A True Analysis Of Your Monthly Financial Statement
Since becoming chairman of the National Coalition, one of the issues that has been brought to my attention consistently has been the reclassification of 7-Eleven franchisee operating expenses. This was brought to SEI’s attention in February, and at our Portland Board meeting in May it became a bigger issue of concern with franchisees. During our recent convention in Orlando, many franchisees expressed the same concern as well as their frustration because there really is no clear understanding as to what expenses are allowed anymore.
Generally, up to about mid-2013, SEI has pretty much accepted all of the operating expenses we’ve submitted in our financials. But between then and now, SEI has been examining the expenses we list more closely and has been changing what is allowed as operating expenses.
Allowable operating expenses are listed in our franchise agreement as Exhibit F. The definition includes ten categories of expenses or credits permitted to be charged against the Open Account. But there is a catchall that allows other miscellaneous expenditures as operating expenses, which SEI has not disclosed to the franchise community.
Basically, some of the operating expenses that were acceptable in the past SEI is now disallowing. For instance, outside landscaping and maintenance is clearly permitted in the franchise agreement, but in some cases it is being removed by SEI. Interest on lines of credit used to maintain minimum net worth are now being voided out. Travel expenses between stores or to meetings are being looked at a lot closer. Group health insurance is now being disallowed, and in some cases is being charged back, along with telephone lines for the stores. Anyone who may have purchased a laptop or a computer for home use pertaining to the business is being declined when they try to list it as an operating expense.
There is concern among franchisees that allowable operating expenses are being decided arbitrarily, and franchisees have no recourse to correct the expenses they have already submitted. Additionally, there is concern that once these expenses are moved to unauthorized draws it is inflating the franchisee’s income and not really reflecting the true income of the store. The bigger question is where can we draw the line in trying to get this rectified.
We consulted our general counsel Eric Karp about this, and his understanding is that under the franchise agreement SEI has reserved the right to make a reasonable judgment about whether a miscellaneous expense is allowable regardless of the classification by the Internal Revenue Service. We can argue whether their judgment is reasonable or not, but in the agreement they have expressed that they do reserve this right, which they are apparently using.
More worry is placed on franchisees when they review these financials and see these expenses being removed because SEI has of late been using strong-arm tactics for what could be considered curable infractions. I have found out that in some cases, if you do have one of these charges that has been applied to Unauthorized Draw, you should create a case within 72 hours to research and possibly reclassify. This entire situation puts a burden on our relationship with SEI because nothing is clearly spelled out in terms of allowable operating expenses.
Back in February, the National Coalition reached out to SEI and offered to work with them in trying to define a policy that we could send out to all franchisees to clarify it and make it work. The National Coalition has shown, and continues to show, our willingness to work with SEI cooperatively on our national standards regarding operating expenses in order to avoid the inconsistent application of these standards in all parts of the country. We will continue to work on a resolution to this issue because it’s probably the concern I’m hearing most from franchisees and represents the majority of the calls we receive at our national office.
I want to take this opportunity to thank all of the franchisees, our vendor partners, the executive team, my office staff and the volunteers who worked together to make our national convention and trade show in Orlando very successful. My biggest enjoyment was being able to actually communicate one-on-one with a lot of folks and talk about our business. Thank you all for the support you have given to the National Coalition, and please feel free to reach out to me any time you may need assistance.