What to Look for in a Franchise’s Litigation History
Before investing in a franchise, most prospective franchisees look at the brand, startup costs, royalties, and potential revenue.
But there’s another part of your due diligence that deserves close attention: litigation history.
A franchise’s litigation history can provide valuable context about disputes involving the franchisor, franchisees, suppliers, employees, customers, or other parties.
The goal isn't to assume that litigation automatically means something is wrong. Businesses can face lawsuits for many different reasons.
The important question is what the disputes are about, how frequently they occur, and what they may tell you about the franchise relationship.
Here are several things to look for.
1. What are the lawsuits about?
Start with the nature of the disputes.
Are franchisees alleging issues involving fees, advertising, territory, contract terms, disclosure, or support?
Or are the disputes unrelated to the franchise relationship?
The subject matter can provide important context when evaluating the overall franchise opportunity.
2. How frequently has the franchisor been involved in litigation?
One isolated dispute may tell you very little.
A pattern of similar disputes involving multiple franchisees may deserve closer examination.
Look for recurring allegations or disputes involving the same aspects of the franchise system.
3. Who is bringing the lawsuits?
Pay attention to whether disputes involve:
- Current franchisees
- Former franchisees
- Multiple franchisees
- Suppliers
- Employees
- Customers
- Other businesses
The parties involved can help you understand where disagreements have occurred within or around the franchise system.
4. How recent are the disputes?
A lawsuit from many years ago may have less relevance than a recent dispute involving the current franchise system.
Consider the timing alongside other information about the company.
A franchisor may have changed leadership, policies, agreements, or business practices since an older dispute occurred.
5. How were the disputes resolved?
Don't stop at the existence of a lawsuit.
Look at how disputes were resolved when that information is available.
Was the case dismissed? Settled? Decided by a court? Is it still ongoing?
The outcome and surrounding circumstances can be just as important as the fact that litigation occurred.
6. Look for patterns, not isolated incidents
This is one of the most important points.
Litigation shouldn't be viewed in isolation.
Compare what you find with the franchise's disclosure documents, financial information, franchisee turnover, closures, and conversations with existing franchisees.
If several different sources point toward the same concern, that's when it may be worth digging deeper.
7. Ask the franchisor questions
If you find something you don't understand, ask about it.
A prospective franchisee can ask the franchisor to explain the circumstances surrounding particular disputes and how similar issues are being handled today.
You don't need to make assumptions based solely on a lawsuit appearing in a search.
You need enough information to understand the situation.
8. Review the FDD carefully
The Franchise Disclosure Document (FDD) is one of the key documents prospective franchisees should review during the due-diligence process.
Among other things, the FDD contains information about certain litigation involving the franchisor and other specified parties.
Don't simply skim this section.
Use it as a starting point for questions and further research.
Litigation isn't automatically a red flag
This distinction matters.
A lawsuit does not necessarily mean a franchise is a bad opportunity.
Franchising involves contracts, business relationships, and hundreds or thousands of locations. Disputes can happen even within established franchise systems.
The objective of reviewing litigation history isn't to find a franchise with zero lawsuits.
It's to understand what happened, whether there are recurring issues, and whether those issues could affect you as a franchisee.
Do your homework before you invest
Buying a franchise is a significant financial decision.
Looking beyond the marketing materials and understanding a franchisor's history can help you ask better questions and conduct more informed due diligence.
Before you sign, know what you're getting into.
Want a second set of eyes on your franchise opportunity?
Lightway Advisorshelps prospective franchisees navigate the evaluation process with a structured, due-diligence-focused approach.
From reviewing franchise opportunities and understanding the numbers to identifying questions you should be asking before you commit, Lightway's goal is to help you move forward with a clearer understanding of the opportunity in front of you.
Considering a franchise? Talk to an experienced advisor here
