What is "Tied-Buying" in Franchising?
I have to admit I am not fully up-to-speed on the current, specific legalities of “tied buying” in franchising. “Tied-Buying” - in my understanding - means the extent to which a franchisor can force its franchisees to purchase goods, services, products, ingredients, etc. from them or designated suppliers, and the franchisor’s ability to receive income based on those purchases.
According to a recent comment left on Franchise Pick by Les Stewart:
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.
Years ago, when I was VP of a franchise consulting company, we advised our clients to simply derive revenue from their royalties and generally not to mark up their products, ingredients, etc. to their franchisees. When I was working for a franchisor, we followed that philosophy. Our job was to make the franchisee as profitable as possible, and to build our revenue as a percentage of the top-line sales. (Not long ago I saw a forum post by Dave Hood of iFranchise Group in which he recommended this same approach to franchisors.)
Way back when, 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 and clarify this issue. Thanks!
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POSTED IN: x Franchise 101, xBuyer Beware
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