Q: My brother bought a pizza franchise two years ago and it hasn’t worked out. He’s losing money every month, and he can’t even afford to pay himself a salary. He’d love to sell the franchise but nobody will buy it. Now he’s behind in his payments to the franchiser, and they’re threatening to shut him down. He invested about $200,000 in the business, but if he shuts down he’d only get about $25,000 for the equipment. He might have to go bankrupt because of all his debts. The franchiser has offered to buy him out for $35,000, and will probably run the store until it can be sold to somebody new. Can the franchisor do that?
A: In short, yes. This kind of thing happens more often than you’d think, and not only in franchise businesses. But franchise contracts are typically written to favor the franchiser. Franchisers usually control key aspects of the business, such as where to advertise, what products to offer, and what promotions to run. People buy franchises because they expect to benefit from the franchiser’s name recognition and established business model. When a franchised business fails, the business owner can feel cheated even if the franchiser has not violated the franchise contract.
Q: So is there anything my brother can do so he can avoid filing for bankruptcy?
A: There is a possibility worth exploring. When your brother bought the franchise, he probably got a disclosure document, called an FDD. Franchisers must give these documents to franchise buyers before they commit to the purchase. The disclosure document must comply with complicated rules, and franchisers sometimes make mistakes in preparing their FDD. For example, the rules require franchisers to estimate various costs related to their investment, to list previous lawsuits and bankruptcies related to the franchiser, and to include audited financial statements for the franchiser. If franchisers include earnings or sales projections, they have to be able to justify the projections.
If the franchiser gave your brother an FDD that violated disclosure rules, he might be able to force the franchiser to give him back his money, and even reimburse him for his past business losses. If your brother decides to file such a claim, he should do so within three years from the time he purchased the franchise. He should consult a franchise lawyer to determine if this is an option.
This “Law You Can Use” column was provided by the Ohio State Bar Association (OSBA). It was prepared by Stanley M. Dub, a Cleveland-area attorney whose practice focuses on franchise law.