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Minimum franchise performance clauses are bad for franchising.

Updated: May 16, 2023


Franchisees looking at monthly profit and loss

Minimum monthly charges have been a feature of the franchisee business model for many years. Franchisors see them as justifiable. The guaranteed income can make budgeting easier, and they are a useful way of incentivising underperforming franchisees. Prospective franchisees often overlook the significance of these clauses in the franchise agreement and the fact that they are guaranteeing the franchisor a large amount of money over the entire term of the agreement.


In favourable economic conditions, well run franchises with sound business models seldom encounter difficulties with minimum service fees. In recessionary periods, or very special situations such as pandemic induced lockdowns, problems start to emerge. When sales become less plentiful and fall below the point at which the minimum monthly fee applies, the profit margin is drastically reduced. A business model based on paying a percentage of sales is only valid if the sales volume is sufficient to keep service fees payments above the minimum.


During the lockdowns, many franchisors waived the minimum fee to assist their franchisees. Their decisions were assisted by the various government support schemes that were available. That generosity may not be forthcoming during the recession that now looks inevitable and where there will be no handouts from a cash-strapped Chancellor of the Exchequer .


Minimum fees are a major factor in franchise disputes. If a franchisee cannot pay the service fees because, for whatever reason, their branch is unprofitable, the franchisor will invariably warn them that they risk termination of the agreement. That will lead to a claim based on all the remaining minimum fees, until the expiration of the agreement. This creates a situation in which the franchisee continues with an unprofitable business and the franchisor continues with an under-performing franchisee. It is almost inevitable that this will lead to resentment. Other franchisees who have had the same experience share their grievances and all hope of a harmonious relationship with the franchisor is lost.


In the same situation of a failing franchisee being unable or unwilling to pay, if there was no minimum fee, the franchisor would terminate and find a more suitable franchisee. The franchisee would be freed from their failed business and could enter employment or start again with something else. Both would be able to move on.


To the detriment of the franchising industry minimum fees are widely abused. We know of one franchise that operates with a minimum monthly fee that is set so high that many of the franchisees are required to pay the minimum fee rather than the 10% on which the business model is based. In some cases, their sales are so low that the resulting service fee percentage is a whopping 20%. Not surprisingly, this wipes out their profitability.


In another case, a well-known franchisor of a nationally known brand, uses minimum monthly fees as a method of securing a non-disclosure agreement from franchisees who fail. This business is heavily weighted in favour of the franchisor to the detriment of the franchisees. This causes a high failure rate. To compensate for this, it operates an aggressive franchisee recruitment programme. When a franchisee fails, they are presented with a huge claim for all the minimum fees until the end of the agreement. The franchisor then agrees to accept a lower figure in exchange for their silence, via a non-disclosure agreement. A replacement franchisee is recruited, and the process is repeated. This is scandalous and probably bordering on being fraudulent. It continues through the confidentiality that is coerced by the threat of charging the total outstanding minimum fees.


Minimum monthly fees is an area that is crying out for regulation.

 

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