The Playing Field Must Be Leveled

By Arnold Hauptman, General Counsel, UFOLI New York

Undoubtedly, except for a few colossal volume stores, this is the most challenging time I have ever witnessed for franchisees to both make a profit or to sell their stores for goodwill value. I make this statement based upon more than forty years of legal representation of both individual franchisees and 7-Eleven franchisee associations—local and national.

The present conditions are dire for both the old-timers as well as for the newer members of the 7-Eleven franchisee community. As to the many owners of 30, 40, or even longer years of tenure, their dreams of working hard towards a decent and well-earned retirement has mostly evaporated. They are often unable to sell their stores at any price because the stores are unprofitable or barely profitable, and no experienced franchisee would invest money for a franchise fee and goodwill premium for a losing proposition.

If a purchaser is found, the price being paid is far below what was expected ten or fifteen years ago, because operating 7-Eleven stores are now an uphill battle, even for multiple owners, and simply not worth the time, effort and money to try to resurrect an underperforming store or stores. The result is a plethora of stores for sale with no takers.

It breaks my heart to listen to the woes of members at UFOLINY meetings, the FOA I represent as counsel. They are, for the most part, not making a decent living and are stuck in a business with no light at the end of the tunnel. Some are working at separate jobs to pay personal expenses. This is not the secure and profitable future that was promised. I have represented franchisees who were losing money to the point where it was no longer feasible to stay in business. These franchisees simply walked away or sold their store for a pittance just to stop the flow of financial blood.

Of course, much of the problem must be attributed to the periodic store agreements, with each successive one being more favorable to SEI and less desirable to the franchisee. The 2019 agreement is no exception, with 7-Eleven charges skyrocketing at a time when they should be reduced to make stores earn a bottom-line profit.

Given the ever-increasing operating expenses, in my view, it is time for SEI to revisit the entire franchisee store agreement terms because if it doesn’t, the 7-Eleven franchise system may disappear as have other franchise systems that failed to develop a happy, successful and profitable franchisee community.

It appears from my observations that there are more corporate-operated stores than ever before. These are stores, I believe, that were either returned to SEI by franchisees who could not make a go of it or newly built stores that SEI could not franchise.

Recently, I have represented new franchisees that have franchised corporate stores, some of which should have been shut down because there is no way they could be profitable. Of course, franchising a corporate store without paying a goodwill price, and with the franchise fee frequently being partially financed, seems to be a good deal. All too often, however, it is not the pot of gold that it appeared to be, with the stores quickly going under minimum equity and with breach letters being served demanding more money that is simply not available.

There was a test program that SEI put in place wherein franchise fees would be reduced by one third provided that a fully signed goodwill contract be submitted to the Franchise Sales Representative. That was a good start, but the period within which to sell a store was too short. There are just too many stores on the market for a purchaser to be found quickly. It remains to be seen whether this program will be enough of an incentive to jump-start goodwill sales at a reasonable price. There is always a downside to these programs. In this case, lower franchise fees will result in lower long-term tenure payments for those franchisees in the system since 1991.

I find it impossible to believe that SEI does not hear the cries and pains of its franchisees, who are the lifeblood of its business. Management must know that the newest 2019 agreement particularly has swung the pendulum too far in favor of SEI and that immediate action is required to level the playing field before it is too late for franchisor and franchisee alike.

Let’s hope for better times.