The franchising of a proven concept can be a great strategy. When a business decides to franchise, they are not just in the concept’s business, they are now in the business of finding, training and supporting franchisees and hopefully keeping franchisees happy. The franchisee becomes the partner/customer.
One should purchase a franchise because the franchisor has a “proven system” with a strong brand and strong support/infrastructure. Franchising is not a “get rich” scheme for a franchisor or franchisee. Franchisors often receive a 6% to 8% royalty plus add-ons when, if they owned the business, they may be making 18% to 30% net profits.
One generally offers franchises to use the management skill and finances of a franchisee to expand the system. Franchising can speed expansion dramatically. Franchisees may also be more incentivized than some company-store managers.
Some franchisors charge only a royalty (and some marketing fees) and some also require the franchisee to purchase goods/services from the franchisor. What we sometimes see with franchisors is what we call the “double-dip” franchise. We call it this because the franchisee is charged a royalty plus the franchisee is required to purchase goods or services from the franchisor or its affiliate – you buy the goods and then also pay a royalty when you sell the goods. Thus, a double-dip. Sometimes these purchases are for far more than market prices.
The State of Washington is what is known as a “good faith and fair dealing” state and has a special statute known as the Franchise Investment Protection Act (FIPA). RCW 19.100.180(2)(d) states that it is a violation to: “Sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.”
The statute does not define “fair and reasonable price.”
The Washington State Supreme Court (in Money Mailer, LLC v. Wade G. Brewer) recently held that a “fair and reasonable price” is a question of fact regarding what prudent franchisors and franchisees in similar circumstances would regard as an appropriate price. The Court listed numerous factors.
What does this mean?
Any price for a product or service can be challenged as “unfair” or “unreasonable” by a franchisee. However, reviewing the factors in court may require expensive discovery and expert testimony which may actually preclude litigation. A big franchisor may have more resources than a single franchisee. On the other hand, a franchisor might just think the high cost of litigation could be too much to take on.
Franchisees should be happy customers of the franchisor. A good franchisee is a good team player. Treating franchisees well adds to the happiness and loyalty of a successful and profitable system for all.
Because each situation is different, this information is intended for general information purposes only and is not intended to provide legal advice on any specific facts and circumstances. Ryan, Swanson & Cleveland, PLLC is a full-service law firm located in Seattle, Washington.