Unfair Term??

[AdamsDad]

Hi folks,

I recently bought a franchise and it hasn't worked out. I (the franchisee) have made zero profit in three months so I've just worked my ass off for free. The Franchisor has made several £000. I always knew they would take 15% but I understood this to be 15% of the Nett turnover. They are actually taking 15% of gross turnover.

Having reviewed the contract I signed up to, I agreed that they would take 15% of the net turnover, do you think the definition below is an unfair term or even misleading?

As always, all feedback appreciated.

Edited by AdamsDad on Saturday 30th August 22:39

[ATG]

What did you expect their definition of net turnover to look like?

[AdamsDad]

ATG said:

What did you expect their definition of net turnover to look like?

When reading the agreement in its entirety, I understood "Net Turnover" to be different to "Gross Turnover. I expected the franchisor to take 15% of the profit, rather than 15% of the turnover.

[Austin_Metro]

What are the other exclusions? That is, other than VAT?

[AdamsDad]

Austin_Metro said:

What are the other exclusions? That is, other than VAT?

Just refunds and discounts from the Franchisor.

[ATG]

AdamsDad said:

ATG said:

What did you expect their definition of net turnover to look like?

When reading the agreement in its entirety, I understood "Net Turnover" to be different to "Gross Turnover. I expected the franchisor to take 15% of the profit, rather than 15% of the turnover.

Ah. I'm not an account, but net turnover is not profit. It is turnover adjusted for stuff like discounts. It's very much just a measure of sales revenue.

[Boringvolvodriver]

IANAL, unlike ATG although in the extract you have put, I read nett as all turnover less VAT. I.e. all sales net of VAT.

I don’t think any franchise operation would take their fees on net profit - at a push maybe gross profit if you had to or could only buy your materials from them.

Did you take any advice when you took it on?

[Vsix and Vtec]

Trying to redefine "Gross takings" for the purpose of a contract as the actual figure of Net takings is jolly unfair, but as demonstrated here was included in black and white in the contract you signed. Now, I agree I would never expect an established term such as Gross to be used in such a counterintuitive way, and I certainly wouldn't have signed said contract without clarification as to whether this was a typo or something more nefarious, but we are where we are. Unfortunately, it appears to be the latter, assuming the differences between net and gross and the 15% take are equal to your profit, I'd be inclined to suggest it leads one to think it almost a deliberate calculation or an unusually unfortunate happenstance. It all depends how charitable towards the franchisor you feel, I suppose.

What you do about it, im not really sure. What are your local legal advice options like, and your terms for contract exit?

[AdamsDad]

ATG said:

AdamsDad said:

ATG said:

What did you expect their definition of net turnover to look like?

When reading the agreement in its entirety, I understood "Net Turnover" to be different to "Gross Turnover. I expected the franchisor to take 15% of the profit, rather than 15% of the turnover.

Ah. I'm not an account, but net turnover is not profit. It is turnover adjusted for stuff like discounts. It's very much just a measure of sales revenue.

I haven't suggested that net turnover IS profit. Turnover is a measure of sales revenue (I'm unclear on the term Net Turnover), but it doesn't consider operating costs such as materials, fuel etc. In my simple mind, turnover minus operating costs equals profit.

[Sebring440]

AdamsDad said:

I haven't suggested that net turnover IS profit.

But, you said:

AdamsDad said:

I expected the franchisor to take 15% of the profit, rather than 15% of the turnover.

[AdamsDad]

Boringvolvodriver said:

IANAL, unlike ATG although in the extract you have put, I read nett as all turnover less VAT. I.e. all sales net of VAT.

I don’t think any franchise operation would take their fees on net profit - at a push maybe gross profit if you had to or could only buy your materials from them.

Did you take any advice when you took it on?

I didn't take any advice before signing. I'm hoping we can part ways amicably, just trying to keep my options open if it doesn't go to plan.

[AdamsDad]

Vsix and Vtec said:

Trying to redefine "Gross takings" for the purpose of a contract as the actual figure of Net takings is jolly unfair, but as demonstrated here was included in black and white in the contract you signed. Now, I agree I would never expect an established term such as Gross to be used in such a counterintuitive way, and I certainly wouldn't have signed said contract without clarification as to whether this was a typo or something more nefarious, but we are where we are. Unfortunately, it appears to be the latter, assuming the differences between net and gross and the 15% take are equal to your profit, I'd be inclined to suggest it leads one to think it almost a deliberate calculation or an unusually unfortunate happenstance. It all depends how charitable towards the franchisor you feel, I suppose.

What you do about it, im not really sure. What are your local legal advice options like, and your terms for contract exit?

Thanks for the reply, that is exactly where I'm coming from. In the last three months, I've paid the franchisor £3k, profit over the same timeframe is £0.

To terminate the contract, I have to give three months notice and provide VAT returns on request.

[Vsix and Vtec]

AdamsDad said:

Thanks for the reply, that is exactly where I'm coming from. In the last three months, I've paid the franchisor £3k, profit over the same timeframe is £0.

To terminate the contract, I have to give three months notice and provide VAT returns on request.

So a total of 6 months of trading whereby you work to see your profit margin of presumably 15% disappear off to the franchise. Charming set up. Is there scope to increase your profit? Or is the RRP set by the franchisor? There must be other franchises making a go of it, unless the whole thing is built upon a revolving door of people like yourself starting up, and then winding down.

The terms for exit seem fairly amicable other than the galling nature of making sweet FA.

[AdamsDad]

Vsix and Vtec said:

So a total of 6 months of trading whereby you work to see your profit margin of presumably 15% disappear off to the franchise. Charming set up. Is there scope to increase your profit? Or is the RRP set by the franchisor? There must be other franchises making a go of it, unless the whole thing is built upon a revolving door of people like yourself starting up, and then winding down.

The terms for exit seem fairly amicable other than the galling nature of making sweet FA.

Franchisor takes 15% of turnover. Profit is £0.

There is scope to increase my profit by increasing my prices for both labour and material but I'm reluctant to do so. I do live in a location which means I do need to travel for 30-60 minutes to reach my customers and I also have to cover the fuel cost. So, if I was in a city, id be making good money (even better on my own).

So, rather than increasing prices for my customers, who are primarily domestic customers, I prefer to go it alone.

[Dg504]

Their net turnover seems to be exactly what it says on the tin.

Do you hold a lot of stock? If you’re packing it in what’s the harm in ramping the prices up for the last 3 months? It’ll either tank and franchisor will get 15% of nothing (unless there’s a monthly royalty) or it’ll make you a little pot to go away slightly happier with

[BlackTails]

AdamsDad said:

When reading the agreement in its entirety, I understood "Net Turnover" to be different to "Gross Turnover. I expected the franchisor to take 15% of the profit, rather than 15% of the turnover.

Is Gross Turnover defined?

That term isn’t misleading. A franchise agreement would normally be a B2B arrangement. Unfairness doesn’t come into it.

[vaud]

BlackTails said:

Is Gross Turnover defined?

That term isn’t misleading. A franchise agreement would normally be a B2B arrangement. Unfairness doesn’t come into it.

There can be unfair terms in B2B but the threshold is much higher and normally towards liability, constraint of trade, indemnity, etc

[Steve H]

I can’t see a great deal unfair or unclear in the OP and it is not unusual for a franchise fee to be a percentage of turnover, however it is defined or described.

But it is a little optimistic in most cases to hope that a new franchise would be profitable within the first quarter. Did you really manage to get your 100% capacity in such a short period? If you did then your hesitation to increase prices seems badly misplaced; if not then isn’t profitability about growing the workload rather than binning the franchisor?

If you can give notice and go on your own with zero disadvantages then fair enough but it raises the question of why you bothered getting a franchise in the first place?


For context, I have run a business both as a franchisee and independently and have seen others do the same with varying results

[BlackTails]

vaud said:

There can be unfair terms in B2B but the threshold is much higher and normally towards liability, constraint of trade, indemnity, etc

This isn’t about those sorts of terms.

And the reality is that fairness or reasonableness challenges in a B2B context, in practice, are vanishingly rare.

[vaud]

AdamsDad said:

Franchisor takes 15% of turnover. Profit is £0.

There is scope to increase my profit by increasing my prices for both labour and material but I'm reluctant to do so. I do live in a location which means I do need to travel for 30-60 minutes to reach my customers and I also have to cover the fuel cost. So, if I was in a city, id be making good money (even better on my own).

So, rather than increasing prices for my customers, who are primarily domestic customers, I prefer to go it alone.

Not intended as an attack OP but with a 30-60 min drive, what is the sensitivity for fuel price increases, vehicle running costs? And how does that travel affect your possible utilisation?