Escaping a franchise deal gone bad
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, CNNMoney.com 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 FranchiseKnowHow.com 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 Lawyers.com as a place to seek out the attorney that is best for you.
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From Patricia, Las Vegas NV Before you get an attorney involved, it's best to get a case analysis and strategy from a recognized and testifying franchise expert. They will be able to give their take on the case, and these days they're usually a prominent fixture in franchise litigation cases, advising the attorneys on strategy and educating the arbitrator or jury. Do a google search for FRANCHISE EXPERT as a starting point. If the franchise expert is also an attorney, then you have a powerful combination. There's also a lot of good information about franchise complaints and evaluating franchise attorneys on the Franchise Foundations website.
From Bob – Boise, ID Lisa needs a contract attorney- badly.
You should never enter into a franchise agreement before you have done a market study, have an attorney review the franchise agreement, and have about 120% of the total startup costs arranged BEFORE you jump in.
It is extremely unwise to sign up for a franchise and then try to raise the money afterwards. Odds are, if you don't have all the money to begin with, you are doomed.
Also, there are VERY few franchises that are worth getting involved with. With a little research, almost any franchises business model can be easily duplicated on your own. Unless there is an extremely compelling reason, such as brand name, to buy into a franchise, you are better off avoiding them like the plague. After you have signed on the dotted line, you are on the hook for a good long while.
From Carol Kansas City MO Generally, any franchise agreement you sign is a legal trap from which there is no escape without punishment — If you can get a competent business attorney to read the contract, he/she should be able to level with you at the first appointment.
If the attorney recommends litigation, be sure to get an estimate of how many hours, and how much per hour, it will most likely take to conclude the matter.
At $200 and $300 per hour for an attorney, litigation is often counter productive even when you are right!
From joe blow sounds like to me the place I bought into, wow that was a fox's pizza den and believe me I would never recommend anyone to ever do business with them crooks.
From Bryan Hargrave I believe this person is suffering from serious buyer's remorse. The lure of a franchise is that it all sounds so easy. It also takes a plan, including the raising of what seems to be a ridiculous amount of capital to start a business, in this case. The subject did not have a concrete plan to get the business off the ground. Now she wants to take what she has learned, AND get the franchise fee back? Ridiculous.
From Jon Kap West Chester, PA It sounds to me like Richard Royce is making serious accusations when he has none of the information he would need to come to his conclusions.
From Murray, Costa Mesa,CA Richard Royce is right.
From SW, Raleigh, NC It is without a doubt a poor resolution that always requires the added expense of one or several lawyers.
The typical problem is that BEFORE the agreements are entered the buyer must beware and must due the most exhaustive due diligence of his/her life or else you wind up needing to finance a lawyer usually with no hope of financial recovery, only more loss.
Better to keep your money and start the business on your own without a franchisor.
From Richard Royce As an experienced franchisor – it sounds to me like Ms.Gubbels got buyers remorse and took all the franchisors trade secrets and business plans and then wants now to get the money back without thinking of how much that costs or hurts the franchisor. To start claiming "misrepresentation" – after she could not raise funds to launch – isn't the franchisors fault. Lisa Gubbles of Iowa should suck it up and make sure she knows what she is doing before she signs any kind of franchise agreement.
I have looked into franchises several times in the past.
The representatives in all cases did a lot of talking but provided little real information. They reminded me of a fly by night used car salesman (appologies to the honest majority of car sales).
As I examined the available information, including lawsuits with confidentiality agreements and realized that signing a franchise agreement gave all the power to the parent company while I took all the risk, I declined.
At that point I was insulted by more than 1 of the reps.
Still better to be insulted by a con man than fleeced by one.