The 2019 Agreement: More Than What Meets the Eye

BY AJINDER HANDA, NCASEF VICE CHAIRMAN, PRESIDENT, GREATER SEATTLE FOA and
CHANDER SHEKHAR, VICE PRESIDENT, GREATER SEATTLE FOA

Any franchise system should aim to provide benefits for both the franchisor and the franchisees. For franchisors, the primary benefit is the ability to expand the brand more rapidly than they could either on their own, or through investors or lenders. The initial franchise fee and ongoing royalties allow franchisors to fund operations at corporate headquarters, train and support franchisees, market and advertise the brand, improve the quality of goods or services, and build the brand in the marketplace.

For franchisees, benefits include: a higher chance of success than in a sole proprietorship, initial training and ongoing support, assistance in finding an optimal site, the selling power of a known brand, lower costs through group purchasing, and brand power.

In this light, many view franchising as a commitment much like a marriage. A good match between franchisor and franchisee, sharing mutual goals over the long term, is essential to the success of each franchise unit, and thus the brand as a whole—an essential factor that must be considered seriously by both parties before any contract is signed.

The new 2019 Franchise Agreement proposed by SEI defeats the purpose of building and sustaining a profitable franchise system in many ways. In fact, if you read between the lines, some of its provisions are disastrous but innocent looking, like the 1.5-cent per gallon commission on gas or the credit card fee clause that existed in the old contracts. For example:

  • The more you increase sales, the higher will be the 7-Eleven charge.
  • Franchisees with more than one store must have an approved manager.
  • Managers must complete training to the satisfaction of SEI.
  • Franchisee must participate in all customer loyalty programs, and the cost of redeeming all points earned rests with the franchisee. The details of these programs are left to SEI’s future discretion. Failure to comply is an event of default, with a 15-day cure period.
  • Franchisee is solely responsible for the cost of whatever delivery programs are mandated by SEI in the future. This may include the obligation to employ additional personnel, and to acquire and insure multiple motor vehicles in the future. Failure to comply is an event of default with a 15-day cure period.
  • Franchisee must participate and invest in whatever digital commerce programs are mandated by SEI, including the cost of computer-related equipment facilitating pickup at and delivery from the store. This section is written broadly in a manner that would suggest that SEI can issue mandates from time to time requiring investment in digital hardware, and require a franchisee to incur the additional costs to implement pickup and delivery, with no guarantee of a corresponding benefit.
  • $8,000 as grand opening expense, added for franchise agreements executed on or after January 1, 2019. This is a coercive threat hanging over the franchisee — and makes no sense for existing stores, only newly opened stores.
  • Franchisee may incur costs for SEI equipment. In-store music service subscriptions are the responsibility of the franchisee. This perpetuates the built-in conflict of interest
    with SEI ownership of the equipment and franchisee responsibility for maintenance.

In the previous agreement there was only one event of default for which there was no notice and no cure period. Now there are 12 such events, and the cure period for many events of default has been shortened substantially. For example, the cure period for foodservice standards has been changed from 30 days to 3 days.

Nearly all of the insurance responsibility and associated cost has been transferred to the franchisee and requires that the  franchisee name SEI as additional insured under all of these policies. We estimate that the typical franchisee will pay approximately $230 per month for these insurance requirements. There are also broad indemnification provisions that may not be insurable.

There are many more provisions in the 2019 Agreement—such as transferring payroll responsibility to franchisees, transferring indemnification responsibility to franchisees, etc.— which would make anyone think, “Why should I buy a 7-Eleven store?”:

  1. Does it really support a viable franchisee system?
  2. Does it really work for the long-term success of franchisees?
  3. Is it really a saleable agreement?
  4. Does it make any business sense?

The answer to all these questions is NO, it actually goes against the fabric ofany franchising system.