BCP Store—Is It Right For You?
According to my copies of SEI offering circulars, the Business Conversion Program (BCP) was rolled out by SEI in 2006. There are enormous differences in the business model between traditional stores and BCP stores, and you should be aware of these distinctions if you are thinking about investing in a BCP store.
The major differences are that you will not be obtaining a lease or sublease for your store from SEI, nor will you be getting a turnkey operation as you would with a traditional store. Instead, you are expected to either convert an existing c-store, which you own and operate to a 7-Eleven store or, as seems to be occurring frequently, locate a site which is acceptable to SEI and then purchase or lease it for the purposes of building a store from scratch.
If you do decide on a BCP Store, it will be you, and not SEI, who will be responsible to pay rent or mortgage payments, real estate taxes, and all other expenses associated with leasing or owning real estate. You will also be responsible for utilities and maintaining the physical structure of the store, including HVAC, landscaping, etc.
Of course, the biggest expense will be with respect to building the actual 7-Eleven model store. Depending on whether you are converting and remodeling an existing c-store with acceptable floors, ceilings, lighting, etc., or are actually fully constructing an essentially vacant ready-to-build site, the costs can range from a relatively small amount to several hundreds of thousands of dollars. Keep in mind you can’t go shopping for your own contractors. Prior to the effective date, SEI will provide specifications and requirements that you must follow for the design and layout of the store, with the work to be performed by SEI contractors. SEI will lease to you any 7-Eleven equipment it deems necessary, as well as any fixtures and improvements, which may include counters and cabinets. A good deal for SEI; for a small investment, it gets another store with a 7-Eleven sign on it.
Here is the other side of the coin. Instead of paying a franchise fee of up to several hundred thousand dollars for a traditional store, depending on its actual or projected gross profit for the prior 12 months, the current franchise fee for a BCP store is a flat $25,000. Moreover, with a traditional store, the 7-Eleven charge can vary greatly, from as little as 48 percent to as much as 57 percent. In a BCP store, on the other hand, the charge ranges from 22 percent to 25 percent, depending upon the gross profit.
Whether or not to consider establishing a BCP store, especially one that is a totally new c-store location, is a huge business decision. The biggest risk, obviously, is that the prediction of the volume of business is just that—a prediction. If that prediction does not materialize, you will still have to pay the rent or mortgage installments, real estate taxes, and other costs. SEI will not bear this risk and, even if you are a corporation, it is more than likely that your landlord or mortgage lender will require you to personally guarantee the rent or mortgage debt.
So what if things don’t turn out as planned? Get this. If you decide that you made a big mistake, and you find yourself continually putting money into the store instead of taking out money and must give up the franchise, or if your agreement is terminated by SEI because of the many grounds for breaches, then you will have to pay to SEI what is known in legal circles as liquidated damages. Those damages range from a flat $200,000 if the termination occurs during the first two years, down to 40 percent of the prior 12 months 7-Eleven charge if the termination occurred 108 or more months after the effective date. Keep in mind that the entire agreement is only for a term of 10 years or 120 months. Of course, SEI also gets to remove the leased equipment.
Since the inception of the BCP Program, I have gained personal knowledge of some of these operations. For sure, many BCP stores have been very successful, even exceeding expectations, with both franchisor and franchisee being happy campers. However, I have also been contacted by BCP franchisees who have related horror stories to me. Those unfortunate franchisees found themselves with high rents and other related costs that could not be paid from disappointing revenue, and with other high expenses that continually put them under equity requiring a constant infusion of money. In one case, unanticipated store encroachment was the villain.
So what is a franchisee left with should disaster strike? More than likely, a private c-store requiring the replacement of the leased 7-Eleven equipment, removal of all 7-Eleven signs and design motif, and a liquidated damage payment of as much as $200,000. Even that scenario may not be possible because of the agreement’s non-compete clause, which prevents you—for 2 years—from operating that store as a c-store if it is located within a half-mile of any existing or intended 7-Eleven store.
Maybe even worse is the necessary total abandonment of the business and site. In that case, and in addition to the above issues, rents and/or mortgage payments and other expenses continue because of personal guarantees you have given—and without any income stream at all.
So, as you can well imagine, an unexpectedly poor BCP store can be infinitely worse than a traditional store where you can just walk away with only the loss of your franchisee fee. That is bad, but better than years of debt and perhaps bankruptcy. The only answer is to minimize your risk, as best as possible, by doing due diligence and seeking the advice of a good business consultant. The rest is up to lady luck.