Business Law

Franchise Agreements Say No to Having It Your Way

"Have It Your Way!" The jingle goes way back to the 1970s, but Burger King franchise owners don't like the sound of it right now. Facing tough competition from $1 deals at McDonald's and elsewhere, Burger King headquarters is demanding that all its stores offer $1 double cheeseburgers.

Burger King Franchisees Want It Their Way

Last November, the National Franchisee Association on behalf of Burger King franchisees filed a class action suit in federal district court in Miami over the $1 double cheeseburger requirement. Burger King says individual owners can file a class action suit, but the Association responded that the owners are afraid of retaliation if they add their names to the suit.

Their attorney argued the question was decided last year in a different case. The ruling in that case said Burger King Corporation had the power to require its stores offer Value Meals at the prices it dictated. The court said franchise agreements told its stores what maximum amounts they can charge for certain products, called "maximum pricing."

Burger King's attorney has asked the district court to throw out the current lawsuit. They claim all franchises offer dollar deals, and requiring franchisees to do so is just good business judgment. A decision hasn't been made yet.

Franchise Agreements Are Strict

Burger King franchisees voted twice against the $1 double cheeseburger, and corporate headquarters allowed them to raise the price to $1.29. The Miami class-action suit attorney says the Association just wants the court to interpret the franchise agreement. He argues the agreement only gives Burger King the power to recommend, not dictate, maximum prices.

Many people looking into becoming a franchise owner are quickly discouraged when they look at the tough requirements when deciding which franchise to open. The franchise contracts include strict requirements about pretty much anything in the store or restaurant:

  • How to clean
  • Whom to hire
  • Where to build or rent
  • How much they need to earn to stay profitable
  • What hours they should be open

Corporate representative can visit local stores to ensure investments meet all expectations for cleanliness, service, and quality.

The franchise contract spells out who pays for costs, and whether the franchise can use certain vendors. The ingredients and food service supplies generally come from headquarters or from vendors approved to supply all of the stores in the region.

All local, state and federal laws, even though some of its decisions are dictated by headquarters must be followed. For example, the local owner will follow local labor and employment laws and not discriminate on the basis of factors such as race, gender or age. City and state health and safety codes and regulations also must be followed.

Profits Depend on Many Factors

The Burger King franchisees argue that forcing certain prices down negatively affects their profits. Fixed costs on a double cheeseburger are about 40 percent of the price, according to the Burger King attorney. That means the stores have to keep down their costs to make a profit.

Many factors go into keeping costs low enough to make a profit from what they sell. Also, a franchise fee is paid to corporate headquarters as a part of operating expenses. There are utilities, property taxes, sales and revenue taxes and payroll.

Franchising can seem like an attractive option to owning your "own" business, but watch out for restrictive guidelines. Be sure to have a special franchise lawyer read the agreement before signing it and committing to confining rules.

Questions for Your Attorney

  • How can I apply for a fast food franchise?
  • In a franchise agreement, do I own the store, or does the company?
  • At what point can my franchise be taken away?
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