Franchising Industry Disputes

Franchise contracts vary from simple product to more complicated business format franchises. They all place obligations on the parties to meet performance standards.

More than any other business area franchising relies on positive business relationships and effective communication as the failure of either party to meet their obligations may result in financial loss for the other party. Many disputes arise when the performance of the business fails to meet the expectations of the franchisee, as presented in the disclosure documentation. Other disputes can relate to disputed trading areas, maintaining operating standards, uncompetitive product pricing, royalty payments, assignments, and terminations.

Case Study  Franchising Industry

Background

Frank Wiley was the owner of ‘Blast’ a franchise for household cleaning services based in Melbourne. Following the success in Melbourne Frank decided to try the concept in the Sydney market. Wayne & Sue purchased one of the franchise outlets in Sydney.

The Dispute

After two years Wayne & Sue were unable to pay their franchise royalty. Attempts by both parties to find a solution by direct negotiation failed and Wayne & Sue requested the matter be mediated on advice from their solicitor. Frank Wiley agreed to the mediation in an effort to prevent costly litigation.

The Facts

The franchise agreement was 10 years plus a further 10 years from the date of purchase. Initial cost included goodwill and capital for equipment and start up costs. A Retail lease was in place, with 12 months and a three-year option remaining.

The Process

The mediator requested a private meeting with both parties as emotions were running high. Wayne & Sue were a young married couple who had borrowed from their family to buy the franchise and the possible failure of the business was creating significant stress. They believed Frank Wiley had not supported the Sydney network and had not honoured commitments made at the time of purchase causing the business to fail.Frank admitted in private his concern about the Sydney market. However, he also believed Wayne & Sue were poor performers thus compounding the problem.The joint mediation session (held at neutral premises) enabled the parties to table all relevant documentation including current financial data. The major outcome revolved around the realisation that the market in Sydney could not support the current number of franchisees. Although many potential solutions were explored, including new business opportunities and various cost cutting initiatives, no agreement could be reached.

Private sessions were then held between the mediator and each party in confidence. Wayne & Sue declared their preferred option was to sell the business to the franchisor as soon as possible, but they required a reasonable price to cover their existing debts and would like some compensation. They acknowledged that their lack of experience had contributed to the problems and were realistic about the costs and risks of pursuing litigation.

Frank also believed that buying the franchise and combining it with the adjacent operator would be the best outcome. His concerns related to the purchase price and the ability of the adjacent franchisee to finance the additional franchise. Frank was also concerned about the impact on Blast’s goodwill in the market if the business was allowed to deteriorate further.

Having achieved a common objective, being the ‘sale of the business’, the mediator was able to assist the parties to negotiate an acceptable price. Although this option was not foreseen prior to the mediation both parties were pleased with the outcome.

The Mediated Outcome

Frank agreed to buy the franchise, including stock and equipment, and take over the existing retail lease. The price was discounted, however, it allowed Wayne & Sue to exit the business and repay the family loan.

Lessons to be learnt

Detailed disclosure by the franchise company is essential prior to purchase. Seek professional advice to evaluate any new business venture. Critically assess your skills and experience to manage a new business venture.