Remember our article from a few months back: Buy a Franchise or Start My Own Business? We explored the differences between independent startups and franchise initiatives, touching on a few key points, but one in particular stands out in light of the latest NBA controversy involving Mr. Donald Sterling…
How much power do you really have as a franchisee owner?
In a franchise arrangement, on the surface it seems as though you are in much the same position as any business owner. You own your establishment. Or do you? In the case of Donald Sterling, let’s break down the sequence of events:
- Vile, racist comments are made
- However revolting, these comments don’t change the fact that he owns the Los Angeles Clippers in the NBA Franchise
- Just four days later, NBA Commissioner Adam Silver banned Donald Sterling from the league for life and fined him $2.5 million
- But he still owns the Clippers!
- Not for long…now the NBA owners are actively taking steps towards forcing a sale on Donald Sterling
At its core, the NBA is a franchise just like any other.
Although most of us think of it in quite a different manner, the NBA is a franchise. Similar to McDonald’s, Subway, Supercuts and 7-Eleven, the NBA franchisors ultimately hold the power in the arrangement – not the franchisees. As we can see from the Donald Sterling case, at any time, franchisees can be banned, fined and forced to exit the business.
Read the fine print.
You’re not above the law just because you own something or because you have money.
Caveat Emptor. Before you sign, be sure you’ve read every clause and understand every provision. There are some franchisors who own every franchise lease and take hefty royalty fees in perpetuity. Just because it’s a successful franchise doesn’t mean it has favourable arrangements for its franchisees.
The power lies in the franchisor, not the franchisee.
Take a look at another recent example: the Alex Rodriguez (A-Rod) case against the MLB. For months he pressed forward, suing the MLB in an effort to fight his 200-game suspension for multiple drug use violations. Suddenly, realizing he didn’t stand a chance against the MLB in court, he immediately dropped the lawsuit and the MLB went on to put the issue to rest in an even greater position of authority than originally anticipated.
What’s the moral of the story?
Do your homework. Understand fully the contractual arrangement into which you are about to enter.
In a franchise agreement…
Yes, you own a franchise.
But what exactly does this entitle you to? How much authority do you really have? What happens when things go awry? Are you fully protected? Will you be able to carry on the business you worked so hard to build? Or will you be “forced” to exit the franchise much like what we’re bound to see happen to Donald Sterling in the days to come?