Franchisor to franchisee:
OR: Les the new poo-extraction technology will cost you $100.
EE: So the non-logoed dog poop scoop, in the real world, costs $5.00. Right?
EE: But I have to buy this propriety equipment from you, right? [tied buying]
EE: So I end up paying 20 times as much for the scoop, does that sum it up the situation?
EE: And if I don’t want to [as any sane independent businessperson would do]…?
OR: I can terminate you and refuse any potential buyers and other nonsense which deprives you of, say, 90% of the $100,000 you’ve sunk into your business. Sound fair, Les?
EE: So my decision is either:
- lose $95 by saying yes or
- lose $90,000 plus the exit costs by saying no. [Prospect Theory]
Is that a fair comment?
OR: Is that a fair comment, what?
EE: Is that a fair comment…sir?
OR: Yes, Les. You’re coming along.
Sunk costs as they compound business risk are a unique and little discussed aspect of franchising. Law makers are particularly negligent in not putting each post-signing franchisee buying decision in its appropriate context. Franchisees often look stupid in hindsight because sunk costs are not taken into account.
- Context is everything in the bizarro world of a franchise relationship.