It’s not common for major franchisors to terminate franchise agreements, though it can – and does – happen. Recently, Burger King terminated franchise agreements with one of the largest franchisees in the U.S. after a video went viral of rats in one of the locations, among other circumstances.
Franchisee Guillermo Perales and his company Sun Holdings ran 37 Burger King franchise restaurants across South Texas. In March, a YouTube video was published showing rats on the kitchen floor of a Harlingen location, and the video quickly went viral. Burger King then terminated the agreements for all franchises owned by Perales for the following reasons:
- Displaying a “reckless disregard for the physical and mental well-being of employees, customers, BKC representatives or the public at large.”
- Failing health inspections at several locations, leading to the voluntary closure of four locations and to Burger King ordering that two more locations close.
- Bringing negative attention to the chain and brand, resulting in lower sales in the South Texas area.
Despite the termination of the agreements, Burger King alleges that Perales continues to operate the remaining locations with Burger King’s brand. The chain filed a lawsuit in federal court seeking an injunction to stop Perales and his company from using the Burger King name, branding, and signature products. Burger King claims that the continued use without a franchise agreement will confuse customers into thinking that Burger King is still providing the food and service at those locations. Due to the health-related concerns, Burger King no longer wants to be associated with Perales or his operations.
Perales claims that Burger King’s claims in the lawsuit are unfounded and that he expected an “amicable resolution” that allows for a continued franchise relationship with Burger King. We will see what develops in this case.
Complications with Franchisees
Often, the news focuses on how large franchisors fail to treat franchisees fairly. However, franchisees can cause serious complications for large chains, especially in today’s internet age.
When an experience at a restaurant or store goes wrong – whether it is bad service, hazardous conditions, or other failures – you can expect that most customers will head online as fast as they can. Publishing negative reviews on Yelp, posting on Twitter and Facebook, or sharing videos on YouTube can spread information about the experience to thousands or even millions of people in a very short period of time. Many people will be watching to see how the franchisor reacts to the situation.
When a video, post, or tweet goes viral, a franchisor does not have much time to fully understand the facts or allow the franchisee to defend their position. Instead, to protect the brand, it often has to act quickly to show that the company does not condone the poor franchisee behavior exhibited online. This may include terminating a franchise agreement on the spot to protect the reputation and integrity of the company as a whole.