This article are provided for information purposes only, and are not intended as legal advice.


What can you do if you bought a poorly performing franchise?

March 19th, 2010

You have heard that someone may buy a car and it is a lemon, the same can happen when you buy a business or when you buy a franchise.  If you bought a new franchise, do you have any rights?  If you have a problem, you need to consult a lawyer to determine if there is any recourse under the laws applicable to your area were broken.  I have seen from experience where a franchisor provided specific projections for a particular location and that document came back to haunt the franchisor.

 

Needless to say, the actual revenue of this particular franchise was no where close to the projections.  The franchisor said that you needed an experienced operator.  The franchisee asked for a name and hired the recommended person.  The franchisor said that the franchisee needed to supplement the national advertising and provide discounts and the operator did twice the level recommended by the franchisor.  The problem was that the location was a very poor location.  It was one mile from the main road and it was off an industrial road.  A fast food restaurant needs to have exposure to high traffic.  This location did not provide that.  It was at the edge of a new commercial plaza but the landlord of the plaza was unable to secure a tenant for four years, again, due to the poor location.

 

In the end, the master franchisor started to pay the rent for the location to assist the franchisee in covering costs.  Even though they were paying the rent, the franchise was still losing money.  In year five, the actual revenue was one third of the projected revenue which meant that it was impossible to reach break even.  The franchisee sued the master franchisor. 

 

Many people who buy a franchise invest their life savings in the franchise.  In this case, this was an investor who purchased a franchise as an investment.  He had the resources to go after the master franchisor.  In the end, the master franchisor settled and paid him 50% of the losses which he had incurred over five years,  He  gave back the franchise in the settlement with the master franchisor.

 

Many franchisees do not realize that they have rights.  If the master franchisor picked a good location, this problem should never arise but from time to time, a poor location is picked and it eventually closes.  McDonald’s has closed locations, many other franchisors have closed locations.  There must be a reason why locations were closed.  But if you purchased a franchise which is a lemon, seek legal help to see if you have recourse.  My example above shows that a franchisee can win, he still lost money but he was able to mitigate his losses and get out of his commitments.  A less informed franchisee may have lost everything and would not realize that he could recover money. 

 

This situation was unique, the franchisor provided projections to a specific location.  The franchisee’s lawyer looked at the contract and the local laws and determined that this document provided by the franchisor provided them an opportunity to sue.  Another franchisee may have no recourse depending on the wording of the contract and the documents provided.  As a result, not every bad franchise investment may have the results that this investor had.  Seek legal counseland determine if you have recourse against the franchisor if you purchased a lemon.


Filed under: Franchises — Gary Landa @ 9:08 am


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