Looking Into Franchise Litigation
When looking for a franchise to invest in, you need to look into their franchise lawsuits. By law, all franchisors must provide a UFOC which contains significant information about the company. This document also contains information about litigation that the franchise has been involved with. It is important to understand why the legal conflicts came about. Franchisors usually instigate litigation when a franchisee does not follow through with contract obligations. Franchisees usually instigate litigation because they are unhappy with their business. They may not get along with the franchisor or they are not making enough money. The problem is that franchisors are much more careful to follow all the obligations they signed for but do not assure that the franchisee will be happy or make any money. You can avoid any lawsuits by really understanding all that you are getting into.
If you end up uncovering a lot of litigation between a franchisor and its franchisees, I would advise that you do not get involved with that franchise. No matter what party instigated the litigation, the amount of lawsuits should be small. Look at the total number of litigations for the past two years and see what their percentage is. Less than 1% is what you want. If it is more than 4 or 5%, I advise you not to invest. Even if there is a small percentage like 1-3%, you still want to do some research and find out what the nature of the litigation was.
If you are noticing that franchisees are mostly instigating the litigation, I would research how the company is doing financially. See how well the franchise brings in money. Franchises that are doing well do not usually get sucked into litigation. Franchisees may also be successful but may want to try something else. If the franchisor is instigating the litigation, this shows that the franchisor turns to its lawyers to fix problems.
Another thing you want to do is talk to the franchisor about it. After doing research get the franchisor’s side of the story. The franchisor should not have a second thought about explaining the litigation. If the franchisor is reluctant to talk about the litigation, I would stop pursuing that franchise.
After hearing the franchisor’s side of the story, you will want to talk to the franchisees of the company. There are always two sides to a story. This is why you should try to get first-person accounts.
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