How Game-Changer Franchises Handle Legal Issues
By Jonathan Barber
Game-changer franchises are filling niches, raising the bar on service, helping communities, building cult followings, creating opportunities for others, and generally turning heads everywhere. Aside from growing their franchises, game changers are truly interested in their franchisees’ well-being, and so they’re also rethinking how they view—and handle—legal issues.
Instead of dropping the hammer and collecting, game-changer franchisors are electing to help franchisees get past hurdles. Here, we’ll show you a few ways franchisors are changing the game and looking out for their franchisees on the legal front. Incidentally, this strategy is great for business because when the system works together, the brand takes off.
The Franchisee-Friendly Franchise Disclosure Document
We all know that the franchise disclosure document (FDD) is flat-out hard to read. Even though the federal franchise rules require FDDs to be “written in plain English,” lawyers just have a field day typing up run-on sentences chock full of four-syllable words. At the end of the drafting process, the franchisor has a 200-to-300-page document that they don’t fully understand.
Fortunately, there is a growing movement, particularly among younger, more entrepreneurial franchisors, to keep FDDs short, sweet, and to the point. My firm has recently drafted a few that, including the franchise agreement and all exhibits and addendum, come in at (or under) 100 pages. While the FDD and franchise agreement are at the heart of the franchisor/franchisee relationship, there is so much more that goes into running a successful franchise. The FDD shouldn’t be something that scares away prospective franchisees. In fact, it’s the franchisor’s biggest sales piece, and it should be drafted and treated like that.
Handling Franchisee Problems
A “default” occurs when a franchisee breaches the terms of his franchise agreement. Traditionally, when a franchisor caught wind of a franchisee doing something wrong, the franchisor would send a Notice of Default and then, if warranted, terminate that franchisee’s franchise agreement. Now, however, there is a growing trend among newer, younger franchises, in which the franchisor is more willing to work with franchisees to fix things.
A great example of this is when a franchisee gives a franchisor notice that the franchisee will not be able to meet its financial obligations for one reason or another. The franchisee may have cash-flow issues, staffing problems, or even personal things going on that could lead to this problem.
At this point, a franchisor has two options. On one hand, the franchisor could put the franchisee in default and proceed with terminating their franchise agreement once the opportunity arises. Then the franchisor could legally go after the franchisee for past due royalties, liquidated damages, attorney’s fees, and other expenses through the franchisee’s personal guaranty. That could be devastating to an individual franchisee and his family. Nevertheless, this has happened many, many times in just about every franchise system out there.
On the other hand, the franchisor also has the option to work with the franchisee. The franchisor could waive, reduce, or defer royalties for a few months. He may even send some support staff to help the franchisee operate the business more efficiently. The franchisor could even facilitate the sale of the business to another franchisee or someone outside of the system. In certain cases, the franchisor may even opt to buy the business and take it on as a corporate or affiliate location. These options show that the franchisor puts the health of the overall franchise system and its individual franchisees above its own interests.
Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.