Some franchisors, including some of the biggest, have failed to accurately disclose in their Franchise Disclosure Documents a key indicator of the health of a franchise system: the system’s annual unit growth. This can make it difficult for prospective franchisees to assess the likely success of a franchise before investing.
Growth in franchised units can be calculated in two ways from the numbers in Item 20 of the FDD, and those two methods failed to match in at least one year’s FDD for 7-Eleven, Dunkin’ Donuts, Subway and Little Caesars, among the 310 franchised systems with inaccurate data analyzed by FranchiseGrade.com. That’s 12.8% of systems of the over 2,400 systems reviewed by the research firm.
Highlighting the accuracy problem, Blue Mau Mau recently reported that franchisor Famous Dave’s of America disclosed three different numbers for the count of franchised units in its system.
While such errors may seem harmless, the erroneous reporting of unit growth means that some franchisors are providing a confusing picture of the health and growth of their systems.
Did you decide to invest in your franchise system based on information you think was inaccurate?
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A federal judge’s ruling in franchisee litigation provides details on 7-Eleven’s “Operation Philadelphia,” a scheme whose existence the company initially denied and which franchisees say involved targeting for termination outspoken franchisees, South Asian franchisees and those with profitable stores.
Magistrate Judge Joel Schneider noted that witnesses who provided details of 7-Eleven’s alleged “churning” scheme “were privy to 7-Eleven’s internal workings while employed at 7-Eleven.” Schneider’s ruling included the following points:
- Former 7-Eleven officials provided evidence about “Operation Philadelphia,” centered in the Philadelphia/southern New Jersey area and also known as “Operation Take Back,” and “Project P.” The judge cited former Senior Field Consultant and Market Manager Ian Shehaiber, who stated that the company targeted South Asian franchisees and “franchisees that were opinionated, successful and involved in franchise associations.” In addition, former Field Consultant John Spavlik also stated that 7-Eleven engaged in a practice of targeting franchisees for termination and that this practice originated in 7-Eleven headquarters.
- 7-Eleven first denied that Operation Philadelphia existed and then admitted its existence but claimed that its purpose was to staff stores after findings of alleged franchisee fraud, rather than to use terminations to retaliate and discriminate against franchisees or to pad revenues.
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Citing evidence of a dramatic power imbalance between the nation’s top franchisors and their franchisees, the Service Employees International Union petitioned the Federal Trade Commission on May 18 to launch an investigation into the franchise sector and issue recommendations for curbing ”abusive and predatory” practices by franchisors.
The request for investigation marshals evidence from an extensive review of franchise agreements and disclosure documents for 14 of the country’s largest franchise systems. The review found that franchise agreements are consistently one-sided, often allowing franchisors to terminate franchisees for minor violations of thousands of pages of ever-changing rules and to refuse to renew franchise agreements for any reason or no reason at all.
[Read SEIU’s petition to the FTC]
The 32-page petition also contends that franchisors often provide inadequate information on the main issue of concern to potential franchisees: the financial performance of franchised units. This makes it all but impossible for many potential franchisees to make an informed decision on whether to invest.
The petition calls on the FTC to use its investigative authority to compel top franchise companies to turn over information about their franchising practices.
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