Franchise lawsuits and bankruptcies

Every franchisor has to tell buyers about certain lawsuits and bankruptcies before they sign. It is one of the few places in a franchise’s documents where the brand describes its own problems, and one of the most skipped. This guide shows how common those disclosures are, which kinds of brand have the most, and how to read them.

What franchise brands must disclose

Under the Federal Trade Commission’s Franchise Rule, a franchisor must list pending lawsuits that matter to buyers: claims of fraud, unfair or deceptive practices, or breaking franchise law, and other material cases. It must also list similar cases concluded in the last ten years, lawsuits it brought against its own franchisees in the last year, and any regulatory actions against it. The same section covers its officers and other key people.

Bankruptcy has its own section: the franchisor, its parent, its predecessors, affiliates and key people must disclose bankruptcies in the last ten years. Of the 3,314 brands here, 1,288 disclose at least one lawsuit and 203 disclose a bankruptcy of some kind.

Lawsuits rise with the size of the brand

The bigger the system, the more likely it reports a lawsuit. That says more about volume than about conduct: a brand with thousands of owners, landlords, suppliers and employees will be in court somewhere, and many of the cases it lists are actions against owners who stopped paying. A small brand with several lawsuits from its own owners is the more telling case.

Lawsuits by industry

Hotel, printing and sign and tax brands report lawsuits most often, mostly older systems with many owners. Laundromat, lawn care and mobile brands, younger and smaller on the whole, report the fewest.

Well-known brands with no lawsuits to disclose

These are the most searched brands that report no litigation at all. That doesn’t make them safer buys on its own, but it does mean no disputes with owners or regulators of the kind that must be listed.

Franchisors that went through bankruptcy

These franchisors report a bankruptcy of their own, a predecessor’s or a former parent’s. Several are well-known brands whose previous owners filed under Chapter 11 and whose franchise rights were sold to a new company. Existing owners usually kept trading, but supply, support and marketing can suffer during and after a case.

Another 14 brands disclose a bankruptcy at a sister company running a different brand, and 18 at other companies owned by the same investor. Those don’t touch the franchise directly, but they show how the owners handle a struggling business. A further 124 disclose a past bankruptcy linked to an executive.

Reading a brand’s lawsuit record

Sort the cases into three piles: the franchisor suing owners (usually unpaid fees, sometimes a sign of many struggling owners), owners suing the franchisor (look for repeated claims about the same thing, such as sales promises, required suppliers or territory) and regulators. A cluster of owner suits over what they were told before buying is the most serious pattern.

Then ask the franchisor about each case and call the owners involved, whose names are in the filing. The franchise disclosure document guide shows where the lawsuit and bankruptcy sections sit, and the agreement terms guide explains the clauses most disputes are about.