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Jason Daley writes in Entrepreneur Magazine that legal issues could change franchising forever.
Franchising usually makes it into the mainstream press when Taco Bell jams a new snack chip into its burritos. But in the past year, franchising has been making front-page news for other reasons: Several issues that have been simmering for years came to a head, pitting franchisors against franchisees and labor advocates against both.
The results of those conflicts—and their ultimate consequences for franchising as a whole—aren’t at all clear, obscured by hyperbole, legalese and a lack of guidance from regulators. Whether these issues will reshape franchising for the better, as some argue, destroy franchising as we know it—or change nothing at all—remains to be seen. Whatever the case, the legal and political fights are worth watching.
I was interviewed for this article well over 8 months ago and forgot about the interview until it popped up in my google alerts.
At the time I was the Executive Director of the Maine Franchise Owners Association (MFOA) currently I serve as a member of the MFOA Board of Directors.
“What’s happened is that over the years, attorneys for franchisors have tightened franchise agreements to the point where franchisees don’t really own any equity in their business,” explains Jim Coen, executive director of the Maine Franchise Owners Association, which supported the bill in Maine. “When push comes to shove, in most franchise agreements franchisees don’t have anything but the equipment they buy. They have no right to the name, to their customer base, and because of noncompete clauses they can’t use the skills they’ve learned. Yet franchising sells units by telling people they can be in business for themselves.”
Later on in the article I was also quoted as saying:
Coen of the Maine franchise owners’ group agrees that the minimum-wage movement is about union power, but he believes it also ties into fair franchising legislation and helps explain why the SEIU supported SB 610 and other franchising acts that improve franchisee equity. “The unions realize that if they can help franchisees increase their margins, then the franchisees can pay their employees a higher wage,” he says. “And I really think franchisees will pay higher wages instead of pocketing that income. The customer service experience at the counter is so important, franchisees want the best people they can get. The ones making minimum wage are cleaning tables or in the back. Franchisees shouldn’t be afraid of unions. They should be worried about protecting their equity.”
In the last sentence of my quote what I meant to say or thought I said was “Franchisees shouldn’t be afraid of the minimum wage. They should be worried about protecting their equity”.
Not a big difference but an important one.
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Patrick Clark of Bloomberg Business Week reports that the breathless marketing around franchise businesses often makes them out to be surefire moneymakers. Case in point: The website franchisehelp.com, a resource for prospective franchisees, sent an e-mail yesterday advising recipients to “Just Say No to Savings Accounts”—and to consider parking their savings in a “turn-key” franchise business instead.
They make it sound as if a Quiznos is as solid an investment as a New York City taxi medallion. A new analysis published by industry website BlueMauMau shows just how wrong that is. Of 165,000 franchise operations that changed hands or closed from 2010 to 2013, more than one-third, or about 58,000, went out of business. Another 40,000 were terminated—i.e., the franchiser yanked the license back from the buyer because of some breach of contract. And another 12,000 contracts weren’t renewed when they expired. The data were compiled by FranchiseGrade, a company that analyses franchise systems for prospective investors.
In all those situations, franchise buyers are unlikely to have recovered the money they spent to get into the business. Many may have lost more than their initial investments, says Don Sniegowski, editor of BlueMauMau: “Unlike stocks, where you’re out the amount of money you put in, you can invest $5,000 for a startup fee and walk out with a collapsed business and hundreds of thousands in debt.” He adds that some franchisers sue failed storeowners for royalties they would have paid if they have stayed in business for the length of their contract.
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At the last the New England Franchise Association meeting, Tim Bryant of Preti Flaherty stated that franchisee equity was not part of the franchise deal. Tim claims a franchisee leases a franchise and the franchisor controls the equity. That statement is very true for most franchisors and franchise agreements except in states that offer some protections for franchisees.
The basic premise is that today’s franchise agreement do not allow franchisees to build, harvest or perpetuate their equity. Tim Bryant correctly points out that under today’s franchise agreement equity belongs to the franchisor. Listen to what Tim Bryant says, he is speaking the truth of franchising’s dirty little secret, the IFA and dubious franchisors have been avoiding this secret for decades. I and other pro franchisee advocates have been telling you this for years.
There are a number of ways that franchisors can extract equity from franchisees, and franchisor attorneys have been adept at changing the language in franchise agreements to attempt to circumvent the state’s law.
There are some states that offer franchisees a degree of protection to franchisees that choose to invest in a franchise in that state. My advice to anyone looking to invest in a franchise is if the franchise agreement does not allow you to build, harvest and perpetuate your hard earned equity than you should not invest in that franchise. The only other option is to invest in a State that offers protection for franchisees.
I have listed the States with franchise protection laws and the protections that those states offer. These laws will not prevent franchisors from extracting your equity if that is their intent, but these laws curtail some of the approaches dubious franchisors often take to extract equity.
Washington: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, freedom of sourcing, no undisclosed kickbacks, exclusive territory protection, no Litigation out of the State of Washington, fair and reasonable price for goods sold to the franchisee, transfer fee limited to expenses incurred by the franchisor, 30 days notice of termination, 30 day cure period, good cause required, 360 days for franchisor to issue notice of intent not to renew.
Indiana: Discriminatory treatment prohibited, freedom of sourcing, no undisclosed kickbacks, exclusive territory protection, no unreasonable non-compete, no unilateral substantial modification of agreement, mo limits on Litigation, no unlimited advertising contributions, 90 days notice of termination, good cause required, 90 days Franchisor Notice of intent not to renew.
Hawaii: Freedom of association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, freedom of sourcing, no undisclosed kickbacks. exclusive territory protection, reasonable notice of termination, cure period 60 Days, good cause required, franchisor notice of intent not to renew within a reasonable time.
Minnesota: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, exclusive territory protection, no unreasonable non-compete, 90 day notice of termination, good cause required, 60 days cure period, 180 days franchisor notice of intent not to renew.
Illinois: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, 30 day notice of termination, good cause required, 30 days cure period, 180 days Franchisor Notice of intent not to renew.
Nebraska: Freedom of association with no retaliation or retribution, no unreasonable standards of performance, 60 day notice of termination, good cause required, 60 days franchisor notice of intent not to renew.
New Jersey: Freedom of Association with no retaliation or retribution, no unreasonable standards of performance, 60 day notice of termination, good cause required, 60 days franchisor notice of intent not to renew.
Rhode Island: Freedom of association with no retaliation or retribution, 60 day notice of termination, 30 day cure period, good cause required, 60 day franchisor notice of intent not to renew. 30 day renewal cure period.
Wisconsin: Good cause required for change in competitive circumstances, 90 day notice of termination, 60 day cure period, good cause required, 90 day franchisor notice of intent not to renew. 60 day renewal cure period.
California: Freedom of association with no retaliation or retribution, 30 day notice of termination, 30 day cure period, good cause required, 180 day franchisor notice of intent not to renew.
Iowa: Freedom of association with no retaliation or retribution, freedom of sourcing, 30 day notice of termination, good cause required, 30 day franchisor notice of intent not to renew.
Michigan: Freedom of association with no retaliation or retribution, no litigation outside the State, 30 day notice of termination, good cause required, 30 days franchisor notice of intent not to renew.
Connecticut: Minimum 3 Year term, and 3 Year renewal, 30 day notice of termination, 30 day renewal cure period, good cause required, 180 days franchisor notice of intent not to renew.
Most franchisees feel they do deserve to own the equity they have accumulated in their franchise. Many sell those franchises and reap most of the rewards, unless dubious franchisors put their fingers in the franchisees cookie jar. The IFA and most franchisors believe it’s their equity and not the franchisees. It just very seldom that one admits it especially an Attorney member of the IFA.
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On Wednesday evening 10-1-2014, at a meeting of the New England Franchise Association, I served on a panel of four that discussed “Why is Franchise Relationship legislation popping up across the country?” There were three attorneys on the panel: Tim Bryant, Preti Flaherty, Portland, ME, Gregg Rubenstein, Nixon Peabody, Boston, MA; and Rory Valas, Valas Law, Boston, MA. The moderator was Suzanne Cummings, Cummings Law, Stoneham, MA.
The discussion was civil to a point and in particular Gregg Rubenstein did a good job questioning the validity of these laws and the problems they are supposedly trying to solve, he denied that a problem exists. Rory Valas also did a good job of articulating how “bad acting franchisors” take advantage of franchisees. He shared a number of common legal clauses that are unconscionable in that the outcome to franchisees is devastating. Rory informed the audience that the unconscionable franchise agreement clauses are not typically found in other business contracts. Often those business contracts are protected by common law, where franchise agreements are not.
Tim Bryant of Preti-Flaherty sounded more like an IFA lobbyist than an attorney. He stated false statistics as well as the unfounded claim that these laws are being introduced by “wealthy franchisees” that are funding these initiatives for their personal gain.
Not only was I astounded at his accusations. I also found his arguments to be ill-informed, false, hostile and provocative.
On the contrary, I tried to represent that collaboration and transparency to the transaction is the real need and that Independent Franchisee Associations can create leverage and obtain more balance than most laws can. With that said, basic laws can raise the bar for franchisors to treat franchisees with “good faith and fair dealing” and help attract more buyers that have turned away from franchising over the last 8-10 years.
The clip above is of Tim Bryant of Preti-Flaherty from Portland, Maine accusing rich franchisees of supporting a law in Maine only for their self-interests, which is far from the truth. The reality is a Franchise Relationship Law is not retroactive. It will not have an effect on existing franchise agreements. The law if enacted will only effect franchise agreements signed after the enactment of the law. So wealthy franchisee self-interest is a moot point. Besides dubious franchisors prey on the small franchisees who can’t afford to fight back.
The basic premise of these laws is that today’s franchise agreement do not allow franchisees to build, harvest or perpetuate their equity. In the clip below Tim Bryant correctly points out that under today’s franchise agreements the equity belongs to the franchisor. Franchisees, listen to what Tim Bryant says. He is speaking the truth, and I and other pro franchisee advocates have been telling you this for years.
That is exactly why state laws have been introduced nationwide to protect, enhance and defend franchisee equity. Fair franchise bills will continue to be introduced in state capitals nationwide.
Most franchisees feel that they do in fact deserve and do own the equity they have accumulated in their franchise. Many sell those franchises and reap most of the rewards, unless unscrupulous franchisors put their fingers in the franchisee’s cookie jar. But the International Franchise Association and most franchisors believe it is their equity and not the franchisees. It just is very seldom that one publicly admits
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Patrick McGreevy of the Los Angeles Times reports that Gov. Jerry Brown vetoed legislation to protect small-franchise owners against fast-food giants and convenience store chains, saying he needs more proof there is a problem before considering changes that would “significantly impact California’s vast franchise industry.”
The measure by Sen. Hannah-Beth Jackson (D-Santa Barbara) would have prohibited corporations from putting a franchisee out of business unless they have committed a “substantial and material breach” of the franchise agreement. The bill also would have protected a franchisee’s ability to sell or transfer the business without unreasonable interference.
Brown wrote in his veto message that he is open to reforming the franchise laws “if there are indeed unacceptable or predatory practices by franchisors. I need, however, a better explanation of the scope of the problem so I am certain that the solution crafted will fix those problems and not create new ones.”
Jackson said problems do exist. “Current law allows these corporations to put these small franchisees out of business for even the most minor and arbitrary violations,” Jackson said recently in support of SB 610.
Franchise owners have complained that parent firms have forced them to give up their stores or blocked transfers of ownership.
“We are disappointed that Gov. Brown ignored the small-business owners who have invested our life savings and life’s work into creating California jobs, and instead sided with the giant corporate franchisors with his veto of SB 610,” said Keith Miller, chairman of the national Coalition of Franchisee Associations.
Read More at the Los Angeles Times
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On August 21st, the California state senate voted 23 – 9 in favor of SB 610, a bill that strengthens franchisor good faith relations with franchisees. In order the turn this important piece of legislation into law, it is crucial that all franchisees express their support of the bill and ask the Governor to allow SB610 to become law. He can sign it into law, veto it, or let it to become law automatically on September 30th. Franchisor advocates are bringing substantial pressure on the governor in a last ditch effort to defeat SB610.
This is an important time for all franchisees in every state. SB 610 offers significant protection for franchisees and will set a precedent for Governors throughout the US that California has become the best state to invest in a franchise. It’s about time that “good faith and fair dealing” becomes law protecting franchisees and their investment. SB 610 overcomes greed and ruthlessness that many franchisors utilize against their franchisees.
This will take you only a few very important moments, but could be of significant step to protect your franchise equity in whatever state you operate.
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Franchisees invest in franchise systems for many different reasons. One reason franchisees universally share is that they are joining something so they will not be alone to solve the myriad of business challenges they will face.
A business owner today needs to understand and deal with issues that just didn’t exist 25 years ago. From complicated tax issues, to complicated labor laws and insurance needs. In marketing alone: advertising, online, social media and public relations have all drastically changed the marketing dynamics.
Many feel franchise systems can provide assistance in these complicated areas. The reality is most franchisors are in a very different business than their franchisees are in. The business of running a franchised unit is extremely different that running a franchise system. Many of the franchisor’s employees including the C-Suite level have never operated a franchised unit. Most C-Suite’s change every 5-7 years. The institutional memory is lost to the franchisor but remains with the franchisees that tend to be in the system longer that many of the employees of the franchisor.
The reality is franchisors are in a different business and have a totally different set of challenges that are not a part of running a franchised unit.
Independent Franchisee Associations (IndFA) typically form from the imbalance in the relationship. A single unit franchisee may have a difficult time changing the status quo on their own. Many of the multi-unit franchisees feels they have different needs yet they also have the same serious concerns for their investment because of the way onerous franchise agreements are.
Most IndFA’s talk about creating one voice, creating more leverage in negotiations, developing resources to defend franchisee from predatory franchisor practices. Franchisees typically don’t have the knowledge on how to set-up an IndFA. Some franchisees were members of a union so they understand that 1+1=3, and the unions empower workers to act as one they could do the same for franchisees. But most franchisees come from the corporate world and have little experience running a small business.
Franchisees run a business and as stakeholders they are directly affected by how the brand is perceived by its customers. Although many of the reasons listed above are all good reasons to form an IndFA. The most important reason to create a franchisee association is the need and power of creating a shared knowledge base of the branded business from the franchisee perspective. That is something very hard to obtain other than forming an IndFA. Most Franchisee Advisory Councils don’t even let franchisees take notes, never mind discussing the matter in full.
Forming an IndFA is easier said than done, but the benefits of Independent Branded Trade Association can help the stakeholders in the brand improve product, profitability, market share and brand recognition.
Branded Trade Associations can help foster collaboration seek transparency and empower franchisees to have a positive impact on the brand they have chosen and have dedicated their money, heart and soul.
When I run into a franchisee, and they ask me why they should form a franchisee association my typical answer today is “if you want to succeed, decades to come, you don’t have a choice. You must unite franchisees as an essential part of the successful franchise systems to ensure that the franchisees have as much knowledge of the business and the future risks of running the franchised units.” Otherwise, you are putting your business lifeline in the hands of someone that is in a different business and possess a onerous franchise agreement that offers you nothing more than my way or the highway.
Forming an Independent Franchisee Trade Association will not solve all issues, there are multiple sides in the franchise relationship, vendors, franchisees, franchisor, customers, employees and vendors. What matters is the Association will be able to share similar experiences from other franchisees. Independent Franchisee Trade Associations will provide you access to information to help you have a say in the direction the brand and company may take.
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Nicole Smith is a Kuman Franchisee and she is president of the International Association of Kumon Franchisees (IAKF). She is a passionate franchisee advocate and her list of benefits for joining an Independent Franchisee Association are worthy reading for any franchisee.
1. Independent franchisee associations are communities of like minded individuals who develop mentoring, best practices, and support for their business. The discussions amongst members should be your “morning newspaper”, helping you move your business (and instruction) forward.
2. There is power in numbers. I heard it 20 times at the Coalition of Franchisee Associations (Burger King, Subway, Supercuts, Dunkin, 7-Eleven and more) Forum. Being in Washington D.C. year after year and talking with politicians about issues impacting our businesses and families makes a difference. They need our engagement to educate themselves on important issues in small business and franchising.
This is also true within Kumon. In the last month, through the concerted efforts of several franchisees working together, we helped Kumon North America see the value of placing ads in ethnic publications (not in English) and applying a subsidy to these ads. Additionally we were able to negotiate a steep discount and get more value for our money.
3. While franchisors were not in Washington arguing for small business issues (healthcare, taxes, minimum wage, 40 hour work week), franchise associations were! Why? Because we have different priorities. Franchisors go there to talk about issues important to them, as they have the right to do and should do! But we have to work to help ourselves.
The work the International Association of Kumon Franchisees (IAKF) is doing in this political arena is imperative. Through the association you have more power and influence than most people realize. We attended a “Coffee with Corey” Booker at the end of the day for fun. He quoted one of our coalition franchisee reps in his speech from a quick discussion earlier in the day. He did not know anyone from the association was in the audience. We made an impression and he tweeted pictures with us in it!
4. A Congressman who was a former franchisee of a different brand expressed the importance of being in a franchisee association very eloquently. He told us franchisee associations are important because he gets two feet of paper a day to read. He cannot catch the bad legislation that will put us out of business. Franchisee associations have to tell him and other politicians what will hurt their members so they can address it.
This is what IAKF’s being a member of CFA does for us as small business owners. Together with other franchisee association leaders, on an ongoing basis, CFA identifies what will negatively impact our business and advocates for us.
Politicians (and probably the general public) do not understand the franchisor/franchisee relationship. They imagine franchisees are part of the 1 percent with DEEP pockets. Raising wages only impacts corporations, right? since that money will come right from their pockets? We help them understand just because we use a large brand name we don’t necessarily have a lot of money.
As uninformed as this sounds, it is the opinion of many politicians who have never made a payroll, paid rent or Aroyalty. We spent 15 minutes of every meeting with our representatives explaining we are really small local business owners making a difference in our community (Little League, jobs, PTAs). We really can lose our savings and homes when either a franchise business model is bad or the franchisor makes poor decisions, as well as when politicians make poor decisions that impact our business environment. We, franchisees from all brands, need to educate these people that we are the small guy.
As one politician put it, “If you don’t share your voice up here, trust us, someone else’s voice will be heard.”
5. Economies of Scale: Vendors want to work with us as a group to reduce our costs (and increase their business).
Kumon corporate focuses on how to make themselves profitable – quite naturally! – not their franchisees. This is a typical franchise model. Interestingly, other franchise owners confirmed no franchisor wants one franchisee to be too big and powerful. It is something inherent in the system. When was the last policy given that they made us more profitable? In fact some franchise systems do not allow franchisees to set prices. PAKCO (the franchise association before IAKF) negotiated that right for all of us years ago.
Nicole goes on to list some of the common reasons or excuses that franchise owners give for not joining the IAKF: Read the excuses here…
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No relationship is perfect, it doesn’t matter whether the relationship is personal, business or institutional there are always going to be both good things and bad things about any relationship. One of the keys to a long and prosperous relationship is balance. Mutual advantage is the key to sustaining the relationship. Relationships prosper when each party derives worthwhile benefits and subsequent returns. Often this requires a give and take.
Complicated institutional relationships such as labor, government, and business like franchising often require independent organization of the parties involved to insure that each stakeholder has the resources to obtain proper representation.
In our government the US Constitution utilizes “checks and balances” to protect US citizens. The key objective for the drafters of the constitution was to ensure that no one branch became too powerful. Each branch “checks” the power of the other branches to make sure that the power is balanced between them, and ultimately the United States is stronger for it.
One of the keys to a successful franchise system is one in which stakeholders share mutually in the rewards and are mutually involved in the process. That way all parties benefit from a stronger brand and share in the success. Franchise systems require checks and balances to ensure the growth of the brand for all stakeholders.
Each party to a franchise has several interests to protect. The franchisor is most involved in securing protection for his trademark, controlling the business concept and securing his know-how. The franchisee often has significant capital and family resources invested in the system.
As a result of the inherent differences between a franchisee and its franchisor with respect to negotiating power, resources and access to information pertinent to the operation of the franchise system, many franchise systems look to independent franchisee associations, advisory boards and supply chain organizations as a means to address these inequities for the inevitable evolution of the franchise system.
Independent Franchisee Associations (IFA) provide franchisees, a needed check to the balance of power in the franchise relationship. By franchisees organizing their own independent trade organization they are acquiring the power and resources, to defend, protect and guard against imbalance in the relationship.
Franchisors may be resistant to the formation of a franchisee association. In some cases, franchisors may refuse to deal with the association or to recognize the association as a representative entity of the franchisees. In other situations, franchisors may be more aggressive in promoting the use of the advisory council in an effort to dispel the belief that another avenue of communication between the franchisor and its franchisees is required. These institutions are fine. The other opportunities franchisees and franchisors have to discuss different scenarios and business cases the better is is for all stakeholders.
As franchising continues to evolve, the power of franchisees, as well as their financial means, continues to grow. In many systems franchisees own multiple units and the franchisor is a corporation with other holdings. This change in the balance of power between franchisors and franchisees makes franchisee participation in an Independent franchisee association, inevitable and vitally important for all parties.
Each franchise system should have an independent franchisee IFA to defend the interests of the franchisees and provide balance in the relationship for long term viability and success of the brand and the entire franchise system.
It’s up to the franchisees to make that happen.
Franchise Perfection specializes in helping independent franchisee associations to organize, gain members and establish an infrastructure that sustain the organization for years to come.
This article was also posted at Blue Maumau.
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The equity extraction scheme that was exposed by 7-11 Employee Kurt McCord brings back painful memories for me.
The scheme is eerily similar to what was perpetrated against Dunkin’ Donuts franchisees from 1998 thru 2008. In that period it is estimated that Dunkin’ Brands extracted over $100 million dollars of franchisee equity using similar tactics described by Kurt McCord.
The biggest difference in the two brands, is that in Dunkin’s the franchisees made money and were afraid to speak out against what most franchisees knew what was going on. Some franchisees benefited at Dunkin’ because they were able to purchase the shops, but they paid top dollar for that privilege. I’ve been told by franchisees that purchased some of those shops that they were very surprised when at closing that Dunkin’s would walk away with the biggest check and even sometimes the franchise got nothing.
Unfortunately 7-11 franchisees do not make as much money as Dunkin’s franchisees do. 7-11 takes over 50% of any profit the store generates, it truly is a gloried manager’s job that may pay better than minimum wage, but not much more.
Onerous franchise agreements create the tool, greedy investors set the stage, failure to meet development goals cause the C-Suite level management to look for other means to generate cash flow and bingo the franchisee equity extraction scheme is launched.
Michael Seid and the IFA lobbyists scoffed at the suggestion that franchisee equity extraction is a problem in franchising. In Maine the IFA and franchisor lobbyists said that “there isn’t a problem in franchising, just with Dunkin’ Donuts franchisees, it’s an isolated incident”, well it looks like the quarantine is over and the equity extraction scheme is no longer isolated.
I will admit that blatant franchisee equity extraction schemes perpetrated by one brand against its franchisee are not common at let’s say bullying franchisees is. Bullying franchisees is not new to franchising, it happens in many systems, every single day. In Maine the IFA refused to accept any attempt to diminish franchisors ability to extract equity from franchisees, they even opposed “Freedom of Association” or termination with only with good cause, which is central to the effort of stopping equity extraction schemes in their tracks.
Thankfully, 7-11 has a national franchisee association. There is no doubt that they are discussing Kurt McCord’s revelations as I write this. 7-11 franchisees have been complaining about the bullying and equity extraction scheme for years now.
There is a need for pro-franchisee legislation to protect and defend the equity that franchisees invest in each state in the US. By the way 7-11 endorsed the IFA’s position against pro-franchisee legislation in Maine and New Hampshire. What a surprise?
Franchisees, wake-up! Most of the franchise agreements you signed can and will be used against you if and when the franchisor needs cash and is so incompetent they can’t figure out productive ways to generate that cash. Your franchise agreement is the tool that makes franchisee equity extraction possible. That tool may not be utilized as of yet in your system, but don’t kid yourself, it lies dormant in the franchise agreement you signed, and it can be utilized against you unless you live is a state with pro-franchisee legislation or unless you have a competent independent franchisee association working to protect your ability to protect, defend and enhance your equity as a franchisee.