And are franchises’ advantages worth the trade-offs for business owners?
Editor’s note: we originally wrote this memo for AMIBA affiliates as a member resource. We decided to make the page publicly accessible to help prevent others from making costly errors after we saw many “buy local” campaigns derailed by mishandling franchises or cooperatives.
Franchising is a business model used by corporations (franchisors) wishing to expand their reach and increase revenues without taking direct responsibility for financing and managing each new location¹. The franchisor grants licenses and enters into contracts with individuals or companies wishing to open a branch (franchisees). These licenses typically are for a limited number of years and grant a specific territory to franchisees. It’s akin to leasing a business.
While some franchises are operated by area residents, others are owned by management corporations that may own many franchises (this is especially common in fast food, where a single company may run outlets of multiple brands).
Individual store owners may own or lease their store building or space, but they buy into someone else’s business model. Support from the franchisor may include a known brand, business plan, trademarks, training, site selection assistance and other tools that theoretically help make success more likely. The franchisee pays a royalty fee and also may pay a portion of sales or profits as part of the franchise agreement, which usually has a finite term attached to it that may be renegotiated at its end. For most franchises, especially restaurants, contracts typically require buying some or all inputs from the parent corporation or its chosen distributor.
The franchisor typically has the right to revoke the franchise from a franchisee if their stipulations are not followed. Because of limited local decision-making authority, franchisees typically do not meet AMIBA’s suggested definition of a local independent business. However, since we are not a franchisor, member organizations ultimately make the decision of how to handle franchises.
If you opt to allow any franchises to be listed in any of your organization or campaign materials, we recommend strongly it be in a “locally-owned franchises” category, distinct from independent businesses. Make sure your board and staff know your policy to ensure consistency and share this page with them so they can speak knowledgeably on the topic.
The Difference Between Buying Cooperatives (ACE, IGA, True Value…) and Addressing “Grey Areas”
Please note that almost every independent supermarket, hardware store and many drug stores are part of national buying and marketing cooperatives such as ACE, True Value, IGA and Leader Drug Stores. Similar cooperatives also serve businesses in other sectors. This is a fundamentally different arrangement than the franchise model. The store owners typically control and own the company and any binding agreement are ones they design collectively. We recommend these businesses be eligible for a local independent business membership category if the owners are, indeed, local residents.
Also, grey areas do exist. You may encounter businesses that have significant decision-making power and are aligned with a parent corporation for little more than the right to sell their branded products, such as insurance or gasoline. Please see our guide [accessible to AMIBA affiliates] to dealing with “grey areas” for details and our recommendations on auto dealers, gas stations, insurance and real estate agencies and others.
A few groups have created a distinct category such as “Friends of Our Org” or “Locally-owned Franchises Supporting OurTown” to avoid having to say “no” to such businesses they consider largely aligned in their beliefs. Because many citizens may not distinguish between a more autonomous franchise and one that is purely a formula business (e.g., fast food outlets) easily, we advise Independent Business Alliances not to recruit franchises, even if you have a category for those that ask to join. This can help avoid public confusion about the mission of your organization.
If a franchisee asks to join, apply your membership criteria as fairly as possible. If they do not qualify, make clear you are not shunning them and indicate you are trying to provide for unaffiliated businesses many of the advantages they enjoy as a franchise while making clear your Alliance/campaign is not anti-franchise. Franchisees should not be considered for a board positions or as spokespeople. Please consult with us if you feel a person or group is trying to turn franchisees against you.
Learn more about AMIBA affiliation here.
1. An August 2015 ruling by the National Labor Relations Board determined a company that hires a contractor to staff its facilities may be considered a “joint employer” of the workers at that facility, even if it does not actively supervise them.
AMIBA Recommendations on Handling Specific “Grey Areas” (accessible to affiliates)
Keys to Effective Buy Local Campaigns (overview of guide we offer free upon request)