Why the strict rules? – common surprises to franchisees

You’re almost to the finish line and reviewing the contract details, and something so blatantly scary is sitting right there that nobody warned you about beforehand. Before you lay down your pen and walk out in a huff, there is most likely a story behind many of the contract stipulations in franchise agreements.

One of the most common surprises I encounter with my franchisees is when they start to realize within those words, terms, and conditions is a promise by them to abide by strict and precise controls set in place by the franchise. If they ever stray from those stipulations, they may lose any protection under the franchise umbrella, and may even lose their franchise altogether. 

This detail may come as a point of fight or flight for the aspiring franchise, but it’s all for a good reason. I assure you that nobody is out to pull one over on anybody. These controls are all in the name of quality and consistency, not to mention some protection. Read on, and I’ll tell you why.

Unleashed innovation leads to tragedy

If you’re in your 40’s and beyond, you may remember a booming restaurant chain by the name of Chi-Chi’s. For those of you younger than 40, it was once more than a jarred salsa in aisle five at the grocery store.  Chi-Chi’s, founded in 1975, was responsible for the Mexican food craze we have today. You used to see one in every community, then they all quickly disappeared somewhere between 2003 and 2004. I can still taste their chicken that I believe one of the cooks told me was marinated in their margarita mix when I was a server in a Baltimore store. Today the restaurant is nothing but a memory with the Chi-Chi’s brand salsa being the only remaining survivors on the grocery shelves. The tragedy that came to Chi-Chi’s could have happened to any restaurant chain. The events that followed forever changed the structure of franchise agreements in the restaurant industry and variations of limited liability stretched to other franchise businesses going forward.

It only took one franchisee to act outside of the program 

Chi-Chi’s, no different than most restaurant chains, took advantage of the many stores needing the same ingredients to make the same menu items. This advantage was with bulk pricing and negotiating volume discounts for all of the stores, then distributing them with collective pricing discounts. This leverage served them two-fold. First, they could pass on those competitive savings to all of their restaurants in the franchise. Second, they were able to maintain strict control over quality and consistency by controlling the food selection and vendors.  

One franchisee was approached with a great opportunity from a local vendor that he found very hard to refuse. This vendor was offering an incredible discount on green onions. The franchise didn’t think it a big deal to purchase something so small as green onions from another resource. Surely it wouldn’t make any significant impact on their business. It was a great deal!

What happened next ended it all

What started with an innocent produce purchase turned the city of Pittsburgh and Chi-Chi’s upside-down. Those discounted green onions were tainted Hepatitis A. That one franchise was found to be ground zero to the largest hepatitis outbreak in US history. At least four deaths and 660 documented cases all had the Chi-Chi’s name on them from that one location. 

The problem back then with franchise contracts was that there was no protection to the franchise when a franchisee went outside the provided resources and procedures. After Chi-Chi’s settled all of the lawsuits in 2004, it was the end of the franchise. We’re not just talking about Pittsburgh and their green onions, but ever franchise store lost their business because all were held collectively responsible for one man’s overstep.

Never again: protections in place for the corporate franchise and the franchisee

What happened with Chi-Chi’s could have easily happened to another franchise with similar circumstances and bad luck. This landmark incident illuminated a gaping hold in liability with restaurant franchise agreements. This hole identified an urgent need for changes going forward. The most significant contract changes were to hold the franchise corporation harmless if and when a franchisee acts outside of the procedures and the resources supplied by the franchise. When a franchisee makes the critical decision to go against the franchise agreement details, the risk of such an autonomous choice is to withstand any repercussions and consequences without the protection from the franchise corporation (that they would have if they followed the procedures).  

Contract stipulations like this one have spread throughout the franchise restaurant and beyond to protect any innocent franchisees from suffering the fate from one person’s poor decision. A distinctive benefit of entering into a franchise agreement is to benefit from the recipe to success provided by the procedures and resources reserved for franchisees to extend the quality of the brand across every store. To deviate from that winning recipe is not only foolish but as you can see from the Chi-Chi’s disaster, comes at considerable risk in ways you may not imagine yet.

From that tragic event to our franchises today, now you know why those stipulations are in place. They are there not to pull the wool over anyone’s eyes. They exist for your protection as well as every other franchisee that operates the same franchise across the country.

Franchise consultants unravel the mysteries for you

Franchise consultants like Hundred Acre Consulting stand by your side and guide through the entire franchise acquisition process. They are there to answer questions and share experiences along the way. They also help you research and find your perfect match to achieve your goals and desired lifestyle. Nothing makes buying a franchise a pleasant and well-planned experience like when you have a franchise consultant in your corner as your personal advocate.  Are you ready to join the rankings of successful franchisees? Contact Us and let’s get started. We have lots to share, and we can unravel those mysteries for you along the way.