Franchisors: Litigation Risk Can Be Minimized

By Mark Siebert of Entrepreneur.com



One of the largest misconceptions about franchising is that the business model is fraught with litigation. You've heard the horror stories: Franchisees suing franchisors. McDonald's (MCD Quote) hit with a multimillion-dollar lawsuit because its coffee was too hot. The Big Bad Wolf is outside the door, in the form of a franchisee attorney, huffing and puffing and threatening to blow your house down.

And, in truth, it can be scary. Litigation is a fact of life in America, and to ignore that fact is the business equivalent of building a straw house -- good shelter, but not for the long run.

Without an experienced franchise lawyer overseeing your contracts and incorporating case law, you leave yourself open to being sued. Still, franchising offers built-in techniques, and specific laws exist to protect you from many lawsuits. That said, litigation is much less of a concern in the franchising world than it is in other forms of business expansion.

A House of Bricks

First, start with the basics. Build a good legal foundation for your business and you can prevent many problems down the road.

The franchise agreement is usually presented to the franchisee on a take-it-or-leave-it basis. A typical agreement drafted by a franchise attorney is almost always very one-sided in favor of the franchisor. And as franchise law evolves, these documents typically become even more bullet-proof.

Here's how it happens: As franchise-related cases are adjudicated, the attorneys for both sides clarify potential gray areas through judicial precedents that might exist. This case law becomes a precedent in future disputes. Experienced franchise attorneys are constantly reading through franchise-related cases, making adjustments to their franchise agreements, so they are even more favorable to their franchisor clients.