Renewal—Anything To Worry About?

 

The one constant in all store agreements since 2004 is that if certain conditions are met, a franchisee may renew the franchise “for one term equal to the number of years of the initial term provided for in our then current Store Franchise Agreement.” As an example, and assuming future versions of the agreement contain a ten-year term (as the current agreements do since 2010), a franchisee enjoying a fifteen-year term will be entitled to a renewal of ten more years. That second agreement will provide for a further renewal of whatever term is offered at the time of its expiration, and so on unless the agreements are radically changed by SEI with respect to renewal.

Since 2004, there have been two major changes in the store agreements affecting both your right to renewal and the cost of renewing your franchise agreement. The significance to you of those changes will depend upon when you signed your store agreement, i.e. 2004, 2006 to 2009, and 2010 to the present.

Those franchisees who were operating under store agreements expiring prior to December 31, 2003 benefited from a settlement of a class action known as “Offf/ Valenti” commenced against Southland Corp. by a group of 7-Eleven franchisees. The issues in the class action were rather complicated, but for the purposes of this article it extended all those store agreements until January 1, 2004, at which time (sometime in May 2004) all qualifying franchisees were offered the 2004 version of the franchise agreement. Part of the settlement provided that the operational renew process previously required for renewal would not be required for those franchisees signing the 2004 agreement.

That was a big plus for those franchisees because the operational review that had been required was fraught with a great deal of controversy and confusion, and most franchisees coming up to renewal at that time breathed a big sigh of relief. For those franchisees who, for whatever reasons, chose not to sign the 2004 agreement, operational reviews continue to be a requirement.

Subsequent agreements, however, reincorporated an operational review process that is to begin one year prior to the expiration date. Paragraph 24(a) of the agreement sets forth the rather vague criteria of the review as follows:

“We will use a performance measurement rating form that we develop from time to time to evaluate your operation and will inform you in writing of the status of your evaluation.”

The provision goes on to state that you will be given the opportunity to sell your store for a premium if you do not meet the requirements for renewal. Of course, what those requirements will be when each franchisee undergoes the review is impossible to determine and will be a moving target from time to time. Since the 2004 agreements will not expire until 2019, and all subsequent agreements have considerably more than a year before termination, there has been little experience with the operational review process, but you can be sure it will be a hot topic in the not too distant future.

In 2010, the store agreement reduced the term of the franchise to ten years from the fifteen-year term in existence since 2004. Also, and for the first time ever in the history of 7-Eleven franchising, a renewal fee was instituted which requires a payment to SEI “equal to twenty percent of the then-current initial franchise fee that would be charged to a new franchisee for the store.” For many franchisees the renewal fee will be a major expense, and for some it will be unaffordable or simply not make good business sense to pay for the renewal of a marginal or non-profitable franchise. As an example, if the franchise fee for your store, if offered to a new franchisee, would be $250,000, then your renewal fee would be $50,000. The irony is that you, as the franchisee, played the greatest role in increasing the gross profit of your store upon which basis the franchise fee is calculated, and now you are asked to pay a penalty for that effort. Note: The first renewal fee is applicable only to those franchisees signing the 2010 and thereafter agreement.

Here are some of the other conditions for renewal:

a) You must give SEI written notice of your election to renew not less than nine months or more than twelve months before the expiration date. You should not assume that your Field Consultant or Market Manager will give you a heads up on this rather narrow window, but one would hope they would.

b) SEI decides, in its sole judgment, to keep the store open as a 7-Eleven store. Low volume stores should be concerned, especially when low volume is combined with high rental.

c) SEI determines that the store is in compliance with the 7-Eleven food service standards.

d) You are not in material breach and are current with all amounts due to SEI on the expiration date.

e) You have maintained the minimum net worth throughout the one (1) year period immediately preceding the expiration date.

f) You must sign the “then current form of Store Franchise Agreement.” For some of you, especially those on the 2004 agreement, there could be shock waves if your coveted 50/50 split is relegated to history and replaced with a considerably greater 7-Eleven charge.

g) You have not received four or more notices of a material breach during the two years preceding the expiration date.

h) You have completed, at SEI’s expense, any additional training they require.

So, while you might not be facing renewal for a long time (2019 is around the corner for 2004 franchisees) you should nevertheless be aware of what you will be facing and prepare for it.

Have a great and profitable summer.