One of my jobs as a franchise lawyer is to review new franchise opportunities for prospective franchisees. Often, a client with no previous experience in franchising will be so excited about the venture that he wants me to essentially rubber-stamp it. In some of those situations, the client acknowledges that the particular agreement overwhelmingly favors the franchisor, and, in fact, “technically” empowers the franchisor to terminate the franchise upon the slightest provocation, obtain crippling damages in the event of a legal dispute, and otherwise destroy his life. The good news, from the client’s perspective, is that he has a great relationship with the franchisor’s representatives, and the existing franchisees to whom he’s spoken claim to have been well-treated. In short, the franchisee believes that the ’zor will actually exercise its power fairly and judiciously.
The franchisee might, in fact, be correct, and the relationship might turn out well. On the other hand, my experience as a franchise litigator is that nightmare scenarios do sometimes occur. Indeed, the franchisor might not be nearly as friendly and solicitous once it’s succeeded in selling the franchise – and it might be that the “happy” franchisees to whom the franchisor steered the client were not representative of the system’s franchisees as a whole. (As an aside, a potential franchisee should not rely on the franchisor’s hand-picked references. It’s a far better practice to contact non-“recommended” current and former franchisees from the list set forth in Item 20 of the FDD.)
Let’s assume, though, that the franchisor truly is “as advertised.” In fact, the director of franchising is not only highly competent, but also a wonderful human being. When not reading to schoolchildren or helping old ladies cross the street, he’s listening to franchisee concerns and finding creative ways to alleviate them. Can a potential franchisee simply ignore oppressive contract language – which, the franchisor’s representatives tell her, the “legal department” had insisted on – and trust that the franchise director will continue be a benevolent despot?
Depending on the actual contents of the franchise agreement (as well as other factors), a case might be made for accepting the deal. In fact, most franchisors hold disproportionate power over their franchisees, and a franchise purchase usually involves a leap of faith for even the most informed purchasers. On the other hand, the more oppressive aspects of the agreement – assuming that they cannot be negotiated away – should not be disregarded by a prudent entrepreneur. Not only could the franchisor exercise its power differently when faced with new circumstances, but it also could subject its franchisees to a new set of decision-makers.
The first type of “decision-maker” change should be obvious. Most companies face personnel turnover, and franchisors are no different. It’s quite possible that the franchisor’s saintly franchise director will move on at some point during the franchisee’s multi-year term and be replaced by someone less charitable. The second – and perhaps more dangerous – type of change involves a sale or other assignment of the entire system to a new franchisor. While most franchise agreements put restrictions on the franchisee’s ability to make assignments, the franchisor’s freedom to assign is usually unlimited.
Given that someone whom the franchisee has never met might one day be exercising the power granted in the franchise agreement, shouldn’t the agreement’s language be taken seriously?