Why Franchisors and Franchisees Fight





Buying a franchise can provide you with instant customer recognition, a well-designed business model, marketing and operational support, and volume purchasing, but it can also bring you the potential for disputes with your franchisor.

The relatively high level of litigation in franchising has little to do with the people involved – in general, franchisors and franchisees are no more litigious than anyone else in business. Rather, the conflict emerges because the two parties make money in different ways.

Understanding these differences helps franchisors and franchisees avoid escalating disagreements to the level of litigation.

At its heart, franchising is a business arrangement in which one party (the franchisor) rents a business model and brand name to another party (the franchisee), who uses it to sell products or services to end users. The “rent” that the franchisee pays is usually calculated as a percentage of the his or her gross sales. That means franchisor profits increase with franchisee sales, leading franchisors to adopt policies to maximize sales at franchisee locations.

Franchisees, however, make money by generating revenues that exceed their costs. Therefore, they seek policies that maximize profits at their locations.

The policies that maximize outlet-level sales aren’t the ones that maximize outlet-level profits, causing conflict between franchisors and franchisees. A good example is the use of buy-one-get-one-free discounts, which are common in retail businesses. Done right, a buy-one-get-one-free discount will bring more customers to a retail outlet, boosting sales. That’s clearly beneficial to the franchisor whose earnings are linked to outlet-level sales.



But the discounting strategy might not boost the franchisee’s profits. If it doesn’t boost the size of the average customer purchase, the franchisee could be worse off. The buy-one-get-one-free promotion could raise the franchisee’s costs (by the amount of the free item) but not boost its revenues.

The conflict between the franchisor and franchisee is rooted in the economics of franchising, not in the two parties having “bad” attitudes. The franchisor wants the couponing strategy because it will make more money, while the franchisor doesn’t want it because it will not be made better off. If enough money is at stake, the end result could be a lawsuit between the two parties.

Disagreements over discounting strategies aren’t the only disputes driven by franchisor and franchisee goal divergence that result in litigation. A couple of years ago Burger King and its franchisees ended up in court over a disagreement about late night hours. Burger King wanted its franchisees to stay open late to sell more fast food to those seeking it at off hours.

To the franchisor, the strategy made perfect sense. If franchisees sold a few more burgers and fries to midnight diners, Burger King would bring in more royalties, which would boost its bottom line. But staying open late caused the franchisees to lose money. They had to pay employees for the additional hours even though their late-hour revenues were less than those wages.

The difference between maximizing sales and profits also leads causes franchisors and franchisees to fight about adding locations. Even when an additional location cannibalizes sales at an existing outlet, franchisors are better off because the new establishment boosts system-wide sales. But it does necessarily benefit the initial franchisee, who might have the same cost of operations, but lower sales.



Phone Image via Shutterstock 4 Comments ▼


Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions

  1. Joel Libava

    Yes, Scott.

    Fights-disagreements between franchisees and franchisors will always exist.

    The bottom line is this: Whatever the franchisor wants to do needs to be a win-win for both parties. Or, at least “feel” like a win-win.

    The Franchise King®

    • Aira Bongco

      They don’t really have a choice. It is because the franchisee can really get a big cut of the money if he is not under the franchiser. But then, no one would buy from the franchisee without the franchiser to begin with.

  2. Astandard negotiation insight: partners will always fight for more of the pie, but good partners also collaborate in making the pie bigger.

    Franchise systems which only do the former are not going to grow & succeed.

  3. Roberto Delpopolo

    They are fighting because people don’t understand enough who are the kids. Any franchise that is exposing a statue of its own chosen character keeps a safe environment and makes better food. Whoever comes in with another franchise and does not honour this way of doing business is asking for troubles, they make dangerous food and they are in just for the buck. Those who make a franchise without a statue for the kids are only looking for money and they are very aggressive in reducing the cost however they are just doing a war and not doing a business for love of the business. Those who do good fall into a temptation to lower the cost of their fast food and they end up removing the icons for the kids, icons that bring good luck. The result is a food war with dangerous quality for food. Just look at those franchises where they make donuts and have no icons for kids: excess of sugar is everyday business and the gomorra is behind their shoulders to make tricks with food and food supply.

Leave a Reply

Your email address will not be published. Required fields are marked *

*