When Franchisees Have a Dispute with their Franchisor

Question: I am a franchisee of a retail specialty store. For the past three months I have been selling a new product I found through one of my local vendors. My customers are thrilled by the new product and it is selling very well. My franchisor’s field representative was in this week and told me that the product was not authorized and told me that I had to stop selling it immediately. Since I am paying royalties on the new product I do not understand why my franchisor cares what I sell and why I have to stop selling it.

What do I have to do to make my franchisor allow me to sell this product? I am so angry by the situation that I am ready to sue my franchisor for the lost sales if I lose this item.

Answer: Whoa; the first thing to realize is that, even in the best of relationships between franchisors and franchisees, disputes will occur from time to time. But, going to your attorney every time you have a dispute with your franchisor is the wrong way to solve problems. The only person who benefits from that strategy will be your attorney. The best way is to examine the situation, engage your franchisor in conversation, look for common ground and try to resolve the problem between you.

Let's keep in mind that your relationship with your franchisor is ultimately governed by the franchise agreement that you signed. If your franchise agreement gives the franchisor the right to approve all of the products and services you offer in your store (and the majority of them do), then you likely violated your franchise agreement by not getting permission to sell the new product. You may have the discovered the perfect product for the franchise system to offer, but you went around introducing it the wrong way.

In most franchise systems there is a process for requesting permission to offer new products or services. The reason franchisors allow and even encourage their franchisees to recommend new products or services is that it helps the system improve its consumer offering. Good franchisors look for mutual success, and some of the best ideas in franchising have come from franchisees. But good franchisors make decisions on what is best for the system, and have to make choices about what products or services are offered by the system. Even when something may benefit one franchisee or one market, if the franchisor feels that it does not benefit the entire system, they will usually turn down the new idea. Making these types of choices is usually the job of the franchisor.

Let us assume that you did not follow procedure and ask for permission in advance. What do you do now? The first thing to do is harness your anger. Likely you were wrong to introduce the new product without permission. Understand that the franchisor is likely to be somewhat upset with you for violating the relationship. You need to restore your relationship with your franchisor.

Give them a call and explain why you introduced the product. Let them know what the results have been in your store, and provide them with any research you conducted before you offered the product. They will be interested in information about your costs, new equipment that was required to make the product, overall economic impact on your store, supplier information, etc. Let them also have information on the reaction from your customers to the new product and your thoughts on how it fits within the overall concept.

Most franchise systems have procedures in place for requesting approval of new products or services. Often the new items, after thorough research by the franchisor’s staff, are tested in company-owned locations or in franchisee-owned locations. Ask your franchisor what the process is in your system and whether they will consider the new product for testing. If they will, ask them if you can participate in the testing.

If the franchisor says no, in all likelihood the process may be over and you should remove the unauthorized product from your store. In some franchise systems, though, there may be other internal mechanisms for introducing new products through a sub-committee of the Franchisee Advisory Council. If that mechanism is available to you, find out the procedures and go down that path.

At this point, if you still have no support for the new product you have a few choices to make. You can still contact your attorney, ask them to review the situation, and get their advice. In most cases you will find that the franchisor has the right to choose what is being sold to the public under their brand.

Your other choices include dropping the matter and bringing your store back into compliance with the franchise system, or selling your franchise to another person better suited to the restraints of a franchise system.

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“I have known Michael for almost 20 years and he is as knowledgeable about franchising as anyone in the industry. His approach is pragmatic, creative and strategic. When I need guidance or advice in franchising, I go to Michael."

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Peter Hoppenfeld, Attorney At Law
 

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