SMORGAZ

Always look into a company’s background before you decide to invest in a franchise. After all, the last thing you want to do is throw your money into a concept that carries a history of trouble.

Luckily for you, all franchisors are legally required to provide prospective franchisees with a Uniform Franchise Offering Circular (UFOC ) document / Franchise Disclosure Document (FDD), which reports any and all history of litigation and bankruptcy associated with the company. While this is all well and good, you as a prospective franchisee need to make sure that you understand the nature of the relevant franchise lawsuits before you decide whether or not you should invest in the concept.

Understanding franchise lawsuits requires that you understand the origins of the legal conflicts that arise between franchisors and franchisees. For instance, when franchisors instigate litigation, it’s because a franchisee has failed to meet contractual obligations. Alternatively, franchisees generally initiate legal action because they are unhappy with their businesses – they’re either disillusioned with the franchisor or they’re not making as much money as they’d prefer.

Unfortunately for the unhappy franchisee, however, franchisors are generally very careful about their obligations, and make a point of not assuring that their franchisees will be happy or successful. To minimize your chances of entering litigation as a franchisee, be sure you fully understand the disclosure document prior to purchasing a franchise. You might want to keep the following points in mind:

Do the math. When you’re thinking of litigation, think in percentages. Regardless of which side has instigated and why, the overall percentage of litigation should be small for your investment to be worthwhile. For example, in the course of the last two years, the total number of litigations should be less than one percent. If the amount is over five percent, you should consider investing in a different concept. Why go into a business that has a history of trouble? Even if the percentage of litigation is somewhere between one and three percent, you should figure out what the source of the trouble is.

Find out who is instigating litigation and why. Are the instigators of litigation primarily franchisees? If so, be sure to conduct a thorough examination of the business’ financial performance. That is, question the franchise system’s ability to make money – because franchises that are doing well do not, as a general rule, initiate litigation (that is, successful franchise owners who merely want to do something else would just sell their businesses and get into another industry sector). If litigation is initiated predominantly by the franchisor, on the other hand, the indication is that the company merely turns to its lawyers to fix its corporate and inner-company problems.

Start a conversation with the franchisor. When you’re investigating litigation issues, you ought to find out what you can about the disclosure – and it’s always important to get both sides of the story. If a franchisor has reservations about providing an explanation for litigation, then that litigation is most likely ongoing and the franchisor is acting under its attorney’s advice – which means that you should proceed no further and find yourself another franchise opportunity.

Engage in conversation with other franchisees. Franchisees, like franchisors, all have their own unique perspectives when it comes to litigation issues. Be sure to speak with involved franchisees when doing your research. As you are no doubt aware, there are two sides to every story (sometimes more), and you don’t want to handicap yourself by failing to glean all the information that you possibly can.