendar for a year later to consult a franchise attorneys and watch the statute of limitations.