YOUR RIGHTS AS A FRANCHISEE
Jan. 22, 2022
While the website Statista reports 753,770 franchises were operating in the United States in 2020 (with McDonald’s and 7-Eleven ranking one and two revenue-wise), Entrepreneur magazine’s 2022 Franchise 500 Ranking lists Taco Bell and the UPS Store as the best opportunities for new franchisees.
Entrepreneur rankings are based on a variety of factors besides revenue, including start-up costs, royalty fees, growth rate, closures, marketing or operational support, and the financial strength of the franchisor.
People seeking to own and operate a franchise must consider several factors, including how many rights they have in their relationship with the parent company.
If you’re looking to start a franchise in Seattle, Washington, or if you’re already operating one and want to know and exercise your rights, contact the Bundy Law Firm PLLC. The team understands franchisee law like no other firm, and they also represent clients throughout the United States, including Oregon, Texas, and Florida.
What Are Franchisee Rights?
The American Association of Franchisees and Dealers (AAFD) has published a Franchisee Bill of Rights, focusing on loyalty, good faith, and fair dealing.
It focuses on issues including whether the franchisor provides ongoing training and support, marketing assistance and territorial protection, as well as the fairness of the dispute resolution mechanism. Of course, very few franchisors endorse the AAFD Bill of Rights. It is more a wish list for franchisees.
In Washington State, the Franchise Investment Protection Act contains a Bill of Rights that gives franchisees certain additional protections, including prohibiting termination without good cause, prohibiting certain waivers of rights, prohibiting discrimination between similarly situated franchisees, and prohibiting unreasonable or unnecessary requirements.
The Federal Trade Commission (FTC) Franchise Rule requires franchisors to deliver to prospective franchisees a Franchise Disclosure Document (FDD), which must include 23 required sections, referred to as "Items."
For most franchisees, the most crucial sections of the FDD are the following:
Costs (Item 7) — Provides an estimate of how much money you need to invest before you get the business open and operating.
Franchisor’s Obligations (Item 11) — Discloses how a franchisor will provide training, marketing, advertising, and other support.
Renewal, Termination, Transfer, and Dispute Resolution (Item 17) — Summarizes your rights and obligations in the franchise relationship (it summarizes the contract).
Financial Performance Representations (Item 19) — Financial performance representations are permitted, but only in Item 19. They are not mandatory, and no format is specified.
Outlets and Franchise Information (Item 20) — Discloses the number of franchises, including openings and closures for the most recent three years. It is a useful source of information regarding franchises the franchisor has taken back and resold — the churn rate.
Financial Statements (Item 21) — Discloses the franchisor's financial condition over the prior three years, giving insight into the strength and viability of the franchisor.
Contracts (Item 22) — Your contracts and agreements are included for your careful consideration to make sure the deal is right for you.
How to Exercise Your Franchisee Rights
While one of the hallmarks of a franchise is uniformity, occasionally franchisees can negotiate more favorable terms. For instance, a franchise in a rural location may need a larger territory or a franchisee with substantial assets might want to limit their personal guarantee.
When trying to negotiate a franchise agreement, you must consider the status of your relationship with the franchisor. If the franchisor is new, they may be more willing to negotiate because they are trying to get established. If you own one franchise and seek a second or third, they will be less willing to change anything because they already have you. However, if you are buying a large number of units, the power shifts back to you because you are economically strong and they want your money.
Franchisors also have to be careful about how they handle negotiations. They may face the issues of franchise discrimination if they go too far in accommodating certain franchisees as opposed to others. This is particularly true in Washington and a few other states, and if the franchises were sold at approximately the same time. There is always the need for a delicate balance. Experienced franchise attorneys can help you if you need to negotiate different terms or support measures.
Federal vs. State Regulations
The federal government, through the FTC, requires the franchisor to deliver the FDD to prospective franchisees. The FTC model is focused on pre-sale disclosure. The FTC believes that, if the franchisees receive certain important information, they can make better, more informed decisions.
Almost all of the 'teeth' in franchise regulation are at the state level. Twenty-six states have 'anti-fraud' laws that provide that it is unlawful, in connection with the offer or sale of a franchise, to make an untrue statement or to fail to disclose any fact necessary, in light of what was said, to make it not misleading. It is the same standard of truthfulness and accuracy that applies in the sale of shares of stock. Twenty-one states make it unlawful to require franchisees to waive certain rights.
Common Franchisor-Franchisee Disputes
Disputes are common in any business relationship and certainly between franchisors and franchisees. Disputes often derive from the franchisee's business success or lack thereof. Franchisees sometimes fail to strictly follow the franchisor's rules and guidelines. Franchisors sometimes sell part of the territory to different people. Franchisees sometimes do not make as much money as they believed they would. If a franchisee is not covering expenses, they may be unable to continue making royalty payments. The result is a dispute with the franchisor.
How the Bundy Law Firm Can Help
If you’re involved in a dispute, your franchise agreement may include provisions for mediation or arbitration. If not, a lawsuit may be possible. You need to understand what your options are if a dispute does happen. Regardless of how disputes get resolved, the best protection is doing your homework before investing in a franchise.
Whatever stage you’ve reached in the franchising process — just starting, already owning and operating, or looking to expand or even move on — contact the franchise attorneys at the Bundy Law Firm PLLC. They would be happy to talk with you about how to accomplish your objectives.
The Bundy Law Firm PLLC in Seattle can help you wherever you are in the United States, including Oregon, Texas, and Florida. Contact the firm immediately when you have questions, concerns, or when a dispute is looming. When you begin to see trouble, the earlier you contact the Bundy Law Firm, the more likely they will be able to help you.