One of the most common surprises I encounter with my franchisees is when we are at the eleventh hour as they read the contract. What they realize within those words, terms, and conditions is an agreement to abide by stipulated controls. If they are to decide to stray from their restrictions, they are subject to forfeit any franchise protection.
At first, franchisees are taken aback and may even be ready to walk away, but this is all for good reason. I’ll tell you a story about a popular franchise that was brought entirely down by one franchisee who made a poor decision outside of the franchise guidelines.
A story of disaster
Depending on your age, you may remember a restaurant chain by the name of Chi-Chi’s that brought the Mexican food craze to Americans back in 1975, then quickly disappeared in 2003 and 2004. Today the restaurant is a distant memory with the only remaining survivors being branded salsa on the grocery shelves. What happened to Chi-Chi’s changed the structure of franchise agreements in the restaurant industry forever.
Stepping outside of the program
Chi-Chi’s, like many other restaurant chains, had an agreement with their franchisees to provide all of their food ingredients by leveraging volume pricing across their stores and passing the discounts to their franchisees. This arrangement made things easy for the franchisees, for they had a source to provide all of the right ingredients for consistent food quality at a competitive price.
One franchisee got a hot tip on some green onions from a local source. The price was too tempting to resist, and he believed something as simple as green onions wouldn’t be a big deal to substitute with a local source. At first, he felt like a champion for finding a great source that beat the volume pricing that his franchise program provided. Maybe, just maybe, this would lead to more fresh produce purchases if this vendor came through.
What this franchisee didn’t know (and soon found out) is that the deeply discounted green onions he purchased were tainted with Hepatitis A. Those green onions led to the largest hepatitis outbreak in US history, all traced back to the one restaurant. This outbreak passed through the Pittsburgh area with 660 cases and at least four deaths, all starting from those green onions.
The franchise had no protection in their contracts back then from rogue franchisees stepping aside from the established resources and procedures. The franchise settled all of their lawsuits in 2004, which meant an end to every franchise of the brand. In other words, all stores lost their business because one franchisee went off-program to save a buck.
Protecting the franchise – protecting yourself
The Chi-Chi’s incident identified a need for severe correction in restaurant franchise agreements. These corrections hold the franchise corporation harmless if the franchisee goes against the resources and procedures provided by the franchise. If a franchisee decides to make an autonomous decision against the franchise agreement, any repercussions will be theirs to stand and defend alone.
This contract stipulation protects the corporation and all other franchises from suffering the fate of Chi-Chi’s. Franchisors provide processes, resources, and procedures to their franchisees as a means of quality consistency across all locations. A customer should have the same delicious food quality, regardless of which franchise location they dine.
And that, kids, is the story of why franchises have such legal stipulations in their franchise agreements.
Unraveling the mysteries
Hundred Acre Consulting is at your side through the entire franchise acquisition process, providing guidance and answering your questions along the way (this one example is just one example). Are you ready to join the rankings of successful franchisees? Contact us and let’s get started. We’ll unravel those mysteries for you along the way.