Forbes: l0 Reasons ----Unfair Termination

The last of the Ten Good Reasons Not to Buy a Franchise touches on the possibility of the franchisee losing the business due to non-payment of royalties.

Is it a contradiction that those franchisees who don't break even and who are operating at a loss and struggling to break even and to service their debt are the most vulnerable to unfair termination by the franchisor ---and to predatory takeovers of the business by third parties? Those failing franchisees who complain to Corporate are subjected to audits and painful cures for infractions of the agreement that are out of proportion to the infractions, and while this may be unfair, it is legal under the franchisor's self-serving contract. Franchisors premeditate the use the terms of the binding unilateral agreement to acquire the assets of their failing franchisees cheaply for third party second-generation franchisees

The franchisors have IMMEDIATE access to the courts and to injunctions for non-payment of royalties while the franchisees are kept from the courts by the terms of the contract and are forced into mediation if the franchisor breaches the contract.

We cannot know how many franchisees continue to pay their royalties and work for nothing for years until they finally break even or fail. In failure, always, the franchisor can provide a third party to acquire the business in a fire sale or to cheaply buy the free title to the tangible assets from the bank who holds the "defaulted" loan. The banks are always willing to sell the tangible assets cheaply if there is personal collateral or an SBA guarantee backing the loan upon which they can collect the balance from the debtor.

We cannot know how many failed franchisees continue to pay on debt that continues to stand up units in the franchisor's network (under new ownership that continues to provide royalties for the franchisor) because they are honorable and want to save themselves from bankruptcy.

The absolute power of franchisors in the status quo of franchising is corrupting. It produces predators who indulge in abusive management policies to maximize the franchisor's profits at the expense of first-generation franchisees whose capital and labor is the primary resource for the franchisor, in success or in failure. It takes a new franchisee a few years to work up to failure or success and in those years the franchisee is feeding the profits of the franchisor with royalties from the gross sales of the business.

Quiznos, The UPS Store, CS Creamery, and many other franchises who are eligible for SBA guaranteed loans are good examples of abuse of power possible under the status of franchising in the law today. They are good examples of the subsidy that government provides to franchisors.