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Log In / Register | Apr 25, 2018

Harsh Franchisors Spark Franchisee Wars

Franchisors are facing franchisee revolts. Some franchise salespersons, and reporters, are blaming it on this tough economy. For example, take UPS, a lawsuit festering for seven years, says CNNMoney.

Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.

Apparently, the recession’s razor-thin margins have pushed Quiznos franchisees to act. However, those of us who watch the industry know that Quiznos franchisees have been embroiled with their franchisor in lawsuits from the best of times. They are not a happy lot since they say that it costs them $5 to make a sandwich that their franchisor forces them to sell at $3.95.

There’s some good news.

"We're seeing franchisors responding by temporarily deferring royalty payments," says David Kaufmann, a franchise attorney and partner with Kaufmann Gildin Robbins & Oppenheim in Manhattan. "Some have escalated corporate contributions to marketing programs, some are letting franchisees that promised to open new units now push that further into the future."

The economic downturn is resulting in negotiating power that is shifting away from franchisors towards franchisees. Franchisors aren’t just deferring royalties. Some are giving away whole shops. And franchisees are increasingly able to renegotiate more, from the length of their franchise agreement, ad funds, supplies, to territory size.

What the article leaves out is the increasing negotiating abilities of the franchisee entrepreneurs through their growing trade associations. For the chains featured in the story, behind the scenes are Platinum Shield and Brown Shield associations for The UPS Store/Mail Boxes Etc.; Toasted Subs Franchisee Association for Quiznos; and the National Franchise Association for Burger King. These groups are poking at their franchisor, and getting some results.

Sadly, Rita’s Italian Ice franchisees, among which an unprofitable owner is featured in the news piece, has no association.

Quiznos attorney Klein expects that even when the economy recovers, franchisees and franchisors will continue warring over the financial terms of their arrangement.

Klein is right, of course.

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About Darnelle White

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A doctor of businesses by day. A writer and insomniac by night.