PIRTEK USA Franchise: Not All Leaps of Faith End Well
PIRTEK USA and similar franchisors can apparently require that franchisees purchase non-proprietary products from them at whatever price the franchisor feels like charging. After having a strange dream about the worst COSTCO renewal offer ever, I ask former franchisee Jim Lager why any rational person would sign up for such a deal. By Sean Kelly
The other night I dreamed that a sales rep pitched me on a new buying club membership program.
“The yearly membership is very high for this exclusive program,” said the sales rep of the COSTCO/Sam’s Club-like store. “And members must agree to purchase ALL of their food and household items from us or face severe legal repercussions.”
There was a long silence as I waited for him to continue.
“Yes, and…” I stated.
“That’s it,” he said. “That’s the opportunity.”
Confused, I said “Will your store guarantee that they’ll provide the lowest possible prices?”
“On, no,” laughed the salesman. “In fact, the prices you’re required to pay will, in many cases, be higher than you can get at the supermarket or Wal-Mart.”
When I woke up, I laughed “That was a crazy dream. Why would anybody pay to be in such a program?”
Then I realized I had fallen asleep while reading the 2020 PIRTEK USA Franchise Disclosure Document (FDD).
PIRTEK USA Franchise: Pay to Access Our Higher Prices?
Earlier that day, I had interviewed former PIRTEK USA franchisee Jim Lager. PIRTEK USA franchisees provide sales, service and repair of hydraulic hoses and related products for industrial, construction and municipal clients. Until recently, Lager had been one of the top PIRTEK franchisees. His franchise served the Dallas market with both a storefront and a fleet of mobile service vans.
Lager had emphasized how important it is for prospective franchisees to understand how their franchisor makes its money. He claimed that franchisees who didn’t understand the franchisor’s business model (and that their first priority is franchisor, not franchisee, profits) is setting himself (or herself) up for disappointment and, likely, failure.
So I dug into the FDD of his former franchisor to see what he meant.
At first glance, the fees detailed in the 2020 PIRTEK USA Franchise Disclosure Document (FDD) seemed pretty standard:
- Franchise fee of $50,000 (Tier 1 franchise),
- Royalty of 4% of gross sales,
- Marketing fee of 1½% – 3%
And then there are supplemental fees, like the “Computer System Fee/Data Transfer” fee of $650- $2,675 per month and “GPS Tracking Fee” of $100 per van, per month.
PIRTEK USA Earns When its Franchisees Spend
But in the Item 8 section of the FDD (RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES), PIRTEK USA discloses that most of its revenue (over 85%, in fact) is derived not from its franchise royalties, but from the products that it marks up and requires its franchisees to buy at prices PIRTEK USA alone determines.
Does PIRTEK USA promise franchisees it will provide favorable pricing?
To the contrary. Both the FDD and FA state: “We derive revenue from the sale of Inventory Products and other non-inventory items to you by charging more than our wholesale purchase price from the manufacturers… In many instances, the cost of the Inventory Products and other non-inventory items to you may be higher than the cost of other hoses or other similar products on the market.”
Does PIRTEK USA only mark-up proprietary products it manufactures?
It appears that PIRTEK USA is not a manufacturer nor does it have proprietary products. It simply sources generally available products, marks them up, and sells them to their franchisees.
So… PIRTEK USA uses the combined buying power of its franchisees to negotiate the best pricing and pass the savings on to… itself?
It appears so…
In 2019, more than $20M of PIRTEK USA’s total revenue of $24M was derived from “the sale of Inventory Products and other items” sold to its PIRTEK USA franchisees… many times at prices higher than they could have purchased elsewhere (according to their FDD).
In addition to marking up the required products as it pleases, the PIRTEK USA franchise agreement also gives the franchisor the right to charge franchisee vendors fees up to 20%, and to receive rebates from approved suppliers.
Do PIRTEK USA Owners or Executives Own an Interest in Any Approved Suppliers?
I wondered: Do PIRTEK USA owners or executives own a stake in the other suppliers of goods and services to PIRTEK franchisee? The PIRTEK USA FDD says no:
“Except for an officer who has an indirect ownership in the franchisor, no officer of the franchisor owns an interest in any approved supplier as of the date of this Disclosure Document.”
However, the PIRTEK USA FDD cover page states, “no government agency has verified the information contained in this document.” As always, it’s up to franchisees and prospective franchisees to do their own due diligence and verify the accuracy and truthfulness of what franchisors disclose in their legal documents.
Would Former Franchisee Jim Lager Sign Such an Agreement Today?
Honestly, I have a hard time understanding why anyone would sign a deal that appears to give a franchisor total control over their profitability on non-proprietary products.
I’ve known Jim Lager for several years. He’s a smart businessman and a top performing franchisee. I asked him why he would sign a franchise agreement that allows a franchisor to charge even unconscionably high prices if they choose to.
“When I joined PIRTEK USA as a franchisee, many years ago, I felt that the franchisor ownership and leadership team was very trustworthy,” said Lager. “I took them at their word that they would enable franchisees to operate at a fair margin. Becoming a franchisee always requires somewhat of a leap of faith. I felt that, in this case, it was justified, it was a leap worth taking.”
With hindsight being 20/20, I asked Jim Lager if he still thinks that the PIRTEK USA agreement he signed was a good one.
He declined to answer that directly.
“It was a different time, a different situation and a different franchisor back then,” said Lager. “I don’t regret my decision or my time as a PIRTEK USA franchisee. It was a great learning experience. But both the ownership of the PIRTEK USA franchisor and the leadership team have changed from when I joined.”
Would he put that kind of trust in PIRTEK USA, or any franchisor, again?
“Well, let’s put it this way,” said Jim Lager. “I’m a former franchisee for a reason.”
FRANCHISE DISCUSSIONS by Company
Jim Lager: Why Smart Franchisees Fail (Series Index)
Franchise Ownership? There’s No Such Thing
PIRTEK USA related:
As Pressure Mounts, Franchisee Associations Push Back
PIRTEK USA Letter to Kim Gubera, PIRTEK CEO
ARE YOU A PIRTEK USA FRANCHISEE OR CORPORATE EMPLOYEE? OR INVOLVED WITH FRANCHISE THAT MARKS UP PRODUCTS TO FRANCHISEES? SHARE A COMMENT BELOW.
TAGS: Pirtek franchise, Pirtek USA franchise, PIRTEK franchise opportunity, PIRTEK franchise complaints, PFS, mobile hose franchise, hydraulic hose franchise opportunity, PIRTEK complaints, Kim Gubera, Peter Duncan, Glenn Duncan, Jim Lager, Sean Kelly, Jerry Marks, Marks & Klein, franchise tying, franchise required purchases, unhappy franchisee
2 thoughts on “PIRTEK USA Franchise: Not All Leaps of Faith End Well”
That is crazy.. you would imagine a law should exist that protects franchisees from unreasonable pricing practices from franchisors.
It sounds like Pirtek don’t even make any products, they are just ordering and delivering somebody else’s products. Surely they should only be allowed to impose a small mark up for that kind of service?
Thanks for your comment, Tim.
I don’t know what PIRTEK’s mark-up on non-proprietary products is, or what their justification is, or whether it’s reasonable or not. And I’d also like to hear from others how common this has become. I’m sure PIRTEK USA is not unique in this practice.
What strikes me is the tremendous power franchisees grant franchisors in these agreements. No one would sign up for a COSTCO membership that requires members to buy everything from them at prices they alone determine – or get sued. It would be a laughable offer. Yet that’s what franchisees are agreeing to, it seems to me.
It also strikes me that they already anticipate the franchisee learning that the franchisor does not commit to providing lower prices than they could get elsewhere. My question as a franchisee would be: If I can get the same product cheaper elsewhere, and be able to sell it more profitably, why am I not allowed to?
We all know that these agreements are one-sided, but it seems that they have become even more extreme. Many good and fair franchisors never exercise the full power they have in the agreement unless necessary. But, franchisor companies are sold and one should know that the fair and trustworthy franchisor may not be there for the entire term… but the onerous restrictions will remain.