Success stories aren't hard to find among owners of franchises. Throw a muffler or a hamburger, and you'll hit one - a success story, that is.
Guy cashes out of a dead-end corporate job, takes his walking money and invests in, say, a pizza restaurant run by a worldwide chain.
Soon, he has another restaurant and another, and finally he's up to 10 stores and the money is rolling in, and he moves his family from the nice house in the middle-income tract to one closer to the country club. Big house, with a $500,000 price tag.
But it's not all Happy Meals and $3-off coupons in franchiseland. There's another, more troubling, side to franchising.
This one has to do with the sour relationships that can develop between the neophyte franchisee and the big, powerful franchisor, and what happens when those relationships turn bad.
Take the experience of Jeff and Carol Johnson of Lincoln.
From 1985 to 1994, the husband-and-wife team owned three Lincoln restaurants in the Schlotzsky's Deli chain, a franchisor based in Austin, Texas.
Schlotzsky's, a 31-year-old chain, had sales of $61.9 million last year, part of the $1 trillion a year in sales generated annually by all franchises, according to the International Franchise Association.
As of June 30, there were 671 Schlotzsky's restaurants in 38 states (five in Nebraska), the District of Columbia and nine foreign countries. Nationwide, the International Franchise Association estimates that there are 1,500 business-format franchises operating more than 320,000 outlets.
After the Johnsons sold their Schlotzsky's restaurants in 1994, their relationship to the chain was solely as area developers.
They acted as mini-franchisors, helping find prospective franchisees and setting them up in business in Nebraska and 10 other states in the region. In return, they received a portion of the royalties that franchisees in their area paid Schlotzsky's.
Today, the Johnsons no longer have a business relationship with Schlotzsky's. The connection was severed in the fall of 2001. Schlotzsky's paid the Johnsons $2.4 million to reacquire the territories and area developer rights from the couple, according to Schlotzsky's 2001 Uniform Franchise Offering Circular.
Details of most dispute settlements between franchisee and franchisor are kept secret under terms of their original contracts. But franchisors are required to disclose to prospective franchisees, in an UFOC, some information about lawsuits and arbitration proceedings.
In the Johnsons' case, the settlement resulted from a complaint the couple filed on Feb. 9, 2000, with the American Arbitration Association.
Most contracts between franchisee and franchisor require that disputes be resolved by binding arbitration, a stipulation that is, itself, a contentious issue with some franchisees.
In their complaint, the Johnsons accused the Schlotzsky's chain of obstructing their efforts, as area developers, to develop their territory.
"There was no new prospect that I turned in that was acceptable to Schlotzsky's, no new site that I turned in that was acceptable," Johnson said.
The company's goal, according to the Johnsons' complaint, was to eliminate the couple from the franchise system.
Why would a franchisor want to get rid of a longtime franchisee? The Johnsons' complaint suggested two reasons:
- Schlotzsky's wanted to avoid paying the Johnsons 2.5 percent of the gross sales generated by the franchisees in their territory. Area developers can earn huge amounts under the agreements. For example, in August, Schlotzsky's purchased the rights to its largest area developer in Texas, a territory that generated $116.2 million in sales a year, or nearly $3 million for the area developer.
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