Minimum Net Worth Policy Change

 

We all have to maintain a minimum net worth in our stores on a monthly basis. For some stores the minimum is $10,000 under the grandfather clause of the contract, while other stores have a minimum of $15,000 as per the Store Franchise Agreement. Many factors come into play when trying to keep our monthly net worth above the minimum, but a store’s financial performance during any given month is the most essential—a bad month or a bad audit can drag net worth below the equity level. An error by Accounting or even a pending credit not cleared before publication of monthly financials can also affect it negatively.

The agreement clearly states, “You agree to maintain at all times during the term of this agreement a Minimum Net worth of at least fifteen thousand dollars. If you operate more than one franchised store, you agree that we may transfer Net Worth in excess of the Minimum Net worth in one of your stores to another of your stores which has a net worth below the Minimum Net Worth, or directly to us if the other store’s franchise agreement is terminated or expires and there was an unpaid balance in the Open Account at the time of termination or expiration.”

Franchisees work very hard to fulfill the terms of the agreement, and we try our best to keep the performance of our stores profitable. However, sometimes our financial outcome may be negative due to unavoidable circumstances like slow months, which hits our bottom lines and makes our stores fall below equity. This is especially true in low volume stores, which have a difficult time maintaining financial gains. In these cases, the old policy allowed franchisees to deposit the required money to bring the store above the minimum equity level within five business days of the store’s monthly financials being published (although, in some instances an LON would be issued even if the money was deposited in time).

SEI changed this policy a few months back, and now franchisees must deposit the required amount to stay above equity before the 15th of every month or make arrangements with SEI to pay the amount, the terms of which must be agreed upon by both parties. If a franchisee fails to pay the amount by the 15th of the month or does not make an arrangement, a notice of Material Breach is automatically generated and served, subject to the franchisee’s right to cure during three business days. It falls upon your Market Manager to serve that breach legally or hold onto it until you deposit the money. In some cases the breach notice is posted via e-mail through the store ISP, which of course is not legal.

In the part of the agreement titled Termination: Paragraph (8)—Curing Breaches: Multiple Defaults, the second paragraph states, “If you have been served with three (3) separate notices of any Material Breach within the two (2) years before a fourth (4th) Material Breach, we may terminate this agreement immediately upon notice to you of the fourth (4th) Material Breach in such two (2) year period without any opportunity to cure, whether or not such Material Breaches are of the same or different nature and whether or not such Material Breaches have been cured by you after notice by us. Following the fifth (5th) anniversary of our notice to you of any Material Breach, such Material Breach will not be used as a basis for termination under this paragraph 26(b), provided that such Material Breach has been cured.”

It has always been a challenge to run a twenty-four hour business, and today it is even more challenging given the soft economy and declining number of customers. All of this affects our business, and low volume stores are an easy prey to fall below equity. Please make sure that you always try your best to keep a cushion of a few thousand dollars in your Minimum Net Worth account. Check your monthly financials and try to deposit the money before the 15th or make the appropriate arrangements with the SEI team—in some cases a phone call to your Market Manager may save you a breach.

On the other hand, our franchisor is well aware of all the circumstances and hardships faced by 7-Eleven storeowners in this economy, so a phone call by the Business Consultant to remind a franchisee to deposit the money in time would be seen as a friendly gesture. It is not the right approach at all to issue a Material Breach and put it on a store’s record for falling below equity for a small amount of $100 or $200. A store’s history of paying equity on time should be kept in mind before the issuance of a Material Breach, as LONs and breaches are not the only solutions.