Franchisor Liability

Being a franchisor is not just about being at the top of the franchise system. Sometimes it also entails franchisor liability, that is, the fact of being held legally responsible for the actions of your franchisees.

 

Why is Franchisor Liability Even Possible?

 

You may be a bit confused about why a franchisor would be held liable when franchises are essentially independently owned and operated. The answer to that question is that, more often than not, franchisors exercise so much control over how their franchisees run their franchises that they could be said to be involved in the daily operations of the franchises. Thus, if a franchisee’s employee is implicated in sexual harassment, and if the franchisor can be shown, through his or her actions or documents, to have been involved in decisions involving the daily operation of the franchise, then franchisor liability could come into play.

This may seem unfair. After all, the franchisor may not have played a part in employing the individual who subjected his or her subordinates to sexual harassment. Furthermore, the franchisor may not even have been aware that this problem existed. This makes it apparent that being a franchisor carries its fair share of potential headaches. If you want to avoid being put in this precarious situation, then you need to seriously think about how you plan on structuring your relationships with your franchisees. You may want to protect your trademark and the reputation associated with it by giving your franchisees meticulous details to govern the way they run their franchises. However, the more detailed and prescriptive your guidelines are, the more deeply involved you are in the operation of the individual franchises. This is precisely the sort of thing that will result in franchisor liability.

Also, if you are directly involved in training your franchisees’ employees, you may be setting yourself up to be held liable for any illegal activity carried out on the premises of their franchises. It seems evident that minimizing your liability by taking a step back from deep involvement in your franchisees’ operations is your best option. You could make it clear (in writing) that the franchise guidelines you give them are simply suggestions. You should certainly restructure the language in all your documents to make sure that the individual franchises are not being identified with the franchise company. There should be clear distinctions between them because documents that conflate them could easily result in franchisor liability for franchisee actions.

Franchising Rewards

As you consider getting involved in franchising, you should consider what you stand to gain by becoming a franchisor. Franchising rewards have to outweigh the risks of franchising if you are to benefit from the experience.

 

Franchising Rewards and their Implications

 

So what are some of the rewards of franchising? To answer this question, it makes sense to think about what franchising entails in practical terms. Franchising essentially allows you to grow your business without bearing all the financial and logistical burdens on your own shoulders. In a sense, it is a division of labor and, in some ways, a distribution of risk. Because franchisees have a stake in the success of the franchise company, they are likely to invest more goodwill and energy than, say, an employee who is hired to manage a branch of a business. Thus, if the franchisor sells franchises to the right people, he or she will not need to stand over them and monitor them to make sure they’re doing things the right way.

A number of franchising rewards follow from the circumstances described above. One of them is the fact that franchising makes it possible for franchisors to slim down their operations for greater efficiency. It would be logistically and financially overwhelming for franchisors to own, develop and run different branches of their businesses in different cities from one central location. Franchising allows the decentralization of control and expenses. Hence, instead of all the operational decisions being made at the center, franchisees have the power to make important decisions while following a franchise blueprint. This sort of organizational structure can be tremendously efficient if the franchise blueprint is well thought out and if the franchisees are a good fit for the franchise company.

Other examples of franchising rewards are made apparent by the competitive capacity of franchise companies. As the previous paragraphs point out, franchising allows for the quick growth of a business. By buying franchising rights, franchisees invest their own resources into the business, making it possible for more stores to be opened and for the franchise company to grow a larger customer base. A franchise company with units in 50 different cities has greater competitive capacity than does a family-owned company with ten branches. The former is likely to fare better against competing businesses.

Other franchising rewards include the availability of more resources to devote to marketing research, the ability to save money by buying raw ingredients or goods in bulk and having them distributed to different units, and increased efficiency in staff recruitment and turnover.

Franchise Trademark

A franchise trademark is a word, name, image, symbol, device or combination that is intimately associated with a franchise. It is a brand name and should be registered to ensure that it is protected by the law. A franchise trademark is tremendously important because it is often the first indicator of a franchise’s identity. It distinguishes one franchise company from another and is used to show that certain goods or services come from a particular seller or provider.

To the average consumer, it comes to represent everything that a given franchise stands for. A good franchise company’s trademark often provokes a sense of comfort in a customer while a bad franchise company’s trademark is often enough to make customers walk away. Thus, it is important for franchise companies to guard the reputations associated with their trademarks by making sure that all their associated franchise units offer their customers top notch products or services.

It is also important for a franchise company to make sure that other business entities are not using its franchise trademark. Trademark ‘theft’ of this kind can easily dilute a brand name. Additionally, it can eat into a franchise company’s customer base by ‘stealing’ away customers and leading them to believe they are being served by an authentic franchise unit. It should not come as a surprise that various franchise companies have gone to court to sue others for the use of their trademarks.

 

What Makes a Good Franchise Trademark?

 

Because trademarks are so closely associated with the companies they represent, care should be taken in their design. A good trademark often ends up defining a company for life. So a franchise trademark should be able to tell customers what the business is about all within moments of the first glance. As franchising involves expanding an established business to reach new markets, excellent marketing and promotion are necessary to introduce the franchise to new customers and to ensure that they remember its trademark. In this case, a distinct trademark that is easy for customers to remember is ideal.

Most franchisors have the intention of leaving behind a business legacy that will last decades or longer. Thus, it makes sense for their trademarks to be durable. In other words, they should be as effective fifty years from today as they are at the present moment. Franchise companies that have to rebrand every 10 or so years lose something in the process. Companies that have the same logo 100 years on tend to be more appealing to customers. Their longevity earns their customers’ trust.

Franchise Termination

As you consider franchising your business, franchise termination is probably the last thing you want to consider having to do. However, you would be remiss to ignore this very important aspect of franchising.

Franchise termination is to franchising as divorce is to marriage. Just as a young couple blissfully in love might think it inconceivable that their union can end in divorce, franchisors might resist considering the possibility that their agreements with their franchisees could someday go sour. In both cases, hope and optimism are forefront on the minds of the parties involved. However, it quickly becomes evident that hope and optimism do not guarantee the success of any marriage or franchise relationship. Even in the best of cases, things can go wrong, and when they go wrong, it is important for there to be a well thought-out plan to follow. This is why it is important to address the possibility of franchise termination in the reams of documents that you put together for your franchisees to sign.

 

Franchise Termination’s Place in Your Documents

 

Devoting time to franchise termination in the documents that define and govern your franchise relationships is important because it lays out a set of guidelines that you can follow when it becomes impossible to sustain a franchise relationship. Considering that franchising often involves taking on large numbers of franchisees, it is reasonable to assume that this is going to happen with at least one of your franchisees.

The reasons that would inspire a franchisee to withdraw from a franchise agreement vary. Likewise, the reasons that would inspire a franchisor to terminate the agreement also vary. Because it is expensive to set up and to maintain a franchise in the first place, the reasons given for termination would have to be good. Backing out of a franchise relationship for frivolous reasons would simply cost the franchisor and franchisee too much.

Ideally, the franchise agreement or franchise disclosure document should detail the circumstances under which termination is justified, the steps that can be taken to remedy the problems, and, if they should fail, the steps involved in the termination process. The terms surrounding termination may put the franchisees at a considerable disadvantage, and, unfortunately, you may be tempted to use this to your advantage. However, you should be careful about this. It is relatively easy to cross the line into the realm of franchise fraud if you handle terminations in an irregular manner. So it is in your best interests to ensure that you clearly lay out all the franchising terms devoted to termination to your franchisees before they sign on. Subsequently, you should follow these terms to the letter if you end up having to terminate the franchise relationship.