Franchisee Notes: What We Want Out Of The New Agreement

In early July a group of franchisees including many FOA leaders met in person and over the phone to talk about the upcoming 2019 Franchise Agreement and to start establishing in writing what franchisees would like to have in that agreement. The very first thing we agreed on was that we wanted it to be a fair agreement, one that takes into consideration franchisees’ needs as well as SEI’s needs.

We feel that since 2006 SEI has been chipping away and changing a lot of the good points we had in the 2004 agreement. We also feel that the pendulum has swung too far in SEI’s favor since then and must come back to the middle. During our discussions, we considered five factors:

1. Historical—Understanding the past business model, prior franchise agreements, changes to past agreements, and how these all relate.
2. External—Factors outside of the control of either SEI or franchisees that impact our business and threaten the delicate balance of our franchise agreement, such as labor issues, including minimum wage increases, exempt employee minimum salary levels, universal healthcare requirements, paid sick leave, scheduling guidelines, and the joint employer debate; governmental regulation/law changes like bag taxes, FDA shops, changing ages for age restricted products, changing product restrictions by area (i.e. no Menthol Cigarettes can be sold in Chicago); increased competition and channel blurring; growing credit/debit fees, inflation and rising crime.
3. Internal—Factors within the control of either SEI or franchisees that impact our business, such as an increase in food service, a change to QSR/Convenience, ETA, gross profit, maintenance, facilities upgrades/remodels, faulty technology, increased franchise fees, GGPS and the gas commission arrangement.
4. Current State— Understanding the current business atmosphere, the state of the industry and our current business model and strategies, and how they relate to the current franchise agreement.
5. Future State—Considering current trends and forecasting where our business is headed.

With all these points taken into consideration, we came up with the following wish list of things we felt should be incorporated into the new agreement. This list is by no means exhaustive or final.

Franchisee Wish List For The New Agreement

1. Term—Term should be 15 years, and in the case of an early renewal, the unexpired term of the current franchise agreement should not terminate when the master lease expires or is terminated.
2. Renewal—Eliminate the renewal fee and adopt a 15-year term.
3. Gross Profit Split—GPS should be 50/50 for the duration of the term, possibly tied to increases in Minimum Wage.
4. Advertising Fund—Make this 1.5 percent franchisee funded, 1.5 percent 7-Eleven funded, and administer the program using an oversight committee of both franchisees and franchisor personnel.
5. Gasoline—Change commission to 2 percent of the monthly average retail price com- puted on all gallons sold or $.03 per dispensed gallon, whichever is higher, and make price per gallon competitive with market conditions based on transparent criteria.
6. Franchise Fee—Utilize an established, transparent formula based on historical gross profit performance. Include a 180-day right of rescission with a prorated refund, and allocate a portion of the franchise fee toward remodel fees to be utilized during the initial ten years of the agreement.
7. Equipment Maintenance— Implement a capital replacement program based on a specific budget over the first five years of the term, that uses industry standard criteria, open book accounting of preventive and reactive maintenance costs, and parity between franchised and company-owned outlets. Replace equipment at end of useful life. No maintenance fee should be paid by the franchisee on such equipment if not done.
8. Transfers—Consent should not to be unreasonably withheld, buyer should be provided with list of other stores for sale, buyer should be assigned seller’s franchise agreement, and have a mutual release of claims.
9. Hot Food Gross Profit Split— Change the gross profit split of all Hot Food PSA items to 65 percent/35 percent (franchisee/franchisor). Calculate breakeven on daily sales, and do not split gross profit until breakeven is reached (similar to ATM contract). Reconcile food write-offs with audit-to-audit adjustments by SEI.
10. Survivorship—Provide survivors /estate with options to liquidate store(s) and recover fair market value. SEI buys store at fair market value if designee not qualified or in the case of multiple stores where designee does not meet multiple operator criteria. Include language to reflect equitable protection for multiple store operations. 7-Eleven agrees to not unreasonably withhold approval of qualified designees. Designee who meets company’s multiple operator criteria receives comparable number of stores. Create separate “transfer” clause of stores to immediate family members without charging franchise fee.
11. Revenues—Designate all revenues generated from any entity as “System Transaction Amounts” and as defined in Exhibit F in the franchise agreement, as shared income and applied to the gross profit split.
12. Cost of Goods—Strip away all provisions that provide for “in lieu of” a lower cost of goods and instead, ensure franchisees are able to realize the absolute lowest possible cost of goods. All revenue designated as Wholesale Vendor Discounts and Allowances will be included in cost of goods calculations. Except for proprietary items, stores should be able to bypass CDC/ McLane/Wholesaler markups to obtain lowest costs of goods on an item-by-item basis.
13. Banking Fee Expense— Any banking expense deemed to be normal, ongoing fees related to a commercial banking relationship should be borne by 7-Eleven. Fees due to the mismanagement of funds by a franchisee should be borne by the franchise operator.
14. Shared Cost Item—Sharing of expense on licenses and other recognized “normal course of business” items such as plastic bags, etc.
15. Credit/Debit and Other Transaction Fees— 7-Eleven is responsible for all transaction fees. Franchisees have neither control over these relationships nor the subsequent performance of these organizations. Franchisee not responsible for chargebacks due to system failure.
16. Indemnification—Increase the indemnification provided by 7-Eleven to $1M.
17. Recommended Vendor Purchase Requirement—Discuss if this provision is still relevant with the goal to eliminate. If RVPR language is maintained in the 2019 Agreement, insert language that allows the franchisee to prove that any purchases outside of the RVPR guideline improve profitability for both the franchisee and franchisor. Waive the RVPR requirement until subsequent review. Lower RVPR threshold to 80 percent.
18. FSC—Make disclosures self-executing, relax confidentiality, allow for streamlined dispute resolution, act on punitive damages if willful violation found.
19. Ownership of Real Estate and/or Equipment—Provide comparative pro forma profit and loss statements, add territorial protection due to increased investment, address consequences of ter- mination or expiration, and match 1.5 percent GPS paid by franchisee for the purposes of remodeling.

At a time when the National Labor Relations Board (NLRB) is looking into allegations that McDonald’s is too involved in franchisee labor, and the threat of a franchisor being labeled a co-employer suddenly is real, we believe it is in 7-Eleven’s “best interests” to give us a fair contract and eliminate these threats to our system.

During the July National Coalition Board meeting the FOA Presidents decided, by unanimous vote, to hire outside attorney Marc Culp to review the contract with the goal of achieving the most equitable agreement available to us. Please feel free to contact me if you have any questions or suggestions on this information.