7-ELEVEN: How the 7-Eleven Franchise Works

Several 7-Eleven franchise owners have recently had their franchises terminated, their equipment seized, and their notes called.

They have been simultaneously served with lawsuits – usually without warning, discussion or a chance to appeal.

7-Eleven franchisees tell us they are put out on the street, with 7-Eleven free not only to keep their franchise fees (ranging from $180K to $800K each store, we’ve been told), but to sell the franchises to new owners and collect new fees.

7-Eleven, Inc. and their attorneys seem to have this termination process streamlined with the efficiency of a finely tuned assembly line.

In fact, their franchise lawsuits contain boilerplate sections (like the 10+ pages describing how the franchise reporting relationship works) that are simply reused with slight modifications for each lawsuit.

We have taken excerpts from the boilerplate of one of 7-Eleven’s recent lawsuits ( 7-Eleven, Inc. v. Kapoor Brothers Inc. (Complaint)), because it provides an excellent overview of the 7-Eleven franchise relationship from the perspective of 7-Eleven, Inc.

It seems clear that 7-Eleven, Inc. seeks to maintain rigid control over every aspect of the operation – from purchasing inventory to paying employees – which begs the question:  Are 7-Eleven franchisees really business owners at all?

The quoted excerpts below are from 7-Eleven, Inc.’s legal complaints.  The bolded headlines are ours.

7-Eleven owns the real estate, store, fixtures & trademarks

“In the case of a traditional franchised 7-Eleven store… 7-Eleven selects the location of each store, purchases the land and constructs the store, or leases an appropriate structure, and prepares the store for operation, including providing all equipment (shelves, counters, cash registers, lighting and other fixtures, heating and cooling equipment, signs, parking lot preparation, etc.) necessary for its operation. In essence, 7-Eleven presents a franchisee with a complete ‘turn-key’ physical plant ready for retail operation… a franchisee is leased the store and equipment, and is licensed to use the 7-Eleven® Service Mark, related trademarks, trade dress and system of operations.”

7-Eleven franchisees get no ownership – just a cut of the net profit

“In the case of a traditional franchised 7-Eleven store…  7-Eleven’s essential financial interest is in receiving a percentage of the “gross profit” (net sales less cost of goods sold) derived from operation of the store, which percentage (usually between 50 and 52 percent) is designated in the franchise agreement as the ‘7-Eleven Charge.’ In a traditional franchised 7-Eleven store, the net income, in which the franchisee has an interest, is the amount remaining after deducting both ‘operating expenses’ (such as payroll and similar expenses) and the 7-Eleven Charge from the gross profit. In such an arrangement, operating expenses do not include certain store repairs, replacement of equipment, insurance, real property taxes, any rental charge, electricity, heat or other utility costs, all of which are borne by 7-Eleven.”

7-Eleven franchisees purchase initial & ongoing inventory – which SEI finances

“The franchisee is responsible for purchasing the initial inventory for the store and for all subsequent inventory purchases. However, the franchisee may make its initial inventory purchase by paying only part of the purchase price and using 7-Eleven’s financing to pay the balance. The amount financed by 7-Eleven and the balance due from the franchisee is maintained in an account defined in the franchise agreement as the ‘Open Account.’ The Open Account reflects any initial inventory financed, and all subsequent purchases and expenses (that are financed by the franchisee through 7-Eleven), as well as revenues which flow through the Open Account. Essentially, the Open Account is a running working capital account that at any particular point in time reflects the outstanding balance of any unpaid sums that 7-Eleven has loaned or advanced to the franchisee to operate the store.”

7-Eleven receives all financial & transactional data to the minutest detail

“After operation of a store commences, the franchisee is obligated to record accurately all monetary and financial transactions. First, the franchisee is obligated to ring up all sales made in the store, using, to the extent possible, the point-of-sale (POS) scanner, including all sales of merchandise, money orders, cigarettes, lottery tickets, and other sales. The cash register automatically maintains a running total for all entries. The franchisee uses the information collected from the POS cash register totals for the day to prepare the daily reports the franchisee is required to make to 7-Eleven.

“The franchise agreement also obligates the franchisee to report all activity of the store in a manner and at times specified by 7-Eleven.”

Franchisee must make deposits daily into a 7-Eleven bank account

“With respect to sales and receipts of the store, franchisees are obligated to submit a daily cash report (‘Daily Cash Report’) each day and make daily deposits of receipts into a designated 7-Eleven bank account.

“The franchisee is required by the franchise agreement to deposit each day’s cash receipts into the designated bank account no later than the following day.

“The Daily Cash Report indicates the amount of sales for the day as recorded or rungup on the cash register, sales made by credit card, and sales of money orders. The Daily Cash Report also accounts for and records any deductions to or from cash that affects the daily deposit, such as manufacturers’ coupons. For example, a franchisee could record a deduction for cash received from sales that was used to pay a vendor for inventory for the store or for unanticipated or one-time labor costs that are not paid directly through 7-Eleven’s payroll system.”

7-Eleven provides a “payroll service” and issues employee paychecks

“Although the franchisee is responsible for the labor and payroll costs in the operation of the store, the franchisee’s employees are paid through what is effectively a ‘payroll service’ that 7-Eleven provides to its franchisees, as part of the overall accounting services provided by 7-Eleven as contemplated by the franchise agreement.”

Franchisees must report all inventory purchases and submit to 7-Eleven for payment

“When a franchisee purchases merchandise and supplies, the franchisee is required, pursuant to the franchise agreement, to report and submit the related invoice, bill or statement to 7-Eleven for recording and for direct payment to the vendor by 7-Eleven.

“When 7-Eleven pays an invoice submitted by a franchisee for an inventory purchase for the store, the payment is charged to the franchisee through the Open Account. The balance owed by the franchisee on the Open Account is increased by the amount of the expenditure. 7-Eleven pays the related invoice, bill or statement only so long as it is willing to provide Open Account financing to the franchisee.

“Very few franchisees use monies in the store to pay for inventory. Instead,franchisees typically submit invoices for inventory purchases or, more commonly, the inventory vendors electronically submit invoices for purchases to be paid directly by 7-Eleven since this minimizes the paperwork required of the franchisee and aids the accurate and orderly accounting for the store.”

Majority of inventory purchases must be made through 7-Eleven designated vendors

“Commencing in 2004, 7-Eleven provided in its new franchise agreements that most inventory purchases would be made by the franchisee through one of the selected preferred vendors identified by 7-Eleven.

In addition, most purchases through these vendors are invoiced electronically between the vendor and 7-Eleven. Through the electronic invoicing, the payments and charges are made directly by 7-Eleven for the franchisee and posted against the franchisee’s Open Account, thereby reducing and simplifying the inventory accounting for both the franchisee and 7-Eleven.”

Without warning, 7-Eleven can terminate the franchise agreement, demand payment in full, and sue for failure to comply with termination demands.

The Kapoor lawsuit, just like the other recent suits, shows that 7-Eleven can unilaterally decide – with no warning, opportunity to cure defaults or appeal – to swoop in one day, terminate the franchise agreement, demand payment of the financed amount due, demand surrender of the premises and equipment, and sue for non-compliance of those demands all in the same day.  Here is the wording from the Kapoor suit:

“On June 20, 2013, 7-Eleven provided the Franchisees notice through personal delivery of two, separate Notices of Material, Incurable Breach (the “Notices”). Because the breaches went to the essence of the Franchise Agreements and wholly frustrated the Franchise Agreements, 7-Eleven terminated the Franchise Agreements.

“On June 20, 2013, 7-Eleven notified the Franchisees notice that the amounts due under the Note were immediately payable.

“After being terminated, the Franchisees refused to:

a.immediately surrender the Leased Premises and the Equipment;

b.transfer to 7-Eleven or an approved third party transferee the Final Inventory of the Leased Premises;

c.immediately cease using the Trademarks and all elements of the 7-Eleven System, including 7-Eleven’s Confidential Business Information; and

d.cease operating a Competitive Business at the site of the Leased Premises in violation of a covenant-not-to-compete contained in the Franchise Agreement

“In addition, the Individual Franchisee failed to pay for or cure the breaches of the Corporate Franchisee, and the Franchisees failed to pay the amounts due under the Note.”

It appears that a franchisee, who may have invested between $200,000 to several million dollars in their 7-Eleven business, can have that business terminated in an instant if 7-Eleven decides, in its sole discretion, that the franchisee has breached the franchise agreement.

Isn’t a main reason individuals seek to own their own businesses is so they can’t be abruptly fired and escorted to their car carrying their box of personal items?

If 7-Eleven franchisees have to fear being put out on the street one day without warning, can they really be considered business owners at all?

What do you think?

Also read:

7-Eleven Franchise Complaints

7-ELEVEN Franchisee Tariq Khan: Villain or Victim?

7-ELEVEN: Is 7-Eleven a Good Franchise to Own?

7-ELEVEN Franchise Owners Complain, Allege Churning

7-ELEVEN Franchises Raided by DOJ, Homeland Security

7-ELEVEN Downplays Japanese Ownership

7-ELEVEN Franchise Lawsuits 2013

7-ELEVEN’s Japanese Parent Posts Record Profits… Again

WHAT DO YOU THINK?  ARE YOU FAMILIAR WITH THE TARIK KHAN AND THE 7-ELEVEN ASSET PROTECTION PROGRAM?  SHARE A COMMENT BELOW.

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