Many franchisors secure “national clients” for their franchisees. These clients typically have a large geographical footprint, which makes service by one franchisee impossible. Because of this reality, these “national accounts” do not belong to any particular franchisee, but are assigned by the franchisor to various franchisees in the system, depending on location. In theory, national accounts help the franchise system because they generate revenues for franchisees, and therefore result in greater royalties for the franchisor. The national account “clients” also benefit because they have convenient access to uniform goods or services furnished by the franchise system, and typically get aggressive pricing for those goods or services. National accounts can be a benefit for franchises, because such accounts can result in immediate revenues, without any real marketing efforts expended by the franchisee.
However, national accounts are not all created equal, and franchisees must understand how national accounts are handled by the franchisor. If you are a current or potential franchisee, consider asking the following questions about your franchisor’s national accounts program:
1. Are national accounts mandatory? You should be wary of franchise agreements or policies that require you to service all national accounts in your area. Oftentimes, franchisors will negotiate lower fees for national accounts. For example, a window cleaning franchisor might negotiate with a national hotel chain for window cleaning services at 25% off. If you have many hotels in your territory, you could find yourself servicing the discounted national accounts rather than full paying customers.
2. How are national accounts assigned to franchisees? If you are relying on national accounts, you want to know how they will be assigned. In many instances, national accounts are assigned to the franchise owning the territory. However, this is not always the case.
3. How can national accounts be taken away after they are assigned? You may think national accounts are permanent, but be careful. Many national account policies provide circumstances where national accounts can be taken away from a franchisee. For example, you could lose your account if you suffer a default under your franchise Agreement or fail to hit certain minimum sales benchmarks. It is important to know which circumstances will result in the loss of your right to national accounts.
4. Who services national accounts in neighboring areas when no franchisees are present? Many franchisors have policies about servicing national clients in areas outside of existing franchise territories. It is important to know whether you will be permitted or required to service such clients. It is also important to know what happens if you are servicing a client in a territory that is purchased by another franchisee. Will you lose that client? Will you be entitled to a portion of the revenues from that client when the new franchisee takes over?
5. When are others allowed to service national accounts in the franchisee’s territory? You should also understand when another franchisee or the corporate office is permitted to service a national account in your territory. Keep in mind that if you have an exclusive territory that prevents other franchisees or the franchisor from competing with you, that territory will usually not protect you from others servicing national accounts. This is something that is often overlooked by franchisees.
6. What types of accounts are considered “national accounts”? You should also understand what constitutes a “national account.” Is it simply a customer that has multiple outlets? A customer with multiple outlets in a specific region of the country? Or a customer that has a certain number of outlets? Understanding the definition is important. Otherwise, you could find one of your most important clients deemed a “national account” without warning. If this happens, your revenues from that client could decrease as a result of the franchisor’s agreement with the national account to provide discounted prices.
7. Can the policy be changed? It is also important to understand where the national account guidelines are set out. If the guidelines are included in the franchise agreement, there may be a better argument to resist changes in the future. However, if the national account policies are separate from the franchise agreement, or only referred to generally in the franchise agreement, the policies may be more easily changed by the franchisor.
National accounts can be an important and fruitful part of any franchise. However, as a franchisee or potential franchisee, you must be sure to understand exactly how the policy works.
If you have any questions about this topic or any other franchise law issue, please contact Brian Loffredo at
ABOUT BRIAN LOFFREDO
Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.
In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.
Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.
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