This is the absolutely wrong way to run a franchise

By Cliff Ennico 

“A couple of years ago we bought a fast-casual restaurant franchise from a local company that has run several successful restaurants in our area.

“While the company knew a ton about their products — which are excellent, by the way — they had only just started franchising. We were only their second franchisee and bought one of their existing restaurants.

“Our franchise agreement required us to open a second location within a year after buying our first, but we told the franchisor we probably wouldn’t be ready to open the second location for at least a year.

“Well, the restaurant has been a success, but our relationship with the franchisor not as much. We had lots of questions in the beginning, but the franchisor wouldn’t return our phone calls. This didn’t surprise us at first, because the franchise owner was involved in multiple businesses and had his own restaurants to run, but as weeks turned into months we became worried that we weren’t getting the support we paid for when we bought the franchise.

“We ended up hiring a restaurant industry consultant to help us managing the business.

“Six months ago, we received a 50-page lease from the franchisor for a location in the county next to ours, with a message ordering us to sign the lease within 48 hours ‘or else’ we would be in breach of our franchise agreement. We told the franchisor we weren’t ready to take this step, but the franchise owner bullied and harassed us (for once he returned our phone calls) until we signed the lease.

    “Well, surprise, surprise, we were in no financial position to build the second restaurant at the leased location, so the landlord threatened us with a lawsuit, requiring us to hire an attorney and pay thousands of dollars to get a settlement.

     We have been in touch with this franchise’s other franchisee (they haven’t sold any new ones since us — can’t imagine why), and they have had similar experiences with the franchisor. They have given up on the franchise and are running their restaurant on their own, without paying royalties to the franchisor. They have lawyered up in preparation for a lawsuit with these jerks and we are considering doing the same. We have thought about selling our restaurant to someone else but are afraid the franchise will treat our buyer the same way, which might expose us to legal liability.

“We are shocked at the way this franchise has operated. Is this a typical experience?”

The first thing I can think to ask is: Where was your attorney when all of this was happening?

I have written several columns on buying an early-stage franchise that doesn’t have its act together. It’s usually much less expensive than buying an established franchise, but you are taking a much, much bigger risk than you would buying a Burger King or McDonald’s.

The story this reader tells is sadly all too common: Someone develops an idea for a fast-food restaurant, builds several locations in a single area, makes a lot of money, generates positive reviews and then thinks he’s a genius.

So he sets up a franchise and starts selling franchise territories on the assumption that “if it works here, it will work anywhere,” and that once a territory sells, he can just sit back and watch the money roll in.

The problem is there’s a big difference between selling chicken wings and selling franchises.

When you sell franchises, you are no longer in the restaurant business. You are selling a business plan for other people to copy. Your franchisees are now your customers, and you simply have to be responsive to them.

Even though your franchise disclosure document (FDD) states clearly “there is no guarantee you will be successful,” a growing number of courts in the United States have held that franchisors have a basic duty of competence to their franchisees. At the very least, that means franchisors have to communicate with them and be responsive to their concerns.

Given how hardheaded and narcissistic the franchisor is, you are not likely to get anywhere by being nice. What I would do here is team up with the other franchisee, hire a litigation attorney familiar with franchise disputes and send the franchisor a certified letter offering him two options:

1. He terminates the franchise, releases you both from your franchise agreements, waives any unpaid royalties, agrees to continue selling you the food products under an “exclusive supply agreement” and allows you to continue using his company logo under a “trademark license” for a flat annual fee.

2. You go to arbitration and seek recovery for all the damages you’ve suffered, including your upfront franchise fee, the attorneys’ fees you paid to break the second location lease and the fees you paid the restaurant consultant (the whole point of buying a franchise, after all, is that the franchisor should teach you everything about how to run the restaurant).

If the franchisor is smart, he will take Option 1. Arbitration proceedings have to be disclosed in his FDD and no person in his or her right mind will buy into a franchise that’s at war with its franchisees.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.” 

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