we are actually in hurricane force winds today so I have to apologize ahead of time/ I thought
what better time to make a video but there may be some background noise and squeaking.
An overused cliche in franchising is that you are in business for yourself, but not
by yourself.
But are you really in business for yourself and what do you own, if anything.
Many franchisees found out the hard way that franchisors usually hold all the cards and
those smiles and handshakes you got before you signed the contract might not last forever.
We often talk about life cycles of franchises here at Franchise City and how the personality
and culture of a franchise changes as it grows.
Emerging brands typically have intimate communications between the founders and franchisees and are
more likely to work in tandem alongside you towards mutual success.
As franchise systems grow however they are often purchased by huge conglomerates.
At that point in time the priorities change in favor of the shareholders.
This can have a detrimental impact on existing franchisees.
Always keep in mind the franchise culture you step into today may not be the same 5
or 10 years in the future.
But do you actually own anything after you pay the franchise fee?
Can you sell your business down the road for a profit.
Well in certain circumstances yes, but not always.
And franchisors will generally maintain some level of control over the process.
This makes sense because if you sell your business for a ridiculously high price, the
new franchisee will find themselves hard pressed to be profitable under all that debt.
Or if you sell to someone not qualified to run the business that could create issues
for the franchisor.
So at minimum most franchises will maintain some level of control over your sale.
You will want to check your FDD and agreement to determine exactly what is the case in your
particular situation.
One of our more popular videos covers the Chick-Fil-A franchise.
One disadvantage we note in their agreement is you never actually own anything.
At the end of the term there is no equity available except for Chick-Fil-A corporate,
who retains ownership.
So arguably in that contract you are almost a glorified manager for the term.
But at least with Chick-Fil-A you know what you are getting into beforehand.
But what about other franchises like McDonald's?
Surely we can sell our franchise at the end of the term?
Maybe or maybe not.
Most franchise buyers don't give this much thought but most franchise agreements provide
a finite term, say 5 or 10 years, followed by one renewal provided certain conditions
are met.
But after the renewal what happens?
Well unless you have an evergreen contract that outlines automatic renewals as long as
these conditions are being met, it is likely the franchisor has full authority to make
the call whether to renew your contract or not.
No scenario proves that better than the experience of Kathryn Slater-Carter and her husband Ed.
Since 1983 they had operated 2 McDonald's locations in Daly City California.
In 2011 McDonald's corporate contacted them stating they would not be renewing the lease
on one location when it came due in 2014, but the company would be continuing the lease
.....which would allow them to sell the franchise to another franchisee.
2014 came and McDonald's decided not to renew the lease, which is their prerogative.
Slater-Carter had been vocal against certain McDonald's policies so whether this played
into the decision we don't know.
But after 30 years of operating the franchise location now they would end up with nothing.
Or close to nothing as they were only able to sell the restaurant equipment that they
had purchased at market value which is practically nothing.
And according to franchise agreement letter of the law franchisors have the final say
in what happens at the end of the term.
Now some states including Iowa and Rhode Island have enacted some levels of protection regarding
franchisees equity in their franchised businesses.
Other states have tried to introduce similar measures but those bills have been shot down.
Now Slater-Carter's own home state of California tried to pass a bill called SB-610 that would
have protected franchisees from major corporations just taking their businesses away in such
a fashion.
In this bill unless franchisees had committed a "substantial and material breach" the franchisor
would not have the power to shut them down.
Now the bill actually passed state assembly which prompted the IFA, (international franchising
association) to run commercials on how this bill would hurt the economy.
The SEIU which is the Service Employees International Union, countered with commercials this would
be good for the economy.
In late August of that year the state senate approved the bill.
Enter this guy, Gov. Jerry Brown who had the power to, and waited until the very last day
before the bill would become law, to veto the bill and that was the end of it.
No added protection for franchisees
Now some of you might have seen Governor Brown in the news recently, being the politician
who vetoed bill SB-1463 which was a measure aimed at reducing California wildfires from
overhead electrical lines.
Wildfires as we have seen in the news recently have a terrible impact on the state of California
and many people have been affected.
Bill SB 1463 was unanimously voted for without a single person against it 75-0 in the legislature
and 39-0 in the senate.
so Hey Jerry we can help slow wildfires and absolutely everyone is in agreement what do
you say?
Old Jerry didn't like that bill either so he vetoed it.
That decision came back to haunt him as widfires now are burning uncontrollably in his state.
But I digress.
So when you look at it do you actually own anything in a franchise relationship?
technically, unless stated otherwise in your agreement, no.
In many circumstances you are renting the ability to use the franchisors brand and processes
for a set period of time.
Look at the potential profit you could make in the finite term and ask if all that work
is worth it in the event you are unable, for any reason, to renew.
Always have your lawyer clarify with you what happens not just during the agreement term
but after the agreement ends.
And what your rights include.
As it currently stands in most agreements the franchisor holds all the power.
And if you think I'll just leave and open your own store - most franchise agreements
will bind you to a non compete clause preventing you from operating similar ventures for a
number of months or years.
But that's a topic for another video
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Thanks for watching.