The Classic Battle
A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.
The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.
Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you’re buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor’s system. The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.
If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don’t take for granted just because you are going with a franchise that you are getting the benefit of the franchisor’s "bargaining power."
Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.