Liability of Franchise Brokers
Franchise brokers are coming under increasing scrutiny for their activities as franchise sellers under state franchise regulation. The FranChoice lawsuits filed in 2019 became a major wake-up call for franchise brokers and the industry at large. With the increased potential for suits or regulatory oversight, it is essential for franchise brokers to understand their liability risks and how to best protect themselves from claims. Understanding these risks is essential in order to operate a successful franchise brokerage business in the future.
What are the risks involved with selling franchises
The main risks involved in selling franchises for brokers are the potential to be sued for misrepresentation, fraud, or negligence. In the FranChoice group of lawsuits, the brokers were sued for misrepresentations and fraud. These claims were based on several key points that FranChoice and their brokers make to potential clients including:
- “We’ve done much of the homework for you. We have carefully pre-screened hundreds of companies from all areas of franchising…”
- “We examine the record of the franchisor relating to litigation, failures and, most importantly, the satisfaction of the existing franchisees with the people and opportunity they are involved in. We only want to work with the best…”
- Their website also mentioned that using FranChoice would allow candidates to “avoid the confusion of researching the overwhelming myriad franchise opportunities and concentrate on those that have been pre-screened as high quality franchise businesses matching your requirements.”
- Our consultants must go through a thorough and rigorous training program over a six-week period. . . . They must be trusted advisors to their candidates and to do that, they need to truly understand each of our franchise companies so they can represent the business accurately.
The court in those cases ruled that much of the FranChoice marketing statements were subjective puffery or statements which could not be reasonably relied upon by a potential franchisee. The statements were found to be too vague and indistinct to rise to the level of constituting promises or objective representations. The biggest takeaway from the court was that franchise brokers were subject to state franchise seller laws and regulations though the facts in these particular cases did not end up triggering any violations or actionable claims. This means it is imperative for brokers in the future to act as if they were regulated franchise sellers and take steps to mitigate risks accordingly.
Other risks for brokers involve potentially losing franchisor clients or credibility by not adequately representing and understand their franchise system. Most top broker networks have strict requirements for reviewing franchise systems, understanding the unique attributes of that system, and have a unified process for vetting and matching potential franchisee candidates. Following these processes and being well knowledgeable about the franchise systems are the best measures to mitigate these potential risks.
What are some of the steps that brokers can take to protect themselves?
There are a number of steps that brokers can take to limit their exposure to these types of suits, such as ensuring that they have a solid legal team in place and conducting due diligence on the franchisors that they work with. However, even with these precautions, there is always some risk associated with selling franchises.
Having a solid legal team in place
Some key steps that brokers can take to protect themselves from potential liability claims include having a good legal team in place. A good legal team can help brokers to understand the risks involved in selling franchises and can also provide support if a lawsuit is brought against your business. Your broker network likely has a list or preferred attorneys that have worked with the network and their brokers before. Get to know them! They can be a tremendous resource (Reidel Law Firm is happy to be a partner in the IFPG Vendor Membership program). Brokers should also ensure that they are familiar with the state franchise seller laws and regulations, and take steps to ensure that they are properly representing the franchisors they work with.
Conducting due diligence of franchisors
In addition, brokers should make sure to undertake due diligence on any franchisor they plan to work with. This includes researching the history of the franchise and its performance in the market, as well as examining their financials and any potential legal issues that may arise. Doing so can help reduce the risk of being associated with a franchise system that may have a history of issues or that could be particularly vulnerable to legal claims.
Brokers should pay attention to their marketing materials and ensure that they accurately represent the franchisor’s business. This includes making sure that any statements made about the franchise system or its business performance are accurate. Brokers should also examine whether the promises or expectations about the potential financial performance of a franchise are realistic and based on sound market data. You have a lot of experience in the industry and very likely have a good eye for when a franchise system may have some issues or something ‘off’ about it. Trust your gut and dig a little deeper. Limit your exposure to potential claims by only working with reputable franchisors.
Build relationships with franchisors and franchisees
Brokers should focus on building relationships with franchisors and franchisees alike. Developing good relationships can help ensure that the broker is providing quality service and advice to both parties, as well as helping to build trust between all involved in the process. Taking the time to cultivate these relationships can also help brokers minimize their exposure to potential liability claims. Keep in touch with your franchisee clients, they can be a wealth of knowledge about the system you helped place them within and give you further insight into how to best place future candidates.
Advising franchisees to consult with an attorney before signing any agreement
Finally, brokers should advise their franchisee clients to consult with a qualified franchise attorney before signing any agreement. Doing so can help protect the franchisee from any misunderstandings or potential claims that may arise during the course of their relationship with the franchisor. A good franchise attorney will walk your franchise candidate through their obligations and expectations while also counseling on any potential steps to mitigate risks for their franchise opportunity (either within the franchise agreement or outside of the agreement). Some of the better franchise attorneys will offer these services at a reasonable flat fee and timeline. BTW, be sure to check out our flat fee, 5-day turn around FDD Review services HERE!
Franchise brokers should be aware of the potential risks associated with selling franchises and take steps to ensure that they are well informed about the franchise systems they work with, have a legal team in place, and make sure their marketing materials accurately reflect the franchisors. Additionally, brokers should strive to build good relationships with both franchisors and franchisees and advocate that franchisees seek legal advice before signing any agreement. Taking these steps can help reduce the potential liability of franchise brokers in the future.
By following these tips, franchise brokers can protect their business from liability while providing quality franchise opportunities and advice to their clients. With the right knowledge and precautions in place, franchise brokers can continue to provide excellent service for years to come.
Additional resources: If you’d like to learn more about protecting your business from liability when selling franchises, IFPG offers a number of resources that may be helpful. Additionally, Reidel Law Firm can provide more detailed advice on franchise law and how to minimize your risk. We can also work with your franchisees to go into any franchise opportunity wide-eyed and well educated. If we can be of assistance to you or your franchise candidates, reach out anytime. Call Reidel Law Firm today at (832) 510-3292 or fill out our contact form to see how we can help your business franchise.