Author: Yolanda Reyes
In the complex world of franchising, relationships between franchisees, franchisors, and preferred vendors are expected to operate based on trust, transparency, and regulatory compliance. But a growing body of evidence shows that when vendors go rogue — charging hidden fees, inflating costs, or pocketing secret commissions — and franchisors turn the blind eye, it’s the franchisees who end up footing the bill. Even worse, the fallout from these scandals can permanently damage the reputation of the national brands.
Over the past decade, vendors in several major franchise systems have faced lawsuits and federal investigations over deceptive business practices. In many cases, franchisees claim they were forced to purchase overpriced goods and services from these “preferred” suppliers under threat of contract violations, only to later discover those same vendors were funneling profits to company insiders — sometimes in violation of law.
In one high-profile case involving a national food chain, franchisees sued a beverage supplier and its parent franchisor for overcharging them by tens of millions of dollars. The suit alleged that franchisees were required to purchase beverage syrup at prices more than double those available on the open market. The supplier, it was later revealed, had been paying undisclosed rebates to the franchisor. “It was a kickback scheme disguised as a volume deal,” said one franchisee involved in the litigation, speaking on condition of anonymity.
While that particular case was dismissed on procedural grounds, it shone a spotlight on the often opaque financial relationships between franchisors and their vendor partners. It also reinforced a growing concern in the franchise world: that franchisors may be prioritizing private vendor relationships — and personal profit — over the financial well-being of their franchisees.
Another troubling example surfaced in 2022, when a vendor affiliated with a multi-unit service franchise was found to be billing franchisees inflated premiums for services that were required. Though the services were pitched as proprietary and tailored to franchisee needs, investigators discovered that they were largely generic — repackaged and resold at three to four times their retail value. A whistleblower lawsuit filed by a former employee alleged that the vendor’s executives used shell companies to divert portions of the revenue and paid bonuses based on how many locations they could trap into long-term agreements.
Franchisees later testified that they had raised concerns with the franchisor repeatedly, but were either ignored or told the vendor was “non-negotiable” due to contractual obligations. Some now accuse the franchisor of negligence, or worse, complicity.
“There is a dangerous imbalance of power in the franchise model,” says attorney Robert Zarco, who has represented franchisees across the country for more than 30 years. “Franchisors often reserve the right to mandate vendors, but when those vendors engage in fraudulent behavior or price manipulation, it’s the franchisees who suffer the financial loss — with very little recourse.”
Zarco, whose firm has handled high-profile disputes between franchisees and national chains, says many vendor relationships are shrouded in secrecy. “Franchisees are typically not told how much the franchisor earns from vendor deals. In many cases, they don’t even know that these payments exist until litigation or whistleblower complaints expose them.”
When vendor misconduct is exposed, the damage often ripples far beyond the dollars lost. Brands suffer public embarrassment, lawsuits multiply, and, in some cases, franchise sales dry up. “The franchisees didn’t ask for this,” said a former regional developer from a now-defunct chain. “But they’re the ones left with worthless stores and angry customers when a vendor scandal explodes.”
Recent history is replete with similar cautionary tales:
In a major education franchise, franchisees discovered that a mandated software vendor was charging exorbitant fees for outdated technology. The vendor, which had close personal ties to franchisor’s leadership, was eventually sued by multiple owners who claimed they were locked into five-year contracts for systems they never used.
A home services franchise was rocked by federal fraud charges against a logistics vendor that handled customer scheduling and routing. The vendor was found to be double-billing franchisees and laundering funds through third-party contractors. Despite internal complaints, the franchisor continued to defend the relationship until the vendor’s CEO was indicted.
A national automotive brand recently settled with franchisees after a required marketing vendor was accused of producing fake analytics and billing for services never rendered. The scandal led to significant brand reputation loss — and a class action that dragged the franchisor in for “failing to supervise and enabling systemic deception.”
What these cases have in common is a consistent failure by franchisors to vet, monitor, or act swiftly against problematic vendors. In some systems, franchisors benefit directly through “rebate” arrangements — essentially commissions paid by vendors based on sales volume. While not inherently illegal, such arrangements become problematic when they aren’t disclosed to franchisees, or when they result in inflated pricing and inferior service.
Federal regulators have started to take notice. In 2022, the Federal Trade Commission issued a notice warning franchisors that “junk fees” or undisclosed vendor rebates could be subject to enforcement. Several state attorneys general have launched investigations into unfair franchise practices — including preferred vendor abuses — in response to complaints from franchisee associations.
Still, enforcement remains spotty, and many franchisees say the system is tilted against them. “By the time a regulator steps in, the damage is done,” said one franchisee from the Midwest. “The vendor’s gone, the franchisor denies knowledge, and we’re left trying to pick up the pieces.”
Franchisors, for their part, often claim they act in good faith and rely on vendors to deliver quality and compliance. But critics argue that hands-off oversight in the name of convenience or profit can backfire. “Your vendors reflect your brand,” said a former franchising executive who asked not to be named. “If one of them cheats or steals, and you didn’t stop it, the stain spreads to your entire system.”
For many franchisees, these stains come at the cost of their livelihood. As the number of vendor-related lawsuits climbs, a clear message is emerging from the front lines of franchise ownership: It’s not just about good branding or training anymore — it’s about accountability from the top down.
