If you are a businessperson, sooner or later you will have to deal with a lawyer. In the franchise world, it helps – tremendously – to deal with attorneys who understand franchising and franchise law. It doesn’t matter whether you are a franchisor or a franchisee; no matter which side of the transaction you happen to be on, you will want an experienced franchise attorney to be on the other side.
Surprisingly, the level of franchise law knowledge among attorneys who actually get involved in franchise transactions varies considerably. The majority of the time, lawyers who are knowledgeable in franchise law are on both sides of the transaction. But that is not always the case. Sometimes, the attorney on the other side is inexperienced, and “dabbling,” in franchise law.
This is the first of a two-part piece on why these dabbling attorneys can hinder a transaction, or worse, do harm to their clients.
This part one looks at it from the point of view of the franchisor, which is negotiating with a prospective franchise purchaser. Let’s assume this prospective franchisee is the party represented by a lawyer without franchise law experience. This situation is much more common than the reverse – where it is the franchisor, and not the franchisee, that has inexperienced counsel.
Why Franchise Agreements are Different from other Business Contracts
Some, but not all, franchise agreements are negotiable. The most significant problem involving inexperienced counsel occurs when the franchisor is otherwise willing to negotiate with the prospective franchisee.
If a prospective franchisee seeks legal counsel, s/he will typically seek out that person’s usual business attorney, if there is one. If the prospective franchisee doesn’t have or know an attorney, that person will ask friends and family for referrals. Frequently, the referral is to a business attorney who has little or no experience in franchise law.
The business attorney may be tempted to do the work, instead of referring it to another lawyer. After all, the terms in franchise agreements look a lot like the ones you might find in other types of business contracts. But the problem is that the franchise relationship isn’t a typical business relationship. It is critical for the attorneys on either side of a negotiation to understand what makes franchising different.
Specifically, franchise agreements are (on the whole) much more one-sided than other business contracts. This is for a good reason: the provisions are there (in one way or another) to protect the health and integrity of the system as a whole, including its intellectual property and goodwill. Protecting the system is paramount, because if the system fails, all of its franchisees lose.
An attorney representing either side of the franchise transaction needs to understand this basic truth at the core of franchising. When s/he has experience in franchise law, counsel will understand which provisions are typical or atypical. They will also understand which terms may be negotiable and whether, taken as a whole, the franchise contract is more or less one-sided than is typical for those agreements. Having this experience will make the negotiation more productive and efficient. A more efficient negotiation will typically result in lower attorney fees.
The Frustrations of Dealing with Inexperienced Franchisee Counsel
You might think that the franchisor would benefit if the lawyer on the other side is inexperienced. I can assure you that is not the case.
Here’s the problem: when a franchisor is negotiating with a prospective franchisee’s counsel, that attorney’s lack of franchise law experience frustrates and needlessly complicates the process. Because the lawyer for the prospect doesn’t understand franchising, s/he may try to negotiate items that simply can’t be negotiated from a system protection perspective.
Again, the provisions in a franchise agreement are there to protect the system as a whole. An attorney who understands franchise law gets this, and will instead turn his/her attention to the contract terms that a franchisor may be willing to negotiate. The dabbling attorney, on the other hand, will often try to change these critical terms.
Here is how things usually shake out in those negotiations. The prospective franchisee’s counsel issues a 30-page memo outlining each and every provision of the franchise agreement that s/he wants to have changed. Or even worse, the attorney submits a redlined version of the entire contract containing his or her requested changes or revisions to the contract, which are usually voluminous.
The franchisor is likely to give one of two responses in that situation, and neither of them is good for the prospective franchisee.
1. Refusal to negotiate
The franchisor’s first possible response to the attorney’s negotiating position is to simply refuse to negotiate, at all. A franchisor will react this way when it is overwhelmed and frustrated by the number of requests, which the company believes seek to change key provisions of the contract.
The franchisee is then presented with a choice: (1) walk away from the deal entirely, and lose out on what may have been a good business opportunity; or (2) accept the entire franchise agreement as written, without any changes, thereby missing the chance to negotiate for some critical changes. In either case, the inexperienced attorney did his/her client a disservice by impeding the deal. This is frustrating to both sides.
2. Agreeing to limited changes
The franchisor’s second possible response to the attorney’s negotiating position is to agree to some, but not all, of the proposed changes. Obviously, this is better for the prospective franchisee than under the first scenario. But even in this situation, inexperienced counsel can be an impediment to the prospective franchisee.
This is when experience really matters: an attorney who understands franchising will also know which provisions are worth negotiating, and which are not. The experienced attorney will know when the franchisor can be pushed, and when it cannot. As a result, the selection of specific provisions that are the subject of any negotiation becomes critically important.
In other words, the “shotgun” approach to negotiation -- asking for everything under the sun -- lacks focus. And it’s this lack of focus that can result in a less effective negotiation process, when the different / changed provisions are not the ones that can make the biggest difference for the client. By taking the unfocused approach, the dabbling franchise attorney misses the opportunity to conduct an effective negotiation for his or her client.
When franchise contracts are negotiable, an attorney who dabbles in the area, lacking experience in franchising, can frustrate or impede the process. For this reason, franchisors tend to prefer that their prospective franchisees hire experienced franchise counsel, and those prospective franchise buyers should seek out lawyers who understand franchising. Plus, hiring an experienced franchise lawyer will typically save money, because the knowledgeable attorney will be more efficient than the dabbler.
In part two, I will discuss the problems that can occur when a dabbling attorney attempts to represent a franchisor. Stay tuned.