Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Franchisor Financial Problems Dragging You Down?

I was quoted in this article from The Street entitled, "When The Parent Company Drags You Down". The article discusses the financial woes of some franchises including Quiznos and the impact on franchisees.

If your a franchisee caught in a system experiencing financial problems, my first piece of advice is to carefully review the terms of your franchise agreement to make sure the franchisor is meeting its obligations to you. Another expert quoted in the article encourages franchisees to organize and band together. Banding together can enable franchisees to gather information and gives leverage and bargaining power with the franchisor, vendors and suppliers and even help with trademark rights, said Brian Miller, CEO of The Entrepreneur's Source

If your franchisor is experiencing serious financial issues, it's also prudent to speak with a franchise attorney to get an understanding of your rights.