Franchise Lawsuits: What You Should Know

Franchise businesses are growing in popularity all over the United States, from fast food restaurants to vending machines to car repair shops. A franchise can potentially be a lucrative investment if you have done your research and if you are properly educated about the specific franchise you are looking to acquire.

Franchise lawsuits are almost as popular as the franchises themselves because a lot can go wrong in a business venture. The bulk of litigation inspired by franchises are instigated by the franchise owners because the franchisee is not upholding his or her end of the contract. However, franchisees have also been known to sue the owners because they are failing to make money.

When you are considering a franchise in which to invest, the owner is required to submit to you a Uniform Franchise Offering Circular (UFOC), which discloses pertinent information about the company and its executive officers. Included in the UFOC is a description of any and all litigation related to the franchise, regardless of who initiated it.

The problem with franchises is that although many of them are doomed from the start, you can bet that the franchise owners will be covering their legal behinds to be sure that they aren’t liable for any monetary damages. It is up to the franchisee, at that point, to make sure that they are dotting all i’s and crossing all t’s.

When considering a franchise, be sure to consider the following concerning lawsuits:

Franchise Lawsuits Rule #1: Add It Up

When you receive the UFOC, add up all of the litigation listed (pending and otherwise) and then find out how many franchises exist. The total number of lawsuits filed should total less than 1% of all current and past franchise owners. If the number is more like 5 or 6 percent, then you might be better off looking elsewhere. That means that either the franchisors are having problems with their franchisees, or it means that the franchisees are unhappy.

Franchise Lawsuits Rule #2: Find Out Who is Filing Lawsuits

You can learn a lot about a particular franchise by determining who is filing the lawsuits. If it is the franchisors who are filing the lawsuits, the story may be different from a franchise whose franchisees are pursuing litigation.

Franchise Lawsuits Rule #3: Research the Monetary Averages

Litigation often means that the franchise is not making enough money. Your entire purpose for investing in a franchise is to make money for yourself, and if the business model is not capable of generating substantial income, then you’ll find yourself in the hole. When people lose money on a deal, they often turn to the courts for compensation. Look at the records for each of the franchises to determine if they are making any money.

Franchise Lawsuits Rule #4: Ask Questions

Even with the UFOC in your hand, you can still approach the franchisor with your questions. Create a list of things you want to ask on paper before meeting with him or her, and make sure all of your questions are answered to your satisfaction. Dodging questions and formulating inadequate answers are often a sign of trouble. Use your instincts.

Franchise Lawsuits Rule #5: Talk to Franchisees

Ask franchisees about litigation – both past and present. Locate them and find out their version of what went wrong. Often, a document from the court case will not give you sufficient information with which to make an educated decision.

Franchise lawsuits are often messy and difficult to understand, but before you decide to invest in a franchise, you should know about all lawsuits concerning that business. As they say, it’s better to be safe than sorry.

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