CHAPTER 1: SOLE PROPRIETORSHIPS AND FRANCHISES 17
did not necessarily intend to drive the franchisee out of business, but only wanted to attract patrons with
case of the franchisor facing declining profits and taking action, in a commercially reasonable manner, to
whole or in part.
whole or in part.
20 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
terminate Chic Miller’s franchise. The dealer failed to maintain floor plan financing, a material requirement under the
days, another material requirement under the parties’ contract.
Based on GM’s previous effort to enlist Chic Miller’s in buying out another GM dealership in the area, the
dealer believed that GM was attempting to reduce the number of dealerships in that area from three to two. Would
such an attempt, or even a plan to accomplish this result eventually, constitute “bad faith” on the
Suppose that in March 2004, Chic Miller’s had placed one newspaper ad promoting its services and
had sold one car. Would the result have been different? No. In fact, after the seven-day closure, Chic Miller’s did
place a newspaper ad for “body work business” and sold one car, and cited these facts as evidence that it was open
and operating for business. The court stated, “This evidence vastly is insufficient to show the conduct of regular,
CHAPTER 1: SOLE PROPRIETORSHIPS AND FRANCHISES 21
3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was
wrongfully terminated. What is the main factor a court would consider in determining whether the
franchise was wrongfully terminated? The franchisor’s good faith and fair dealing in terminating the
franchise would be the chief factor that a court would consider in determining if the termination was wrongful..
4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s
franchise in this situation? Why or why not? If La Grande Enchilada attributes the termination of the
franchise solely to Del Rey’s failure to follow safety procedures, then the termination would be wrongful. The
towel that caught fire was about two feet from the grill, which complies with the requirement that towels be at
least one foot from the grills.
DEBATE THIS
All franchisors should be required by law to provide complete estimates of the profitability of a
prospective franchise based on the experiences of their existing franchisees. Because many
franchisors seem only to survive by selling more franchises—rather than from current operations—they tend
to exaggerate the potential profits than can be made. Those seeking to buy a new franchise are therefore
often provided with little hard evidence about how much profit they can expect to make. To prevent
individuals from succumbing to franchisors’ exaggerated sales pitches, government should require that
verifiable estimates of profitability be provided. These should be available in print and on the Web and be
current.
The profitability of any given franchise depends on many factors, including the business acumen of the
franchisee. Even if franchisors provided accurate estimates of potential profitability for the average
franchisee, there would be no guarantee that a new franchisee could earn the average profits so estimated.
Hence, if franchisors were required to provide profitability estimates to prospective franchisees, the former
would end up defending numerous lawsuits from franchisees whose business abilities turned out to be poor.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
specified sales quota can constitute a breach of a franchise agreement. If the franchisor is acting in good
faith, “cause” may also include the death or disability of the franchisee, the insolvency of the franchisee, and a
breach of another term of the franchise agreement.
whole or in part.
20 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
terminate Chic Miller’s franchise. The dealer failed to maintain floor plan financing, a material requirement under the
days, another material requirement under the parties’ contract.
Based on GM’s previous effort to enlist Chic Miller’s in buying out another GM dealership in the area, the
dealer believed that GM was attempting to reduce the number of dealerships in that area from three to two. Would
such an attempt, or even a plan to accomplish this result eventually, constitute “bad faith” on the
Suppose that in March 2004, Chic Miller’s had placed one newspaper ad promoting its services and
had sold one car. Would the result have been different? No. In fact, after the seven-day closure, Chic Miller’s did
place a newspaper ad for “body work business” and sold one car, and cited these facts as evidence that it was open
and operating for business. The court stated, “This evidence vastly is insufficient to show the conduct of regular,
CHAPTER 1: SOLE PROPRIETORSHIPS AND FRANCHISES 21
3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was
wrongfully terminated. What is the main factor a court would consider in determining whether the
franchise was wrongfully terminated? The franchisor’s good faith and fair dealing in terminating the
franchise would be the chief factor that a court would consider in determining if the termination was wrongful..
4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s
franchise in this situation? Why or why not? If La Grande Enchilada attributes the termination of the
franchise solely to Del Rey’s failure to follow safety procedures, then the termination would be wrongful. The
towel that caught fire was about two feet from the grill, which complies with the requirement that towels be at
least one foot from the grills.
DEBATE THIS
All franchisors should be required by law to provide complete estimates of the profitability of a
prospective franchise based on the experiences of their existing franchisees. Because many
franchisors seem only to survive by selling more franchises—rather than from current operations—they tend
to exaggerate the potential profits than can be made. Those seeking to buy a new franchise are therefore
often provided with little hard evidence about how much profit they can expect to make. To prevent
individuals from succumbing to franchisors’ exaggerated sales pitches, government should require that
verifiable estimates of profitability be provided. These should be available in print and on the Web and be
current.
The profitability of any given franchise depends on many factors, including the business acumen of the
franchisee. Even if franchisors provided accurate estimates of potential profitability for the average
franchisee, there would be no guarantee that a new franchisee could earn the average profits so estimated.
Hence, if franchisors were required to provide profitability estimates to prospective franchisees, the former
would end up defending numerous lawsuits from franchisees whose business abilities turned out to be poor.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
specified sales quota can constitute a breach of a franchise agreement. If the franchisor is acting in good
faith, “cause” may also include the death or disability of the franchisee, the insolvency of the franchisee, and a
breach of another term of the franchise agreement.