Some franchisees face high termination risks

A new analysis of Franchise Disclosure Document data shows that franchisees of some of the country’s biggest systems face a worrisome risk of losing their business because their franchisor terminates or refuses to renew their franchise agreement.

Earlier this year, Blue Mau Mau looked at annual franchisee termination rates in the lodging industry and called Motel 6 the “worst of the worst,” with a termination rate of 4.8 percent, and found four other systems with rates above 3 percent per year. A three in a hundred chance every year of losing your business adds up when your franchise agreement lasts for 10 years or longer.

We Are Main Street analyzed the termination rates of the 25 largest franchise systems, including hotels. The analysis also included non-renewals: While many non-renewals are the result of a franchisee’s decision, a franchisor’s refusal to renew is often another way franchisees lose their investment of money and years of effort. The analysis showed that, on average, in each year from 2006 to 2013, nearly 12 percent of the franchisees at cleaning company Coverall lost their businesses to termination or non-renewal. Three other systems have annual termination/non-renewal rates averaging 4 percent or more from 2006 to 2013: RE/MAX (the nation’s largest real estate franchisor by unit count), Ameriprise Financial (the second largest financial services franchisor), and Liberty Tax Services (one of the largest franchised tax preparation providers).

Top systems with high terminationnonrenewal rates (2006-2013)

The analysis was based on the franchisors’ disclosures from 2006-2013 in Item 20 of the FDD, which requires franchisors to list the number of terminations, non-renewals and other kinds of closings in each fiscal year.

While there can be legitimate reasons to terminate franchisees, franchisors have gone  after franchisees who  spoke out about problems in their system, or have tried to force franchisees out so the franchisor could resell their units at a profit. McDonald’s refused to renew a longtime franchisee – which she believes is because she supported franchisee rights legislation). 7-Eleven seized stores from franchisees who, according to a former Corporate Investigations Supervisor, had done nothing wrong. And, adding to a record that includes terminating franchisee association board members Quiznos has reportedly decided to “aggressively default” (terminate) franchisees for alleged violations of operating procedures.

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