Escaping a franchise deal gone bad

January 20, 2009: 11:19 PM ET

You'll need a lawyer if you want to recoup any money, but here's what you should know before you go attorney-shopping.

Lisa Gubbels, Council Bluffs, Iowa
I live in a community that does not fill the demand for children's entertainment, so I decided to invest in a franchise based in Georgia that did just that. I paid $35,000 in August of 2007, signed the franchise agreement, and tried to raise $250,000 to get the business running. It did not happen. The business manager changed the business plan, discussed it with me, and we went forward to open a smaller version of the franchise. I have invested a total of $70,000. I am upset by misrepresentation of what I was told I would receive from the agreement. At this time I want out and want to open my own business with no help from a franchise. Of course, I would love to get that franchise fee back as well. Any thoughts about how I can resolve this without getting into more debt?

By Emily Maltby, staff writer
The first thing you need to do is get in touch with an attorney, recommends Ed Teixeira, founder and former president of consulting firm and author of Franchising from the Inside Out.

"Gather all the information you can, including the franchise agreement, all e-mails and correspondences related to the franchisor - and don't take any precipitous action without counsel," he says.

You need an attorney for two reasons. First, if the franchisor is not sticking with an agreement, it will take a professional to help recoup your losses, including the franchise fee. Also, an attorney will guide you through the process of putting up your own sign as an independent business - if it's even possible.

Franchise attorney Robin Day Glenn of Rancho Santa Margarita, Calif., notes that you need to understand the differences between franchise law in your state of Iowa and the franchisor's state of Georgia.

"Ask a lawyer in your home town to find out which franchise law applies here," she says. "Typically, franchise agreements say that laws will be in the franchisor's state. However, many states have laws to protect their own people."

Iowa franchise law may or may not grant you the home-court advantage. Once you determine the state in which you will proceed, you should find a lawyer in that state to follow through. The lawyer will advise you to either threaten action in attempt to get your money back, or follow a conciliatory route by asking the franchisor if you can cancel the agreement and part ways with mutual release of claims.

Teixeira encourages finding a specialized franchise lawyer. Pro-franchisee organizations such as the American Association of Franchisees and Dealers can help you locate one.

But Glenn notes that if there isn't a franchise lawyer in the state where you'll be contesting the contract, it's best to go with a general business lawyer - it is preferable to hire an attorney who is familiar with the laws of the jurisdiction than an out-of-state specialized lawyer. She recommends as a place to seek out the attorney that is best for you.

Give us your advice: Check out recent "Ask & Answer" questions.

Related links:

Calculating the risk of a franchise investment

New franchise rule: More disclosure, same high risks

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