Minneapolis franchisee lawyer Ron Gardner explains what a franchisee can do if a franchisor is making an offer where the franchisee cannot make money.
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One of the dirty little secrets and there are a few in franchising is that franchisees don’t really have an inherent right to quote, “renew.” You and I in normal conversation would think renew means well, we do over what we did before. Almost 100 percent of all franchise agreements say that if a franchisee is to renew they have to sign what the term of art here is then current franchise agreement. So whatever we’re offering 20 years from now if you’re willing to sign that then we’re willing to renew you. Well, you get 20 years down the road and invariably the franchise agreement has changed and often changed in a way that isn’t advantageous to the franchisee. Things don’t get better for franchisees as time goes by in those agreements. Royalty rates go up. Ad rates go up. The amount of control the franchisor is exerting over the franchisee goes up. The design of the logo changes so you have to spend all the money to change your signs, whatever it is. And so frequently franchisees get to the end of their term, they’re looking at renewal but what they get is something they determine hey this a different economic model than what I’ve been doing and I don’t think I can make this.
And so, in those situations the franchisee is forced with some tough choices. Whether to accept it and try to make a go of it. Whether try and negotiate the term so they can change certain provisions that will make it work for them. Whether or not they can sell to someone who’s willing to take these terms so they can get their money and take it with them. Or whether or not they want to just terminate and claim that they’d been forced out of business through what we call a de facto termination. That is you didn’t actually send us a termination notice but you’ve changed things in this renewal document so much that we might as well have been terminated and if we sign this we are going to be terminated. And then hypothetically you can then import into the dispute with the franchisor those laws, statutes, regulations, contract provisions, common law concepts that we always talk about when we’re talking about termination. Good faith and fair dealing, have to have notice and opportunity to cure, the types of things that we always look at when we’re talking about termination.
And so that’s how we can go about attacking a then current franchise agreement when it’s something that a franchisee just doesn’t think they can make work.