So Let’s Review …

 

In my role as general counsel to the Coalition, it is part of my job to write six articles each year for publication in Avanti. That means I have already written 24 articles during my four-year tenure, and it is not an easy task to avoid repetition when your topic is limited generally to legal affairs and the interpretation or explanation of your store agreement.

However, certain topics seem to be the basis of many of the questions posed to me by phone, e-mail, or at board meetings and conventions. So why not review those topics on an abbreviated, but nevertheless informative, level? You should, however, consult your agreement for a more expansive review.

Non-Compete Provisions—Paragraph 5

In the 2004 agreement, there is no provision for non-competition during the term of your agreement. Subsequent to 2004, all agreements provided for both in-term and post-term restrictions with respect to “maintaining, operating or engaging in a competitive business.” The restriction during the term of your agreement is a competitive business within one-half mile of any intended or actually existing 7-Eleven store, excluding any such business owned by you as of the effective date of your agreement.

The post-term restriction on operating a competitive business is for a period of one year at a location “which is, or intended to be located at the site of the store [i.e.: the store ceases operations as a 7-Eleven store for any reason], or at the site of any former 7-Eleven store within two (2) years as it last being operated as a 7-Eleven store.” The language is a little convoluted but, in a few words, stay away from operating a competitive business in former 7-Eleven store sites for one (1) year.

The question frequently arises: What constitutes a “competitive business?” Here is the definition in Exhibit E:

“Competitive Business” means any business that is the same as or similar to a 7-Eleven Store (except 7-Eleven Stores operated under valid agreements with us), including a convenience store or other store not designated as a convenience store in which the product mix is fifty percent (50%) or more of goods or services substantially similar to those then-currently offered by a 7-Eleven Store.”

Audit Rights—Paragraph 12

Periodic audits, of course, are essential and benefit both SEI and you. Through such audits you can discover, among other things, that employees may be the cause of cash or inventory shortages.

You are entitled to an audit each calendar quarter, with additional audits available at your expense. Moreover, and upon 24-hour prior notice to SEI, you can engage your own auditors. What about notice of an audit to you? Generally, SEI must give you 24-hour notice, but under certain circumstances no notice is required. For instance, no notice need be given in the event of a burglary or robbery, a casualty, missing receipts, your failure to timely report purchases or account for receipts or expenses, you are below your net worth minimum, or your prior audit indicated an inventory overage or shortage of more than one percent. If you are a multiple owner, under any of these conditions SEI can audit all of your stores simultaneously without notice.

However, you or SEI have the right to have a re-audit if requested within 24 hours of receipt of the audit report. Contrary to the advice given to some owners recently that a re-audit must be “justified” in some way, you have an absolute right to such a re-audit within 24 hours, with or without a reason acceptable to SEI. But keep in mind—you pay for the re-audit unless it results in an audit adjustment of more than one percent of the prior audit.

The 2006 & 2010 Agreement

Even though you may not think so, and even though you were then first introduced to the eighty-five percent recommended vendor requirement, consider yourself lucky if you are operating under the 2004 agreement. This is the last contract in which all stores are enjoying a 50-50 gross profit split. Also, that 50-50 split can be transferred to a good will purchaser for the balance of the term of your agreement, which will typically be until 2019 unless sooner terminated pursuant to the contract—i.e. most notably expiration of the store lease and all options.

2006 brought to the system a radical (and not a good) change to the method of computing the 7-Eleven charge. Gone was the universal 50-50 split. In its place came the “tiered” split based upon your gross profit, adjusted every year. This dramatically impacted high volume stores with a potential 7-Eleven charge of as much as fifty-six percent. Compounding this dramatic income swing to SEI is the fact that the various tiers are not adjusted for inflation. Stated differently, you can find yourself on a higher tier simply by reason of inflationary market forces beyond your control and without selling any more product.

More bad news in 2010: that store agreement reduced the term from 15 years to 10 years, thereby reducing the good will value of your store, and for the first time ever, imposed a renewal fee equal to twenty percent of what the franchise fee would be at the time of renewal. WHEW!! That could really be a big deal. It is anybody’s guess, again considering inflation, what the franchise fee could be many years from now.

Over and over again, I am asked whether or not a current franchisee will be required to pay the renewal fee upon expiration of his or her agreement. The answer is NO with respect to any pre-2010 agreement. Each such executed agreement provides for a renewal at expiration at no additional fee for a term provided for in the “then current agreement”—now 10 years. When your renewal agreement expires, you will then have to pay the renewal fee. Some examples:

• You are on the 2004 agreement, which will not expire until 2019. You can then renew at no additional fee for 10 years. Upon further renewal in 2029, the twenty percent renewal fee will be imposed.
• You are on a 2008 agreement, which expires in 2023. Again—no charge to renew for 10 years, but a renewal fee in 2033.
• You are on a 2010 or later agreement which expires in 10 years. You will be required to pay the renewal fee at the expiration of your agreement.

As always, call or e-mail me with any questions.