Is it legal for a franchisor to take 100% of a franchise's income to pay a debt owed to them?

Asked almost 2 years ago - Newport News, VA

My clients pay my franchisor directly and after taking their royalty fee the remainder is sent to my franchise. Suddenly, the steady flowing, predictable income completely stopped. The franchisor claimed that my franchise owed them too much money, and the only option was to give them control over the franchise and take a salary job with them, which I refused. Any attempt to work out a payment plan was denied by them due to the amount of the debt. After several months of this issue, my franchise financially sank due to past-due bills. I would like to know if they can legally take all the company's earned income? This situation caused crushing debt and not having enough funding to continue operating even though the franchise was profitable.

Attorney answers (4)

  1. 2

    Lawyers agree

    Answered . My colleagues are correct; you need to see counsel now. A thought or two; you seem to admit that there was a monetary obligation to the franchisor. In most cases this would be a default and give the franchisor many options. In some systems, the franchisor can "step-in" and operate the franchised unit until the default is cured. If that is the situation here can only be determined by a review of the franchise agreement. Also, the large debt does not square with your statement that the operation was profitable; clearly an analysis of the overall situation is needed.
    Set an appointment with counsel at the earliest time.

  2. Answered . As a franchise attorney , who has actually walked the walk, owning and operating a very successful franchise, and a court-accepted, testifying franchise expert, I agree with my colleague.

    Unfortunately, the questions you need answered are much more complicated than can be answered here.

    No attorney here on AVVO can advise you without knowing all the facts and circumstances surrounding your case and the specifics of the contracts (express or implied) entered into by the parties.

    Your best bet is to consult with a franchise attorney asap.

    Best of luck,

    Kevin B. Murphy, B.S., M.B.A., J.D.
    Franchise Attorney & Franchise Expert
    Director of Operations - Mr. Franchise

  3. 1

    Lawyer agrees

    Answered . I agree with the other attorneys who recommended seeing experienced franchise counsel as soon as possible. But based on the limited information you have provided, this sounds similar to situations I have seen before, specifically where the franchisor collects the money from the franchisee's customers (clients), determines some cost factor that needs to be deducted, and then remits what the franchisor believes may be due the franchisee. Often times the franchisor retains more than its share, as these types of arrangements (money going to franchisor first) are not the norm and sometimes can signal a less scrupulous franchisor.

    But my observations are based on the clients I have assisted, and until you present the full story to a franchise attorney in your area, you cannot know if your situation falls into the category of those I have just described. I mention them solely to alert you to the potential gravity of the situation and empahsize even more heavily the need to act quickly and meaningfully. Best of luck.

  4. Answered . You need to retain an experienced franchise attorney immediately. The attorney will need to know more of the specifics of the situation and review the franchise agreement you signed. You have not provided sufficient information for anyone to properly advise you, but you may have an action against the franchisor.

    In addition, you are in VA, which has franchise laws that protect you. Please feel free to contact me during the work day (215-525-1165 x101) if you would like to further discuss this situation.

    This response does not create an attorney-client relationship and is not intended to provide legal advice for your... more

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