Rebates: A bone of contention on both sides

Robert Purvin, chairman of the American Association of Franchisees and Dealers, views sourcing of supplies and a franchisor’s ability to control purchasing as the prime issue in franchising…To Purvin, a general disclosure is worse than no disclosure, because it lets the franchisor off the hook. In other words, they have disclosed the information, but in a manner that doesn’t address specifics.

Franchise Times
September 1, 1999

Rebates: A bone of contention on both sides
Nancy Weingartner

Rebates – or kickbacks, depending on your frame of reference – fall under the same category as the age-old question: Is the glass half empty or half full?

To many franchisors, vendor rebates – money refunded for large purchases – are viewed as a vehicle to provide another revenue stream for the franchisor or a means to help fund conventions or other franchisee gatherings.

To the franchisee, any kickback a franchisor receives on products the franchisee has to buy should be passed along to the franchisees, or at the very least directed to the advertising fund or some other mutually beneficial program.

And while franchisee advocates admit that there is nothing illegal in the practice of pocketing rebates, there is a moral question.

One of the reasons franchisees join a system is to take advantage of economies of scale, according to Keith Kanouse, a franchisee attorney in Boca Raton, Fla. “They want to save money on their purchases…When they’re forced to buy products from the franchisor, he’s free to charge what he wants,” Kanouse said.

In the case of third party purchases, if a franchisor is receiving a rebate, most likely the franchisee is not receiving the lowest possible price, he added.

Robert Purvin, chairman of the American Association of Franchisees and Dealers, views sourcing of supplies and a franchisor’s ability to control purchasing as the prime issue in franchising.

It is a situation that drew the attention of state regulators in 1993. After much discussion with the franchisee, franchisor and vendor communities, Item 8 of the Uniform Franchise Offering Circular asked for some disclosure vendor arrangements.

“The franchisor community wasn’t happy with the disclosure (requirement),” said Steve Maxey, who headed the North American Securities Administrators Association franchise committee at the time.

During the drafting process, there was a lot of “give and take” on both sides, and the item was softened to include only a disclosure of the practice. Franchisors didn’t have to name names or give specific dollar amounts.

“Item 8 was one of the toughest (sections) to draft,” Maxey, a regulator in Virginia, contends.

Because there are so many variables and so many different types of industries involved in franchising, “you have to cover all the bases,” Maxey said, explaining why consensus work in franchising is a lengthy process.

To Purvin, a general disclosure is worse than no disclosure, because it lets the franchisor off the hook. In other words, they have disclosed the information, but in a manner that doesn’t address specifics.

John Martland of Martland & Brooks agrees. In court cases where franchisees have challenged the practice, “the courts seem to say that as long as it is disclosed it (the practice of accepting rebates), it’s OK.” It may be disclosed, but somewhat weakly, he added.

Gail Schubot of Strasburger & Price, who worked as an in-house counsel before joining a law firm that represents franchisors, believes systems are moving toward the rebate sharing. “Usually if something is coming back, it’s tagged for the system,” she said. “Sometimes franchisees don’t appreciate the value-added (benefits) the franchisor has negotiated into supplier contracts.”

Good franchisors should be looking for price breaks on products franchisees have to buy, as well as vendors that can provide the level of customer service required by nationwide franchise systems, she said.

Because vendors want exposure with the franchisees along with the franchisor, Schubot said vendors often give “rebates” in the form of sponsoring some part of the national convention, such as hosting a dinner or the trade shows.

Franchises employing a team system often include franchisees in negotiations with vendors, Schubot said.

Another method of working together is forming buying co-ops that include both the franchisor and franchisee. Late in 1998, Tricon formed one of the largest co-ops when it combined the buying power of its three restaurant chains, KFC, Taco Bell and Pizza Hut.

Purvin’s group, the AAFD, has also started a national co-op, where members can take advantage of the national group’s numbers for a variety of services and products. For instance, franchisees in smaller systems can have the buying power of the large systems when purchasing everything from long distance phone service to insurance. And in his co-op, the rebates are returned the members, he said.


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