Why Disclosure is a Good Thing

As reported in Franchise Times, a Michigan-based franchisor, Tubby’s Sub Shop, created a subsidiary that was a required supplier to the franchisees, from which the franchisor received a 35 percent kickback on franchisee purchases. Yet, the company’s UFOC said that they received a 2 percent rebate. This happened after vendors raised their prices to the franchisees by 130 to 150 percent.

A former employee brought it to light in court and the company was found liable for failing to disclosure the distribution setup, and settled a lawsuit brought by 20 franchisees.

A franchisor can create a distribution company that is a required vendor, and this can provide improved service and buying power to the franchisees, while generating a profit margin for the franchisor. A franchisor can also receive rebates from suppliers, that it keeps. However, all this must be clearly disclosed in the Franchise Disclosure Document, and be fair. Disclosure is good!

The Franchisor/Franchisee Relationship

It is said that, in the early days of franchising, the relationship between franchisors and franchisees was something like a dictator and his subjects. Well, that does not work today, as franchisees are looking for a much higher level of relationship between themselves and the franchisor.

What is the actual franchisor/franchisee relationship? It is certainly not a partnership, not a "family," not arms length, and not employment. We think a good franchise relationship model is mentoring. Successful franchisors sincerely want to help, and thus mentor, their franchisees. The franchise agreement may be written in a way that seems to allow the franchisor to be a dictator, but that is only for the worst of situations. In successful franchise programs, what is good for the franchisor is generally also good for the franchisee.

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