Looking to franchise your business and want to know how to avoid getting into franchise legal trouble? More than likely, each of us has either been involved in a lawsuit or knows someone involved in some kind of lawsuit or legal problem. And while you probably don’t hear much about the cases, franchise legal problems and litigation is “alive and well” in the franchise industry.
So let’s talk about the most common problem in franchising that could get you into trouble. More than 60% of all franchise litigation results from franchise sales misrepresentation (according to the American Bar Association). As a franchisor you must be very careful who is talking with your franchise applicants, so these applicants do not come back later and sue you for fraud and misrepresentation (more on why you should use caution if hiring a franchise broker). As a franchisor you should be especially weary of franchise brokers (or any third party who gets a commission from helping you sell franchises). More on this topic later but for now, let us share with you a real situation where a franchisor is being sued for fraud.
There have been many lawsuits relating to franchise sales misrepresentation, however one in particular is a lawsuit involving the franchisee of an urgent care franchise and its franchisor. The franchisee claims that during his due diligence of the franchise opportunity, he was given false and misleading information about the franchise. Once on board, he followed all guidelines and procedures that were set forth to run his business, but he was never able to achieve anything close to what he was told.
It’s Not As It Appears
When the full details came out, it was revealed that the franchisor had hired franchise brokers who also masquerade themselves as franchise consultants or franchise advisors to sell the franchises (learn the difference between different titles in the franchise industry). Needless to say, franchise brokers can be a shady lot; many are all flash and no substance. Franchisors take a BIG risk in outsourcing franchise sales. Brokers are typically overeager to make franchise sales and tend to make reckless comments, misrepresenting franchise opportunities. And this is the case with this franchisee’s lawsuit.
Let’s be real. In general franchisors are also eager, especially new ones to sell franchises (check out our article on how you can handle your franchise sales). Being a little naïve new franchisors (such as yourself) are likely to be “sold” by a fast talking franchise brokers. And franchise brokers are just looking to add another franchise opportunity to their portfolio, ensuring that they have something for every eager entrepreneur they get. For as long as The Franchise Maker has been around, we’ve found only a couple of legitimate franchise brokerage companies out there (who, by the way, do not perform franchise development services) and they’ve been around for well over 15 years.
Unfortunately, regulations for franchise brokers are not as stringent as they are for sales agents in other industries. However it is not uncommon for some states to require that franchise brokers are licensed. Franchise attorneys nationwide recommend that the best way to avoid litigation for claims of misrepresentation and fraud is for each franchisor to handle his/her own franchise sales.
Don’t Be Scared, Get Informed!
If you have been worried about the legal side of franchising or how to stay out of franchise legal problems, no need to fret! Contact Us and we will answer ALL your questions about franchising, build you a comprehensive franchise structure to minimize your liability and teach you best practices to avoid litigation.
