Do franchisees have legal obligations to pay royalties to franchisors on loss-making product introduced by the franchisor?

Specifically: We have a franchised restaurant that sells merchandise (7 percent royalty)and beverage and food (3 percent royalty). Merchandise and beverage are both profitable but substantial losses occur on food due to franchisor's restrictive pricing structure and forced use of overly large portions.

Jeff Elgin answered October 6, 2008|

Comment

The simple answer is that it depends on what your franchise agreement contract says. If the contract says yes, then the answer is yes, but that doesn't have to be the end of the discussion.

Having said that, the situation you describe doesn't make much sense--especially if it's a long-term problem rather than a short-term factor. Most franchise systems have advisory councils of franchisees to interact with the franchisor when there are fairness issues that need to be addressed, and most good franchisors are willing to listen and adapt to systemic problems affecting franchisee profitability.

I would advise you to first make sure this is a systemic problem and then run it up the flagpole of exposure so the franchisees are collectively addressing this with the franchisor in order to have more bargaining power in terms of getting this addressed. I have seen this approach work effectively and constructively many times in the past.

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Jeff Elgin

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.