How Stuff Works: Franchises

I was reading a story earlier this week about a man who owned a Dairy Queen franchise who apparently did not understand how a franchise agreement works. I say that because after he went off on a racist tirade that was captured on video and posted online he was still surprised when the parent company revoked his franchise and closed the location he had previously run. The only explanation I can imagine for the original meltdown, let alone the naïve belief that a public apology would be enough to extricate himself from this mess, was that the former franchisee believed that since he owned and operated his own business, no one could call him into account for behaving like an ass in front of customers or making the company look bad. But in a franchise arrangement this isn’t always the case…

You can find the original story from the Washington Post here if you want to, but there isn’t a whole lot more to it. James “Jim” Crichton had been the franchise owner of the Dairy Queen location in Zion, IL, until he was unwise enough to get caught on video yelling racist epithets and profanity at a customer. Although Mr. Crichton tried issuing a public apology and promising to put himself and his staff through sensitivity training, the parent company was no more impressed by that offer than the community in Zion was, although I would imagine the fact that one of the things he was recorded as saying was that he could call anybody anything he wanted to in his own restaurant probably didn’t help in either case…

The reason I am calling Mr. Crichton’s understanding of franchises into question is that control over the operation of these locations is the entire point of franchising a Dairy Queen in the first place – at least, as far as the company is concerned. Selling somebody a franchise license is, by definition, cheaper than building and staffing a new store yourself. Once the franchise makes back the franchise fee the subsequent profits will be much lower for the company, but that can take years, and long before that happens the company should be able to sell another franchise somewhere else. But if it were to become known that any Dairy Queen franchise is selling an inferior product, or, as in this case, an inferior dining experience, the company’s chances of selling either Dairy Queen products or additional franchises will drop significantly…

For this reason, all major franchise contracts incorporate quality standards, and most of the ones that involve consumer services also place requirements on the behavior and conduct of the operator and his or her employees. Without seeing the Dairy Queen franchise contract I can’t tell you how strict their version happens to be, or how draconian the penalties for failing those quality standards are, but the ones I’ve seen from other fast food chains also had provisions that would have allowed the parent company to revoke the franchise under these conditions. In the case of a McDonald’s franchise, the company would not have to return the franchise fee, either, and a McDonald’s franchise can run upwards of $2 million USD just for permission to start one. Unless the Dairy Queen corporation is a great deal more understanding than any other I’ve ever heard of, the tantrum in the linked story may turn out to have been a seven-figure mistake…

Now, I don’t want to suggest that franchises, or even licensing agreements, are by any means simple. There is no way I would ever negotiate, let alone sign, such an agreement without advice of counsel and a great deal of background research. But in all honesty, if I’m going to sign a multi-page contract that not only lays out how much money I have to pay someone else but also the conditions under which they can repossess the property they are selling me without refunding my money, I’m going to be very careful about remaining in compliance with that agreement. Because the fact is, despite the name, you don’t really own a franchised business. You may control certain rights, but ultimately you are operating a branch of somebody else’s company, and they can and will dictate the terms and conditions under which you are allowed to do so…

If that idea bothers you, or if you want to truly have the right to scream any racist, sexist, profane or stupid thing you want in your place of business, then you’re going to have to start your own…