When It's Time To Leave

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

As more and more franchises age and become less than worth the continued investment value they were thought to have when much younger, more and more franchisees decide that it really isn't worth continuing to pay for - and certainly not renewing for another franchise term.

Markets mature; become more price competitive; more heavily populated with competitors; suffer from technological changes and several more incursions of advancing market crepitation.

In the face of this kind of natural development in any business segment, franchisors, because their franchise agreements say they can, offer renewal agreements on less favorable terms than back when the franchise had more investment value.

This is called the sickness of believing that agreements rule markets rather than markets trumping agreements. But markets always do trump agreements.

This exquisitely absurd set of facts usually produces unwillingness of franchisees to renew and their desire to stay in the same business as independents. Now their franchise agreements have post termination covenants not to compete. The franchisors always insist that those covenants are enforceable. In these market circumstances there is far less likelihood that the covenants will survive a challenge.

State laws around the country have adjusted for this. Today, if the temporal scope of the covenant is too broad, the court or arbitrator may rewrite it to make it narrow enough to achieve some semblance of fairness. Moreover, courts and arbitrators may now decide that they should not be enforced by injunction, and award damages for its nonobservance.

These damages are usually less that the franchisees offered the franchisor to be released from the covenant in the first place. In these circumstances there is reluctance to award attorney fees and expenses to the franchisor even though he may have won "something". The result is that the franchisor, when the franchisees are being represented by very good trial counsel, usually loses money by not accepting the buyout offer. They passed up a better deal because they thought their covenant was immune to market circumstances even though the value of their franchise investment has been tanking for a long time. The metrics to show this are not hard to identify. The reason for this is usually executive ego reinforced by the franchisor's counsel supporting their client's desire to hear that they have a good case. They don't if the franchisees have really top notch representation.

In some instances the franchisees do not have the will to fight, and the franchisor wins by default. Usually in this situation the franchisees have retained some lawyer who is not a real litigator and who reassures them that everything can be negotiated if they just hang in there. Wanting to believe that they can get something of value when their opponent has told them to go to hell, they stay with the lawyer who loves to chat; get nowhere and eventually just throw in the towel swearing all the while that their lawyer ripped them off. That really isn't true. They could have retained a litigator but lacked the will to go in that direction. They wanted to chat it to death and that is exactly what they got.

When someone tells you no, that isn't a signal to keep talking, no matter what the seminars tell you. In franchising franchisors all believe their contracts give them divine right of kings. Their lawyers all tell them that the contract is so "airtight" that they can shoot people with no liability - it just isn't called shooting in the agreement. This isn't tea party stuff. You get what you win - end of story. If you are just going to chat after your franchisor has declined your best buyout offer you should just give up and save your legal fees wasted with some Chatty Cathy lawyer.

What you should do in making the decision to fight or lie down is some useful arithmetic. The metrics are as follows. What is it worth to me to go independent with no business interruption? Are my customers going to be there anyway if I resurrect my business under another name elsewhere after a year or two? Are they big customers who will make strong arrangements with my competitors if I leave the scene, and who I will probably not be able to get back?

Let the math point you in the direction of the most intelligent decision. If it doesn't pay to fight over it, hold your nose and swallow your medicine. That is what intelligent grownups do.

You will always have some fellow franchisees willing to put up the good fight and many others who will not go that route. Quickly weed out the timid from your group so they are not hearing all your plans and reporting them back to the franchisor. What the timid might contribute to the fight fund isn't worth what it will cost you to have Judas franchisees in your midst. Then, with your core group, go see a well known litigator for franchisees and work with him to configure a battle plan you can afford. If you can't afford a real battle plan you will have spent very little money finding that out, far less than you would have spent with the go to meetings guy.

This is tough love advice. But it is the best advice you will ever get. The right decision is always easier to make if you have the will and the intelligence. The real litigator can tell you just how he can give you the best shot to put the franchisor at so much risk of losing and setting a bad precedent for his covenant not to compete that he will change his mind and take a buyout. If he is really a fool, you may have to try the case. That's what real people do when bullied and the cost has been considered competently before starting the fight.

Thus endeth the lesson.