Comment by lotsofpulp | Hacker News Reader

Comment by lotsofpulp | Hacker News Reader

Are these claims below true? I was under the impression that a in a franchisor - franchisee relationship, the franchisee owns the business, and they are paying the franchisor to use the brand according to whatever standards are agreed upon. But I've never heard of a franchisor being able to "take over" a business, or do payroll for a franchisee. I've only ever heard of a a franchisee having to stop using the franchisor's name and possibly paying some monetary penalties as defined in the franchising agreement, but what's described below sounds crazy.

> Store owners found in violation of immigration law could be in breach of their franchise agreements. And as they well know, 7-Eleven has the contractual right to take back a store from someone who’s violated his or her agreement.

>An accumulation of four breaches in two years can give the company cause to terminate an agreement and take over the store.

>Store owners are required to deposit all sales receipts into a 7-Eleven bank account. The corporate payroll department in Dallas reviews time sheets for each employee, deducts taxes, and sends workers their pay, sometimes on debit cards that don’t require a bank account. Franchisees’ earnings are deposited in their personal bank accounts.

Yes this is very common. I know McDonalds and Chick-fil-a both have clauses that if their operators refuse to comply they can shut down and replace them. Usually the building/land the stores are located on are owned by HQ as well so they have options on that end to revoke leases if need be. I wouldn't be surprised if 7-11 has the same setup.

I always assumed franchised businesses weren't owned by the brand that was franchising. Sounds like a terrible deal for the franchisee if all they're doing is renting a license to operate a business and not gaining any equity. I thought the whole point was so that the could work and gain a bit of equity in their business while using the marketing and quality assurance of the brand they franchise.

Depends on the business. CFA handles a lot of the upstart and operating costs such as land, building, equipment, technology, branding, liability, etc for it's operators. As such, they take a large chunk of the profits and maintain strict rules for brand integrity.

Then I'm confused as to what the franchisee is getting out of the situation. It sounds like being a mid level manager, without any benefits that a normal employee would get, that is liable if things go wrong, but almost never shares in upside since royalties can just go up if the business does well.

It seems like most franchisees are not starting a business, they are buying a job.

And the liability for lawsuits from employees, customers, or the government!

That should be the idea, but the brand has requirements. When you go to a McDonalds and order a burger you know what it will taste like. The reason you know that is McDonald's requires all franchises to do quality control. I don't know the exact arrangement, but probably the franchise is not allowed to source their raw materials elsewhere. If a McDonald's burger doesn't taste right they will take action up to taking away your franchise rights - I've never heard of this happening, but they have the right to protect their brand in this way.

When you buy a franchise you get a territory. You know you will not have to compete with anyone else. If the brand thinks it would be good to have a store a few blocks from yours they will either offer you the new store first, or give you a guarantee that your business won't suffer for the competition.

While there is risk, if you buy a franchise and work hard it is a path to a nice life. You won't become richest person in the world, but you should be able to get to upper middle class. The first 30 years are mostly paying the bank though, so be prepared for a long term investment (but after 30 years you can sell your franchise and get the equity back - enough to retire on).

Note that I started with should. Some franchises are better than others. Some will try to sell you a bad territory where it is impossible to live on the earnings. Some will force you to buy (sell) product that your customers don't want. It can be a good deal, but it can also be a ticket to bankruptcy.

>(but after 30 years you can sell your franchise and get the equity back - enough to retire on).

If the franchisee doesn't own the land or building, it doesn't sound like they have any equity. All they have is the licensing agreement with the brand, which I'm sure has an expiration date, but all the power rests with the brand. Unless there's a clause in the franchising agreement that forces the brand to only license to you, the franchisee doesn't seem to be left with anything at the end of the licensing term.

The devil is in the details. There are thousands (more?) of different things you can franchise. Each has different terms! Some are outright scams. Some are great deals. Some are in between where your skill as a business manager is the largest factor.

Owning the land/building is often a negative for a small business - you want to focus on managing your business not maintaining your building (an accountant can explain other reasons why renting is usually better).

While there is risk, if you buy a franchise and work hard it is a path to a nice life. You won't become richest person in the world, but you should be able to get to upper middle class. The first 30 years are mostly paying the bank though, so be prepared for a long term investment (but after 30 years you can sell your franchise and get the equity back - enough to retire on).

This doesn’t sound appealing to me. How much time do most franchise owners spend in the store themselves over the 30 years because they don’t want to pay employees? (That sounded harsh wasn’t meant to).

Say you’re a first generation immigrant, I understand why you would do that for your family but would you ever want that for your kids or would you just send them to college to do almost anything else?

Depends on the franchise and the manager. A gas station has different economics from a restaurant. Generally you need to spend more time doing book work than you expect to be successful, and not having an employee to work while you are in the office makes that part take longer.

When first starting you generally have to work long hours, but after a few years you get better. If you are good at business, you can own 6 franchises and pull in $200k + per year working 40 hours a week. However other franchises do not really allow you do own more than one, it is entirely possible that you are buying a $60/year job working 50 hour weeks (this is a great deal for immigrants). These numbers assume you are good at the business side and the franchise is one of the good ones that wants you to succeed. If either of those fail you take the losses.

They are building equity in the form of earning cash income and then using it to invest in additional cash generating franchisees. It's cash, so they could put that money into owning 7-11 stock, the real estate the store is on or whatever.

I assume the corporation can see any excess profits being made and increase the royalty fees to make sure the franchisee isn't left with much, which it does seem like 7-Eleven is doing according to the article and another poster. It just seems like a very crappy deal, but I guess that's worth taking if you have no other options.

It is sometimes said that McDonalds business model is not in selling burgers but rather being in real estate. They rent out a building and a model for using it, with the goal to rent out more buildings. I don't know how true it is but I have heard that McDonalds as a company don't earn money from any profits from burgers, only from rent. Would be interesting to know how true that is.

Interesting. So payroll goes through corporate, but for some reason they need to call ICE to make sure no illegal immigrants are being employed at the store? And if they are, it's the store's fault?

What am I missing? Seems like every employee ought to have an I9 on file with corporate.

This is totally possible and not out of line with other agreements. I know of one agreement that requires the franchisee to pay corporate's legal fees if a lawsuit resulted from actions in the store.

I've seen that too, but that's also just monetary penalties. From the agreements I've seen for hotels, there was never any equity involved, and the franchisor definitely didn't want anything to do with payroll. In fact, being shielded from that kind of liability is one of the perks of being a franchisor, so it's very surprising that 7-Eleven would even want to be a part of that. I can see wanting to track sales and whatnot so they can verify that they're getting their cut, but I see no benefit to 7-Eleven corporate to getting involved with the staffing, it's not like their royalties would be effected. And they would get to put all the blame on the franchisee when problems like this occur.

It 100% depends on the exact terms of the contracts in question. There's no reason in principle this wouldn't be allowed, and 7-11 would be over-reaching like hell (and get shot down) if they tried it and the contracts didn't allow it, which leads me to believe they do.

Yes. My parents and brother own 7-Eleven stores. 7-Eleven almost always owns or leases the land and builds the store. They also own all the equipment. It is their store that they give you right to run. Every few years franchises are given a new contract that they must either sign or lose their store(s). The new contracts are always worse for the franchisee.

Wow, then it just sounds like an elaborate way for corporate to avoid paying for overtime or being liable for unemployment premiums and other employee liabilities, and having plausible deniability that 7-Eleven employs people without work authorization.

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