Fundamentals of Franchising: Franchisee’s Perspective

Rush Nivet posted on his blog Rush on Business that last week he had the opportunity to attend the ABA’s Forum on Franchising.

He writes: What a great event! First and foremost, it was an opportunity to network with some of the best franchise lawyers in America. Second, I really enjoyed hanging out with fellow Iowa franchise lawyers, Matt Krigbaum of Cedar Rapids and David Bright of Iowa City. These guys are excellent lawyers and terrific individuals. If you are Eastern Iowa I recommend you talk with them regarding your franchising questions.

The initial seminar session I attended was the Fundamentals on Franchising. Some top-notch franchise lawyers spoke during this 4 1/2 hour session but of particular interest to me was the talk by Ron Gardner of the Dady and Garner Law Firm in Minneapolis. The law firm is regarded as one of the best firms in the country representing franchisees in disputes with franchisors. In my franchise law work I counsel and negotiate on behalf of franchisees so the talk was very informative.

Some highlights of Gardner’s talk:

1. If a franchisor is making certain promises you should attempt to have those promises included in the franchise agreement. Often a franchisor will say certain things to entice a franchisee to enter into the franchise agreement. But when you read the agreement these promises are no where to be found. Get those promises in writing. If not, you should have no expectation the franchisor will follow through on its promises.
2. Franchisees and their lawyers must communicate together on much more than just the franchise disclosure document or the franchise agreement. In order to advise you properly it is important to know your background, your needs and your expectations. Without this information it is often difficult to know what it important for you in a negotiation and what is not.
3. Run Away from Franchisors that Won’t Negotiate. Some franchisors will tell you that they won’t negotiate their agreements, or worse, tell you the laws and regulations do not allow them to negotiate their agreements. Tell them to take a long walk off a short dock! Ask youself whether you want to be in business with a franchisor that will not consider your busines goals and needs. Fortunately, my experience has been that many franchisors will negotiate at least certain key terms and conditions.
4. Key Disclosure Issues. Key disclosure issues generally include litigation, initial investment, vendor rebates, earnings, outlets and financial statements. It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures. A high number of transfers may be an indication that franchisees in the system are struggling but bad stores have not been shut down. As I have preached franchise due diligence must include interviews of franchisees, including those that have left the system, in order to get a full picture of the franchise system.
5. Be Willing to Walk Away. I have touched on this before. This is the paradox of negotiation. You should not fall in love with the deal. Prospective franchisees who are willing to walk away usually get much more from those who have decided to sign at all costs.

Cross posted at Let’s Talk Franchising

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