Dealing With A Problem Franchisee

Six alternatives to messy termination litigation

By Jack Eberenz

In every franchise system there comes a time when a franchisee has problems.  The problem could be failure to report results as required, failure to pay royalties or fees, failure to adhere to standards or whatever else could threaten the brand. 

 One thing to remember is that other franchisees are watching.  They want to know how the franchisor will react so they can judge their future actions.  Therefore the actions of the franchisor can affect the whole franchise system. 

Unfortunately, too many franchisors think first of termination.  Terminating a franchisee is a difficult and expensive process.  Differing state laws regarding the location of the franchise, the owners’ state of residence and other items can increase the complexity of the process and the associated legal fees.  And since a large percentage of terminations end up in court or arbitration, you need to be prepared for a years-long and challenging ordeal. 

If a franchisor can get past the franchisee’s emotion, there are multiple ways to either rehabilitate the franchisee or urge him to exit the system voluntarily – avoiding triggering any regulations, arbitration or litigation.  Don’t back the franchisee into a corner with litigation as his only option.  Take every reasonable step.

A Personal Story

When I was a young general manager I stepped in to assist with an angry customer.  I offered to give free service if he would wait 10 minutes and correct the problem.  When that didn’t work I offered a free coupon for service at a future date.  That failed too so I opened my wallet and handed him his money back from my own pocket.   At this point he informed me he was a personal friend of the general manager and was going to have me fired.  When I informed him that I was the general manager he stormed off in a huff with no coupon, money or relief. 

Naturally I was scared that the owner would fire me.  Luckily he said, “You did everything you could; you just can’t make everyone happy all the time.”  So once again, take every reasonable step.

  1. Take One More Shot At Reconciliation:  Sit down with the franchisee and your team to determine if everything that can be done to get them back in compliance has been done.  Document everything.  Include dates, times, actions, responses and agreements in a precise form (No “on or about such and such a date”).
  2. Agree To A Penalty Instead of Termination:  Explore a settlement with the franchisee to recover damages resulting from the breach.  You can then show that there was a penalty but since the franchise is back on track, there needs be no termination.
  3. Sale:  Encourage the franchisee to sell the business to an approved buyer.  Help him sell, if you can.
  4. Buy Back:  Agree to purchase the franchise and run it as a company store or resell it when the right buyer shows up.  The right buyer may be an existing franchisee that is ready to expand. 
  5. Wait It Out:  If it is near the end of the franchise term it might be wise to just wait and then deny renewal.
  6. Take Control:  Having corporate take operational control of the business is a drastic last step prior to litigation.  This option should only be used for very obvious and compelling reasons, such as major health issues or actions that would seriously damage the brand such as drug dealing, selling inferior products, massively excessive consumer complaints or illegalities.  Take pictures, get documentation, even cooperate with local attorneys general or police.  Protecting your brand means protecting all other franchisees.

Even if these efforts fall short, your actions may well lead the judge or arbitrator to conclude, “You have done everything any reasonable company would have or could have done.”