When & Why Do Franchisors Offer Franchisees Buy-out Agreements?
(FranchisePick.Com) If a franchisee fails in the second year of their 10 year franchise agreement, odds are the franchisor can hold them responsible for the estimated future royalties on the remaining 8 years of the contract.
While rarely collected, the threat of “future royalties” can be a big stick used to demand a reduced farewell “failure fee,” a release from liability agreement and/or a confidentiality agreement (gag order) to make sure failed franchisees go away quietly.
Troubled franchise companies will sometimes offer some or all of their unhappy or struggling franchisees this type of deal… and the chance to buy their way out of their franchise agreements - and their obligations to pay royalties for the remainder of their term (even if they fail).
What does this mean when a franchisor initiates this type of deal? Are these franchisees being asked to pay to give up their rights? Should franchisees ever take such a deal, or are these offered by desperate franchisors who have no intention - or grounds - to sue anyway? Please feel free to comment below.
Here are a few examples (feel free to mention others below):
Make & Take Gourmet: The troubled meal prep franchisor, with four recent franchise closures and strong likelihood of being sued, is reportedly offering the remaining 10 or so franchisees a chance to buy their way out of their franchise agreements for $10,000. Franchisees will be allowed to continue using the name and systems as independent businesses, but must agree to release the franchisor from any liability and agree not to sue.
Dream Dinners: According to commenter PissedDDOwner: “Dream Dinners, Inc. said that if I pay them $30,000 and sign a legal paper that I wont sue I can get out of my contract. (I am just learning that other owners have been told this but they haven’t paid) What is my legal right?”
Curves for Women: Curves has a standard $10,000 “failure fee” that allows failing franchisees to close their doors and be absolved of the liability for future royalties if they sign the release and pay the fee before going their merry bankrupt way. So much for being in business for yourself but not by yourself.
Past offers:
Cuts Fitness for Men: Cuts Fitness allegedly gave their struggling franchisees a choice of buying out of their agreements for a couple thousand, or staying in and doing mandatory upgrades of $20K+. All took the former agreement and either continued to use the CUTS name, or changed it.
WHAT DO YOU THINK? SHARE A COMMENT BELOW.
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POSTED IN: CURVES FOR WOMEN, Cuts Fitness (RIP), DREAM DINNERS, MAKE & TAKE GOURMET, x Franchise 101, x Insider Tips, xBuyer Beware
3 opinions for When & Why Do Franchisors Offer Franchisees Buy-out Agreements?
Carol Cross
Jun 20, 2008 at 12:52 pm
You tickle me, Sean! You know, of course, that prospective franchisees never think of failure and have NO IDEA when they put their signature to the contract that their “friendly” franchisor will demand “liquidated damages” or “royalties” - or whatever, for the remaining time term of the contract after their business has FAILED to reach breakeven status after exceeding the projected startup costs, etc.. by thousands of dollars with no solution in sight and creditors standing by. You know that prospective franchisees don’t understand that “failure to thrive” and termination to stop the bleeding constitutes the crime of “abandonment” under franchise law.
You know, of course, that this is a common contractual right of the franchisor that is placed in franchise agreements because it gives the franchisor some control over the failing or failed franchisee and his tangible and intangible assets because the franchisor can threaten to sue for damages as allowed by the contract to secure the cooperation of the franchisee in the takeover of the business by a third party. When a third party, who becomes a franchisee, takes over the failed business, the franchisor gets a general release from any liability, etc.. and a confidentiality promise as well concerning the terms of the FIRE SALE to the third party.
Do you think that attorneys explain this to prospective franchisees when they charge $200 or more an hour to read the contract? I think they would be too embarassed to do so.
The franchisors you mention above just found a clever way to get legal releases and money as well from those to whom they sold a flawed and failed concept –with immunity under the FTC Rule and UFOC/FDD.
onthego4522
Jun 28, 2008 at 1:13 pm
Sean you and Carol are more right than you realize!
In my opinion in the case of Dream Dinners- Darin Leonard at a regional store owners meeting commented that the corporation would need $250K for the defense of the lawsuit brought against Dream Dinners by 30 disgruntled (and rightfully so) franchisees.
Let me ask you what the better way to “raise” money for a Legal Defense Fund than to demand hush money from failing Franchisees to the tune of $20,000 per store owner; then make store owners sign an agreement to relieve Dream Dinners from any future litigation from store owners who sign on the dotted line?
Dream Dinners to date has “persuaded” 8 franchisees to sign the agreement, thus giving them almost half of the amount of money they need for their defense fund-what a scam.
The rumor is that Dream Dinners is preparing for Bankruptcy themselves as a corporation. Why don’t franchisees just close their doors and wait for the inevitable?
The answer is they are all scared spitless of Dream Dinners HQ and what financial havoc they rain on them should they not sign the blackmail letter.
This also helps Dream Dinners and others like Make & Shake Down Gourmet raise money since franchise sales to stupid suckers has fallen way off. Heck, $20,000 2/3 of what a new franchise sale would bring in and they already have current franchisees on the hook.
I guess the Franchisors figure they should grab all the cash they can from the poor souls they’ve bilked hundreds of thousands while they can. Filing lawsuit against that many franchisees for lost royalties could cost Dream Dinners hundreds of thousands of dollars!
He also told this same group that his exit strategy was to sell the company for pennies on the dollar before should bankruptcy become inevitable.
He told all of the owners at this samemeeting to have an exit strategy of their own-that doesn’t give me the warm & fuzzies towards Dream Dinners and it shouldn’t for other owners either
Carol Cross
Jul 1, 2008 at 10:53 am
Thanks On-the-Go —–It is brutal truth to learn that a franchisee is merely a RESOURCE of the franchisor in success or failure under the staus quo of franchising and the law today. And, even in the failure of both, the franchisor still gets to play with a “stacked deck.” I think you pointed this out in a post on Franchise Pundit.
Did you ever read about the Minnie Pearle Franchise Episode and how this franchisor was taken down by the SEC? Maybe this is why the “powers that be” decided that “franchising” would be regulated by the FTC and that franchisors could sell their concepts as “proven” to the public at any demonstrated degree of risk as long as they are compliant with the FTC Rule and the FDD? It is the Franchisor’s Pyramid System that feeds the economy and under the status quo of the law, it appears that franchisees are just calculated sacrifices to TRY to build the pyramid sales of the franchisors —that in turn stimulate the local economies, etc…
Only a small percentage of franchisees ever survive financially or legally to get into the courts and the franchisors know the “liquidation-royalties” clauses give them a lever to use against failing franchises to ensure their cooperation when their businesses are failing and they have to “abandon” the business as defined by the adhesory contract.
Do you think that the Franchisor of Dream Dinners and others have put their personal assets at risk and have signed personal guarantees to get their loans to start up their businesses? This would be interesting to know!
Carol
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