The management and operation of a franchised business requires considerable time and energy on the part of the franchisee. In addition, many franchised businesses also require financial resources that are not always available to a single person.
For these reasons, more and more franchisors find themselves with franchisees composed of several partners or shareholders.
This presents several advantages, but also a risk: that of a disagreement, even a dispute, between the partners or shareholders of a franchisee.
A dispute between partners or shareholders of a franchisee can have serious consequences on the performance of the franchisee, on its relationship with its employees and with the franchisor and, in some cases, can paralyze the decision-making process within the franchisee. Such disputes have even led to the franchisee's demise.
Is there anything a franchisor can do to prevent or avoid such difficulties, or at least minimize the impact on the franchisee's operations, its relationship with that franchisee or its network?
This is a delicate subject since there is always a risk that, by getting involved in a dispute between shareholders of a franchisee, the franchisor will later be reproached for its intervention, as well as for its motivations (real or supposed), in a court of law in the context of a possible dispute.
Here are six practical tips to prevent and manage such a risk:
Verify the compatibility and complementarity of the new partners
During the franchise evaluation process of a new franchisee composed of more than one individual, it would be relevant for the franchisor to also verify the compatibility and complementarity between the franchisee’s partners.
This can also be an excellent opportunity for the franchisor to verify that each of the partners understands his or her role and responsibilities, that they all truly agree on the franchisee's business plan, that they understand and accept all the risks inherent in the franchise and that their objectives are compatible and realistic.
Stipulate appropriate provisions in your franchise agreement
More and more franchisors are stipulating in their franchise agreement some provision to allow them to act more efficiently in case of problems between the partners of a franchisee.
Several clauses can be useful to prevent and manage such a risk, including, among others, a mandatory control clause, a designated operator clause, a clause requiring a shareholders' agreement, clauses imposing dispute resolution mechanisms, etc.
It is also possible to include a provision stipulating that a dispute between shareholders constitutes an event of default under the franchise agreement if it is detrimental to the operation of the franchised business, if it negatively affects the reputation of the franchise network or if it prevents the franchisee from fulfilling any of its obligations.
Ensure that the partners have complete and well-drafted agreements between them
Whether or not the franchise agreement contains a provision to this effect, the franchisor can always ensure that the franchisee’s partners have a written and signed partnership or shareholder agreement between them.
Although it is somewhat risky for a franchisor to interfere in the content of this agreement, it can nevertheless make the franchisee's partners aware of its importance, of the clauses that should be included in it and of the importance of calling upon a competent professional experienced in the drafting of such agreements.
An incomplete or inappropriate shareholders' agreement may leave the impression with the shareholders or partners of the franchisee that their interests are adequately protected, since it is only in the event of a problem that the weaknesses of the agreement will become apparent.
Ensure that the franchise agreement always takes precedence over the agreements between the franchisee’s partners
Although, as previously mentioned, it is risky for a franchisor to interfere in the content of an agreement between the shareholders of a franchisee, it can very well require, by means of a provision to that effect in its franchise agreement, that the shareholders' agreement must contain certain provisions, including a clause stipulating that the provisions of the franchise agreement always take precedence over those of the shareholders' agreement and another stipulating that any transaction of shares or other interests in the franchisee, even between its partners or co-shareholders, can only be made in accordance with the provisions of the franchise agreement.
Get personal covenants and guarantees from each partner
An excellent way to get the partners and shareholders of a franchisee to cooperate with the franchisor's efforts to help resolve any disputes between them quickly and efficiently is to obtain from each of them (even from those who will not be active in the operation of the franchised business), at the time of signing the franchise agreement, their personal guarantee and agreement to abide by all of its terms and conditions.
Quickly seek expert advice
If, despite your precautions and efforts, a serious dispute arises between the partners or shareholders of a franchisee, a practical and important piece of advice for the franchisor is to quickly call in an expert in the matter.
These are very delicate situations in which a franchisor may, without wishing to do so, incur liability if it takes inappropriate action or, conversely, if it fails to take appropriate action in a timely manner.