Reports: Franchisees going out of business – and losing money on transfers

Two recent reports highlight the financial risk of investing in a franchise. According to an analysis from independent franchising research firm FranchiseGrade.com, the number of franchised units going out of business increased last year. And a Franchise Grade survey of ex-franchisees who transferred their units revealed that nearly half were unable to recoup their initial investment. The analyses use data from 243 franchise systems representing 62% of all franchise outlets in FranchiseGrade’s 2,419 franchise system database. Franchise Grade’s data cover the vast bulk of the estimated 3,000 franchise systems in the U.S.

Franchise Grade tallied Franchise Disclosure Document data on units that “ceased operations” for any reason except termination, nonrenewal, or transfer to another franchisee or to the franchisor. The firm found that though this metric declined in the aftermath of the recession, it increased in the past year, climbing from 5,842 in 2013 to 6,900 in 2014. According to FranchiseGrade, ceased operations can mean that the franchisor’s business model is not profitable and franchisees cannot generate a reasonable return on their investment. FranchiseGrade’s data analysis is one indicator of franchisee distress, as is the high and rising rate of franchise loan failure reported by WeAreMainSt.

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Without notice, Domino’s cuts payments to franchisees

Without notice, Domino’s cuts payments to franchisees

With no advance notice, Domino’s cut profit-sharing payments to franchisees in September, despite posting strong profits and high stock prices and spending tens of millions on share buybacks and dividends.

Domino’s franchisees who buy all their food from Domino’s supply chain receive profit-sharing checks from the supply chain operation, but the company surprised franchisees with smaller-than-expected payouts at the end of September. Without notice to franchisees, Domino’s decided to charge the supply chain segment a share of the company’s unexpected insurance expenses in the third quarter. The charge apparently resulted in smaller profit sharing checks.

In a letter to its members obtained by Blue Mau Mau, the Domino’s Franchisee Association board criticized Domino’s for failing to alert franchisees to the reduced payments:

…many Franchisees depend on the checks to reinvest in their businesses and/or to help manage their personal finances. While we understand there are Wall Street related regulations surrounding what can be shared about financial performance, we believe there has to be a better way than learning of the negative impact on the day the checks are processed.

Despite sharing less profit with its franchisees,

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Small Business Investment Protection Act now law in California

CALIFORNIA STATEHOUSE

California now has one of the country’s strongest franchisee protection laws after Gov. Jerry Brown signed the Small Business Investment Protection Act earlier this month. The signature capped years of effort by franchisees to pass franchisee rights legislation in the Golden State.

“The law protects franchise owners from franchisors who seek to terminate their business on a whim or from franchisors who desire to take possession of a lucrative franchise without compensating the franchise owner,” wrote Don Sniegowski on franchisee news site Blue Mau Mau.

Under the new law:

  • It will be harder for franchisors to terminate franchisees, and franchisees will have more time to fix most violations before they can be terminated.
  • Franchisors will have to buy certain items from franchisees if they terminate or refuse to renew a franchise. This means franchisees will not lose every dollar they invested if a franchisor terminates or refuses to renew them.
  • Franchisees will have an easier time selling their units: Franchisors will have to approve proposed sales if the buyer is qualified and the franchisee follows the franchisor’s transfer process.

The Service Employees International Union joined forces with franchisees to press for the bill.

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Judge finds evidence Culver’s discriminated against franchisee

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A federal judge has denied burger and frozen custard chain Culver’s motion to throw out a case brought by a franchisee, holding that there is sufficient evidence of intentional discrimination that the case should proceed to trial. Michael Wilbern, one of Culver’s first African-American franchisees, alleges in the lawsuit that the chain stopped him from opening stores in majority African-American neighborhoods and impeded his ability to operate the store Culver’s did let him open in a mostly white suburb.

Wilbern contends that from 2003 to 2012 he repeatedly tried to open a Culver’s on Chicago’s predominantly black South Side. Wilbern charges Culver’s “denied those locations every time” even though local officials offered him tax breaks to open there. Instead, Wilbern claims, Culver’s steered him to a site in suburban Franklin Park.

Wilbern charges that the “overwhelming majority” of Culver’s restaurants are located in areas where African Americans are in the minority.

The Chicago Tribune explains:

Wilbern, who previously managed a dozen KFC restaurants in Wisconsin, went along with that offer because he wanted to build a relationship with Culver’s, the suit says.

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