Franchisor Strategies for Avoiding Disputes with Franchisees

October 30, 2023

By Stephen Thompson

The COVID pandemic has undoubtedly caused significant problems for certain parts of the franchising sector. Anyone involved in hospitality will have faced considerable challenges, as well as franchises that involve “in person” delivery of services. This has resulted in franchise business failures, sales at knock down prices and also disputes between franchisors and franchisees.

A number of common themes and issues have begun to emerge from the disputes between franchisors and their franchisees. It is worth noting some of these trends, as they point to certain fundamental actions that franchisors can easily take when setting up their franchise and entering into franchise agreements with franchisees which would minimise the risk of disputes arising later on. By taking such relatively straightforward actions, franchisors will potentially strengthen their position legally should a dispute arise. A number of these potential actions are set out below.

1. Franchise Information Memorandum (FIM). If you use a FIM make sure that it is factually accurate. Any financial projections contained within your FIM should be based on experience gained in practice and you should be able to demonstrate this if required. However, it is worth nothing that the use of a detailed FIM is not compulsory in the UK and arguably by providing one to prospective franchisees it increases your risk of legal exposure should a dispute arise – particularly if care has not been taken when drafting the FIM to begin with. It may be better to simply provide franchisees with more general marketing information.

2. Franchisor company. It is common when franchising an existing business to incorporate a new company as franchisor, thus protecting your existing business and intellectual property and other assets from potential legal claims by disgruntled franchisees. However, if you are proposing to put such an arrangement in place, you should make it clear to your franchisees. This will avoid allegations that they have been misled in some way, in that they have not entered into a franchise agreement with the company that actually established the franchise concept. Care should also be taken when drafting the franchise agreement to ensure that it is factually accurate.

3. Intellectual property (IP). It is generally recommended that you register your trademarks in order to protect them legally and you should make sure that you include the registration details in your franchise agreement. Also, if your franchisor company is not the owner of the trademarks and other IP used in the franchise, you should put a formal licence agreement in place between the owner of the IP and the franchising company, and also make sure that your franchise agreement makes the position clear.

4. Franchise agreement. It is important that your franchise agreement is properly drafted by an experienced franchise lawyer. Whilst it is tempting to either download a template from the internet or use one that has been provided to you by a non-lawyer, doing so may well cause you significant legal problems further down the line. Franchise agreements are generally lengthy and complicated legal documents and whilst they usually follow a standard format, the agreement will still need to be tailored to your specific requirements. By attempting to save some legal cost at the outset, you may well find that serious deficiencies in your franchise agreement only become apparent after it is too late.

5. Personal guarantees from franchisee shareholders. When entering into a franchise agreement with a corporate franchisee you should always obtain a personal guarantee from a majority shareholder. This is to ensure compliance by the franchisee with the terms of the franchise agreement, including post termination restrictive covenants. Otherwise, it would be relatively easy for a franchisee to just “walk away” from the franchise agreement, leaving you with only the empty shell of the newly established franchisee company to pursue legally.

6. Proper execution of franchise agreements. If the franchise agreement is not properly executed then the franchisee may be able to argue that its terms are not legally binding. This is particularly the case in relation to any individuals who have signed the agreement as a guarantor. You should therefore ensure that the agreement has been properly executed by all parties. An experienced franchise lawyer will be able to provide you with execution instructions and also even check the proper execution of individual franchise agreements if required.

If you require any advice or assistance in relation to any of the above issues, or any other franchising related legal matter, please contact Stephen Thompson on sthompson@darwingray.com or 07970 160166.