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How Can Franchisees Protect Themselves From Being Forced Into Expensive System Changes?

by on Franchise Your Business

If you worked with a reputable franchise law firm before making your foray into franchising, you probably reviewed your agreement and other contracts closely to avoid potential obstacles. However, it’s possible to experience substantially more cost and pressure than you may have anticipated when the franchisor insists on updates and remodels that cut into your earnings.

You may feel caught between a rock and a hard place, so how can franchisees protect themselves from being forced into expensive system changes?

The answer involves thorough research before you buy your franchise and understanding your legal options in the event the company engages in deceptive or unfair business practices. Below, a franchise attorney from Luther Lanard discusses how to address these concerns.

Protect Yourself Before You Sign on the Dotted Line

Ideally, you did your due diligence on the franchisor company before you began your purchase process. This involves a number of steps, including:

  • Obtain the company’s Franchise Disclosure Document (FDD),  from the franchisor so you get a clearer picture of their financials, marketing, and past performance.
  • Consult with a business accountant to determine the full costs for purchasing and operating a franchise, including potential unexpected expenses from system changes.
  • Work with a franchise lawyer who can help you review your franchise agreement and if buying an existing business letter of intent.
  • Speak with current franchisees under that franchisor to assess any previous problems they’ve experienced with imposed costs.

Through careful evaluation before investing in a franchise with skilled and creative franchise attorneys, for many brands you can negotiate the franchise agreement to your advantage. They can help you have a clearly defined territory, transparent cost expectations, and good-faith protections. As you move forward in your business venture, your franchise lawyer can aid you in disputes and other roadblocks.

Franchise Agreement Clauses That Can Provide Protection

People new to the franchise industry may not realize they can negotiate their franchise agreements rather than accept boilerplate language that often favors the franchisor. One of the first tasks for your franchise lawyer is to educate you about the legal elements of your agreement. 

On reviewing the agreement, they may find franchise red flags that signal a need to negotiate new terms. The American Bar Association (ABA) found multiple clauses that could feature significantly if you are treated unfairly by your franchisor, including the following:

Territorial Rights

While it is difficult to get the franchisor to agree to an exclusive territory as yours alone, you should be able to get a protected territory and push to include language that sets expectations for future locations in the same area. A protected territory typically provides you the exclusive rights to operate a franchise in a territory but makes you subject to competition from other distribution channels that the franchisor may use.  

A franchisor that allows encroachment on your established territory could indirectly impact your ability to deal with imposed system changes. With diminished earnings, you may be less able to absorb the costs of updates and remodels. While a new location may benefit the franchisor, you may need to hold the company accountable legally for intentionally risking your operational success.

System Change Provisions

Franchisors regularly revise their products, branding, and operational methods, meaning you will likely face remodels and updates during the course of your franchise ownership. The costs for these changes can vary widely from minor adjustments to how an ingredient is used to complete building overhauls. However, just because a large company pushes a change down does not mean it is worth the time and expense for franchisees.

While you are limited in what you can refuse, you can review your franchise agreement prior to signing to enact safeguards. Verify that the language clearly states who bears the costs in what proportion, timelines for implementing changes, and how the franchisor will support you in the event of issues. 

Dispute Management

Your agreement may contain clauses requiring alternative dispute resolution (ADR) methods such as mediation or binding arbitration to address contract breaches or other conflicts. The goal is to fast-track a solution and protect the company’s privacy, but you may find these clauses restrictive. Your franchise attorney can advise you on whether it is possible to propose amendments and convince the franchisor to accept them.  

Choice-of-Law and Forum Provisions

When you buy or start a franchise location in Dallas, TX, your franchisor may have its corporate headquarters in another state. Franchises fall under federal law, such as the Federal Trade Commission’s Franchise Rule, but your franchisor may include clauses establishing which state laws apply in case there is a dispute. 

Depending on the state, you may face greater restrictions in your ability to protect yourself. Choice-of-law clauses typically favor the franchisor, because they can select which laws apply and which jurisdictions they want to use. 

Required Supplier Contracts

Franchisors create relationships with suppliers to ensure a smooth flow to franchise locations. You should review this clause carefully, since the approved supplier program could inadvertently lock you into higher expenses than you expect. If a single vendor raises its prices too much, you could have a valid claim that the franchisor’s restrictions unfairly increased your operating costs without an option for relief. 

Renewal Provisions

Your franchise agreement includes a renewal clause that outlines the terms under which the franchisor will continue to work with you. It is common for the renewal to carry less favorable terms and possibly more requirements for shouldering system change costs. This is another area where working with franchise lawyers who review the agreement prior to your signature can head off future problems. 

Monitor Your Balance Sheet and Finances

When you begin your franchise, you know upfront that you will have additional costs as time goes on. You also know that you should plan for royalty payments, taxes, and fee adjustments to balance them against your cash flow. 

By closely reviewing your revenue and costs each month, you can recognize when you may need to adjust transactions to save towards future system change expenses. You can also research additional funding options, such as a line of credit, to absorb any costs that are larger than anticipated. A powerful tool is the funding program offered through the Small Business Administration (SBA). 

If you did not take advantage of SBA loans when you started your business, you may find resources that can give you an injection of capital that makes a remodel more manageable. Closer to home, the Texas Small Business Credit Initiative (TSBCI) program offers state-based support for businesses owned by those in marginalized communities.  The Capital Access Program (CAP) offers loans between $5,000 and $5 million, while the Loan Guarantee Program (LGP) provides assistance for loans between $5,000 and $20 million.

Take Advantage of Community

Look for support from others in your same line of work by turning to industry groups. These communities provide a platform for owners to collaborate, advocate for fair practices, and combat unfair legislation. 

Consider joining the International Franchise Association in Central Texas and following the Texas Taxpayers and Research Association (TTARA), which fights for fairness in taxation on franchise owners and provides a wealth of insight into their concerns. 

You can also develop your own network of experienced franchise owners over time. These are folks you can turn to when you have questions or want to understand the issues. They may have suggestions on managing the challenges of changes to technology, marketing, and other systems.

Spend Wisely and Balance Long-Term With Short-Term Goals

If you are already a business owner who is expanding into the franchisee world, you likely have a proven plan for managing your finances and logistics for growth. If you are a new owner, you may not be as well-equipped and could fall prey to doing too much too soon with too little capital. Expanding too quickly can leave you unprepared to handle mandatory system changes, leading to financial problems.

While you can rely on your franchisor to handle national and even regional marketing, you must devote some of your revenue and time to local advertising in your territory. Failing to factor in these costs affects your location’s profit margin and could result in a drop in standards. Stay focused on meeting your short-term goals of having well-trained and experienced staff to support your long-term goals for growth and expansion. 

Always Have an Exit Strategy

Although rarely necessary, you should always have a plan to move forward beyond franchise ownership. If you find that the requirements are more than you bargained for, even after thorough research and genuine effort, you can consider selling your franchise or transferring your franchise to someone else. You may also find that it is time to sell if the renewal terms for your agreement are too restrictive or your goals no longer meet the company’s plans for the future. 

Balancing Franchisor vs. Franchisee Interests During System Changes

At the American Bar Association 35th Annual Forum on Franchising, one panel addressed the extent of a franchisor’s latitude when implementing changes in marketing, technology, product lines, and other system changes. An essential part of the franchisor-franchisee relationship is that the individual location benefits from the buying and operational power of the larger company. Yet you should not have to bear unreasonable costs because the franchisor instituted changes without adequate preparation.

Ideally, the franchisor will solicit franchisee input for system changes, providing a heads-up to those in the franchise network about what’s to come. Franchisors should also prepare and distribute appropriate training and support to each location. By providing a sufficient notification window, they allow you to arrange for necessary capital and funding for large updates.

However, if a franchisor fails to meet these obligations, franchisees may have a legal remedy to sue for breach of contract or breach of good faith and fair dealing. Under the Texas Deceptive Trade Practices Act, you can seek help regarding common violations in franchising, such as false representations of business models, material omissions, and financial misrepresentations. 

Make a Franchise Lawyer Part of Your Plan for Success</h2 Establishing a strong relationship with your franchise attorney can help you anticipate issues and adjust to system changes more smoothly. They can educate you when you are first considering your purchase and provide ongoing support when you encounter risks or have questions.  <A dedicated franchise law firm can guide you through all aspects of owning a franchise, including the following:

<You may already have a business attorney who manages your contract and other concerns, but a franchise lawyer will give you more focused advice on aspects unique to the industry. For example, if your franchise is failing, rebuilding it or selling it may be much more complicated than with an independent business. Your attorney will be at your side through every step of your franchising journey to help you sidestep obstacles and generate growth.

Consult With a Franchise Lawyer from Luther Lanard Today

At Luther Lanard, we support you as a first-time purchaser and every event you may encounter along the way to business success. Our team can collaborate with your business attorney, your accountant, and investors to create a tailored solution for adapting to franchisor system changes. 

If you’re opening a franchise in Dallas or another major city in Texas, our franchise attorneys are ready to listen to your needs and help you prepare an action plan. Contact our franchise law firm online to arrange a consultation today. 

 

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