You Can't Blame Franchisors for Everything: You Do Have Options before Signing a Franchise Agreement
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Recently I received some interesting and insightful comments from an individual commenting on issues involving franchisee rights. Her main point of contention appears to be the disparity of bargaining power and legal rights between franchisors and franchisees. While this is certainly an issue of concern, I believe that her comments may be giving a "free pass" to franchisees who don't take the time to conduct the appropriate pre-purchase franchise due diligence. The following are some of the commentators insightful points:
On Franchise Agreement Liquidated Damages:
Isn't it true that most franchisees don't understand that the "optional" liquidated damages terms in the contract are premeditated to give the franchisor the advantage when the franchisee fails to thrive? The failure fee is hidden within the contract from the view of franchisees.
Do attorneys point this "failure fee" out to their clients?
My Take on this Serious Issue: As I have previously discussed, "liquidated damage" provisions in franchise agreements - especially those that kick-in when a franchisee "closes his or her doors" have the potential to inflict serious financial harm on a franchisee who already may have lost a substantial investment. However, these provisions may be negotiated by franchise attorneys and are exactly the types of "legal issues" that a franchisee should be discussing with a franchise attorney before signing a franchise agreement. Liquidated damage clauses can be negotiated.
On Franchisees Reading and Negotiating their Franchise Agreement:
While it may be true that franchise agreements may be legally negotiated with the franchisor by individual prospective franchisees, isn't it true that most of the mature franchisors don't or won't negotiate changes and will acknowledge that pre-sale, their contracts are not negotiable. Don't they acknowledge this to the courts, when asked?
My Take on this Serious Issue: Franchise agreements are negotiable and even "mature" franchisors are willing to make reasonable modifications. However, even if we assume that a particular franchisor will not make changes why would a prospective franchisee invest his or her livelihood in a franchise and sign a franchise agreement without first reviewing, understanding and evaluating each and every right and obligation contained in the franchise agreement. Look, there are many times where I believe that franchisees need an advocate but franchisees cannot get a "free pass" when they neglect to conduct even the most basic due diligence.
In the end, you do not have to sign a franchise agreement and, sometimes, even with successful franchise systems, not signing the agreement might be the best course of action for you. No one is forcing you to sign the agreement. Likewise you must know that no matter how many other franchisees may have signed the franchise agreement you - personally - must understand and evaluate what you are signing. Your livelihood depends on it.
For franchisors, a policy that permits limited but targeted franchise agreement modifications may actually strengthen the enforceability of your franchise agreements when faced with litigation.
My thanks to Ms. Cross for some really insightful comments.
What Ms. Cross fails to address is: why do some prospective franchisees fail to perform adequate due diligence? Why do some prospective franchisees leave this to their franchise brokers, who claim not to "charge anything"?
Of course, in retrospect, franchisees understand that they should have never signed these often malicious unilateral contracts. But, even if they have done the best due diligence in the world on what has been provided under law and the FDD, they are still investing blind, because, uniquely, NO UNIT financial performance statistics are provided by the seller of the franchise to the buyer of the franchise in the Franchise Disclosure Document. (Is this why the FTC and not the SEC regulated franchising?)
Franchisors dishonestly disclose all sorts of risk factors except the most important risk factor, i.e., are the founding franchisees successful and do most of the network actually enjoy profits, as would be disclosed by the visibility of the unit performance statistics of the system.
This fatal flaw in the FTC Rule is a subsidy of the franchisors who don't want to provide visibility of the profitability of their units, or the failure of founding franchisees that would expose "churning" to the public and to the regulators.
When franchisees act on the due diligence done with only the franchisees, as provided in Item 20 of the FDD, their damages, of course, are proximate to representations or misrepresentations made by the franchisee references, and not proximate to any factual representations made by the franchisor as to success or profits. How convenient!
Due diligence with the information that is provided in disclosure is ineffective and inefficient but it does protect the franchisors who then don't have to disclose any "facts" concerning success or profits in the disclosure process when they exercise their option NOT to make "earnings claims."
How do attorneys find out the unit performance statistics of franchise systems? When attorneys are hired to help in the due diligence process, they, also, of course, will disclaim that their research will protect the franchisee in the event of failure. Do attorneys provide the failure rate and the profitability rate of systems when they assist their clients in the purchase of a franchise?
Franchisees, of course, believe that the contracts are NOT negotiable because of the government UFOC/FDD that underlies the contract. Unsophisticated franchisees who are smart and dealing in good faith don't understand that the FDD actually protects and is meant to protect the franchisor who will probably disclose nothing concerning profitability of the units or failure of founding franchisees because they appear not to have to do so under the FTC Rule.
Prospective franchisees don't understand that the contracts are negotiable and believe that all franchisees stand in the same legal relationship with the franchisor because of the FDD that underlies the contract.
If the FTC can explain that franchising is "complicated" why can't they explain that franchising is risky and opportunistic and that the Franchise Disclosure Documents and the franchise agreements are negotiable?