#7 of 10 Reasons NOT to Buy a Franchise: Inflated Pricing
Nolo.com features an article titled: Ten Good Reasons Not to Buy a Franchise.
According to the author, there are ten compelling reasons NOT to buy a franchise. We’re looking at them one-by-one.
7. Inflated pricing on supplies. In many cases, the franchisor can designate your franchise’s supplier of goods and services. Franchisors argue that this is done to maintain quality control, but almost all franchisors receive kickbacks from the vendors. By not allowing you to shop around and subsequently limiting competition, you are forced to pay higher prices on supplies.
This is a vexing problem, and recent disputes have brought these issues into the spotlight. For years, one of the benefits of franchising that’s been trumpeted in marketing literature and the press is that franchisees gain the benefit of increased buying power for ingredients, inventory and services. However, Quiznos franchise owners allege that high mark-ups by the franchisor on required purchases has forced them to charge higher prices with lower margins. The UPS Store franchisees allege that their parent company provides greater discounts to corporate customers than to their own franchisees.
Sources of franchisor revenue are required to be disclosed in the franchise offering circulars and franchise agreements that must be provided to you prior to your making a buying decision. Be sure you are clear what the franchisor can and cannot force you to buy from them and their designated suppliers, and at what cost. Ideally, find a franchisor that simply gets their revenue from franchise fees and royalties, and focuses their attention on getting you the lowest prices for goods, supplies and services.
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2 opinions for #7 of 10 Reasons NOT to Buy a Franchise: Inflated Pricing
Les Stewart
Feb 15, 2007 at 10:45 pm
Tied buying provisions have really become a hidden “franchise tax” whose use and severity has grown rapidly in the last few decades.
All businesses must buy competitively to survive and franchising is not exempt from that market reality.
When franchisees are compelled to purchase non-trademark products at an inflated price, it reflects the franchisor’s exercise of opportunism [self-interest only with deceit] within the relationship.
This overreaching can cause severe financial hardship in the areas of: forced renovations, tied contracting (services, equipment purchases, renovation), etc.
The franchisee is faced with “paying the piper” or walking away from their sunk cost investments (which typically yield 15 to 20% to the debt holder).
In one case I am aware of, a franchisee was paying more per month for shipping from his franchisor than he was paying for rent to his landlord.
sean
Feb 16, 2007 at 8:20 am
Les… & Others:
As I typed this comment I decided this is worthy of its own post. Please leave a comment under the post: “What is ‘Tied-Buying’ in franchising?”
I have to admit I am not fully up-to-speed on the current legalities of “tied buying” Years ago, when I was VP of a consulting company that launched new franchise concepts, we advised our clients to simply derive revenue from their royalties and generally not plan on marking up their products, ingredients, etc. to their franchisees. When I was working for a franchisor, we did the same. Our job was to make the franchisee as profitable as possible, and to build our revenue as a percentage of the top-line sales.
At that time, it was my understanding that it was illegal for franchisors to force franchisees to purchase anything from them they could get elsewhere with the same specifications (obvious exceptions being proprietary items, 11 herbs & spices, secret sauce, etc.)
Is that not the case? Legal experts please leave a comment.
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