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AUGUST 2, 2001

SMART ANSWERS
By Karen E. Klein

A Partnership of One
When a partner in a franchise wants out, you're first call should be to an attorney -- particularly if you're being asked to return her investment


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Q: A friend and I bought into a franchise as equal partners and signed a contract with the franchiser, but she backed out early and now wants her part of the franchise fee returned. We never had a written contact -- do I have to pay her back?

---- A.S., Louisville
A: Probably not. Even if you didn't have a written contract, your partner agreed verbally to share the risk of this venture with you -- and she proved it by signing the franchise agreement. If she dissolves the partnership by backing out, she has to split current assets or debts with you -- unless she's alleging wrongdoing and can prove it in court.

The franchise contract and the "uniform franchise offering circular" you should have gotten by law will tell you whether any or all of the fee is refundable, and under what circumstances. Franchise fees are used for location searches, training, and administration and are most often -- though not always -- nonrefundable, experts say. "Franchisers don't typically give refunds just because the franchisee wants out. Even if none of your fees were spent, the franchiser probably is not obligated to refund them unless it promised to do so," says Mary Beth Trice, head of the franchise law group at Fitzgerald, Abbott & Beardsley in Oakland, Calif.

A minority of states have franchise statutes that allow you to get out of the contract within 60 days or 90 days after signing. Check with your state's attorney general on that, or if you didn't get the required offering circular -- in which case you may be able to rescind the agreement and get restitution of the amount you paid. Your state's unfair and deceptive trade practices act (known as the "Little FTC Act") may give you rights if you can prove there was a violation of a Federal Trade Commission rule in the presentation, disclosure, or signing of the contract, Trice says.

MOVING ON.  If you want to go ahead with the business, ask your franchiser for help in remarketing or finding a new partner. Also, check to see if your partner's departure constitutes a change in ownership that is subject to franchiser approval. Don't forget that you both signed a binding agreement with the franchiser: If you don't perform, both of you may be liable unless the agreement gives you the right to cancel. On the flip side, should the franchise become successful, your original partner may decide she wants a portion of the profits.

Contact an attorney familiar with franchise law to learn about your rights and obligations, and take a lesson about the importance of putting partnerships in writing. "Even in close family relationships or friendships, things happen: People die, lose interest in the business, and want to exit the relationship," says Michael H. Seid, a franchise consultant and author based in West Hartford, Conn. Remember, before you can do chicken right, you have to do business right.


Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.
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