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I have a confession - which will either positively or negatively impact my credibility. You decide. My confession is that within the first six months of operating our franchised business, we lost money. Sales were actually up a little, but profits were down (even below those of the previous franchise owner, as we had purchased a franchise already in operation). That frightened me...because the previous owner got out of the business due to not making the amount of money he had planned.

Now, part of the reason we lost money is that the minute we purchased the business everything started breaking - the freezer needed repair as did the ice machine, almost half of the blenders stopped working (within days of each other), and a number of other issues quickly surfaced. We had purchased a café that specializes in smoothies (as well as a variety of wraps, sandwiches and other healthy food items), so you can imagine how important ice and blenders are! It was obvious the previous owner had stopped putting money into maintenance and he got out just in the nick of time, leaving us to foot the repair bills.

Lesson #1, if you are buying an existing business, have the seller warranty critical items for a certain period of time.

Another reason our profits were lower was differences in payroll. Sixteen days before we bought the business, minimum wage increased by $0.60/hour (almost eight percent). For those of you operating a small retail business, you know how tight your margins are to begin with. Eight percent is sizable in an all-hourly workforce.

But that wasn't all...the previous owner had been scheduling himself in lieu of one or even two employees to save money, and he'd been doing that for at least nine months (which is why it was somewhat hidden in the financials during our due diligence process - which leads me to:

Lesson #2 - ask for the last three to six months of employee schedules and worked hours so you can determine how your payroll may differ than the previous owner.

He also refused to pay overtime and paid his employees only what he scheduled them, not what they actually worked. Illegal, I know, but that's what he did. So, he ended up being taken to the National Labor Relations Board by a Shift Leader he erroneously classified as an exempt salaried employee, and paying out more than $18,000 in back wages.

Lesson #3 - know the critical aspects of employment law well enough to keep yourself out of trouble - or have an advisor who does. (Thankfully, we already knew that lesson.)

As I was lamenting about our labor percentages to the franchisor, they told me something I needed to hear - "You don't have a labor cost problem, you have a revenue problem. You need more sales, and your labor will come in line." Now, I know what you're thinking - the franchisor makes money off your sales, not your profits.

But, even so, they were exactly right. We were scheduling correctly for the business volumes (and not scheduling ourselves, because we already knew that our time was more valuable spent building the business than the $8.25 an hour wage we would save if we worked the cash register or food line).

So, we dusted off the marketing plan we had created six months prior when we purchased the business and got to work.

Lesson #4 - the business plan and marketing plan your franchisor likely had you create should actually be used - it's not just an exercise required to get approved as a franchisee.

We parlayed our modest increase in sales during the first six months to more than 8% in our second six months, and it's grown substantially from there. During the second year of operations we were up 21% in sales and another 5% up in operating margins.) How? Here are some of our high-level strategies.

  • Divide and conquer - Kriss spent countless hours in the café ensuring first and foremost that the service levels our employees provided to each and every customer was unparalleled. If we were going to spend money marketing to increase sales, we needed to make sure we would retain every customer we brought in.
  • Secondly, he learned how to maintain and service our equipment himself. It's amazing what you can find on the internet - or what your service providers will share with you. We knew that once our profitability was in line we could consider using outside vendors again if we wanted to.
  • (Note: if you have any equipment under warranty, be sure to know what you can do and cannot do personally before you work on the equipment. Also know if there are any preventative maintenance requirements to keep the warranty valid. The last thing you want to do is void a warranty. Also know what your warranties cover - your repair or maintenance may actually be included.)

I spent enough time in the café to get to know the employees, but the majority of my time was spent executing the marketing plan and handling the back-of-house functions (accounting and administrative work). If you are a solo-preneur, I highly encourage you to train your best employee to do some of this work. You probably have at least one person who wants to learn and grow and has potential to do more than they are doing (and if you don't, hire someone like that). Teach them to do the paperwork/data entry, and/or use your most outgoing employee to help execute the marketing plan. If you try to do everything yourself, or feel that you are the only one who can do it right, you will limit your success and approach "burnout" quickly.

  • Don't recreate the wheel - We scoured all of the resources our franchisor had to offer relating to marketing information and ideas. I am constantly amazed at how few franchisees use the resources available to them.
  • The fees you pay your franchisor are not just for the benefit of using the brand name - almost all franchisors have libraries of marketing materials for your use, and frankly they have a vested interest in your success and benefit from your increase in sales.
  • If you can't find what you need, call your Area Developer or Franchisor and ask for help. That's what they are there for - but don't expect them to do it for you; they are a resource, you are the business owner.

We are also fortunate that we have access to an online Franchisee Forum where any of the brand's franchisees can post questions or suggestions, and others (or representatives of the Franchisor) can comment on them. We've found some of our best ideas from other franchisees.

If you don't have such a forum, pick up the phone or personally go visit other franchisees - especially franchisees who are successful. They are generally very willing to help others because it benefits the brand. Do NOT spend a lot of time with negative franchisees.

They aren't going to help you achieve success, and remember the adage that you are the average of the five people you surround yourself with the most. Surround yourself with the best, most positive, most successful people you can.

  • Love your employees - or find new employees you can love. Your employees represent yourself and your brand to your customers. Are they doing it well? Are they doing it in a way that creates loyal customers who advocate your business to others?
  • Frankly, are you creating an environment that enables your employees to do that? How you treat your employees will almost always be reflected back on how your employees treat your customers. Want your customers to love you? Then love your employees. You often don't need new employees to do that, by the way. People are generally starved for recognition and praise. If you find things to praise your employees about, they will almost always do more to get that praise again.
  • And when you have to correct employees, do it in a way that's respectful and they will respect your feedback. We employ a lot of teenagers in our café. Think about their lives - they often have two working parents, they are digitally connected to almost everything and everyone, and they have instant access to almost everything they want to know via the internet. Their face-to-face interactions are primarily with teachers giving them direction or their parents - yet, research shows that parents today spend an average of 19 minutes a day actually conversing with their teens. That means their interactions with you have an opportunity to be the most significant in terms of the amount of adult communication they have - make that time count, and make it positive. It will make a difference in your business and on them personally.
  • Take care of yourself - If you want to have a successful business, you are going to work hard. And, there is no real substitute for you in your business. As most any franchisor will tell you, owner-run businesses are the most successful. (That doesn't mean you can't have a successful manager-run business - but no one will care about your business and your results more than you.)
  • That said, you need time away from your business, and you need to have people you trust on your team who can handle things while you're away. I have to schedule an out-of-town trip to get Kriss out of the café. Have someone who will hold you accountable for taking care of yourself.
  • And honestly, the employees need time away from Kriss as much as he needs time away from the business. Why? So they can prove they have the ability to do the right thing even when he's not there - and they feel empowered when he shows that he has that trust in them.
  • Also, if he doesn't take time away, he gets burned out and it shows. You may not think your own burn out is apparent to the people you work with, but trust me - your employees either see or at least sense it. And it impacts how the business operates and the service your customers receive. So, for the sake of your business, your employees, your customers, and your sanity, take time off. Book a trip and prepay it to force yourself if you have to.

All in all, losing money was the best thing that could have happened in our business. It was a great motivator to do things differently - actually, to do things right. In future blog posts we will expand even more on what those "right" things are.

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A very long time ago (about 15 years) I wrote about why new franchisors fail.

During that 15 year period we lawyers have "improved" upon the legal infrastructure of the franchisor quite substantially.

As you may know, the franchise legal infrastructure, a/k/a franchise agreements and FDDs, have moved significantly along the road to elimination of all legal risks for franchisors, except maybe for the more hard core thugs.

If you are not and do not intend to become a hard core thug, you might just want to read all of this.

There is still a lot of room for sound concepts to be developed into investment worthy business replication models. And the fact that in doing that your legal infrastructure has morphed into much better protection should be a positive influence for you.

After all, isn't risk reduction what this is all about after you demonstrate to yourself that you have a profitable model and that you can translate that into a profitable business for others even after loading onto it the costs of being in a franchise relationship?

The Current Franchise Landscape

Even in the old days there were dodgy franchisors:

  • They sold tons of franchises and opened very few.
  • They made profit representations that were total fiction and impossible to achieve.
  • They said things about where the business was positioned and about the quality of the support they provided that were outright falsehoods.

In the 1960s some states began enacting franchise disclosure and relationship laws modeled somewhat upon the laws regulating securities selling.

But there were also a lot of really good, serious opportunity franchisors, and a reasonably careful person with some professional help could buy into such things as KFC, McDonalds, Little Caesars Pizza, Pizza Hut, Wendy's and Burger King, among others.

Today there are many more dodgy deals being put out for investment to less able investors.

The techniques for getting around the law one way or another have become more sophisticated. Analysis of potential franchise investments is more complicated. Most lawyers shrink from giving any business advice or analysis for fear of professional liability lawsuits. Asked about an opinion whether a particular franchise is a good investment, the lawyers say that it might be if they are telling you the truth, and stop there - utterly useless.

Franchise blog sites abound on the Internet, chock a block with broke and whining franchisees on their way to bankruptcy and unable to afford legal representation. Class action lawsuits against tough franchisors take years and are rarely certified by the courts. When they are, they drone on for a few years and settle out for paying the lawyers, with the franchisee class members getting little or nothing.

Where Does That Leave You?

If you really have long term intentions regarding the health and survivability of your franchisees, it helps to build a dynamic financial model of what the business is that your franchisees have to live in.

(None of the bozos do this. They don't really care anyway. All they want is as much fast revenue as they can squeeze out of the system)

For the serious long term franchisor, departure from the IFA norm can really help you measure the health of your system.

But you have to make the franchisees send in the tax returns their agreements require anyway, and from those, you can build the dynamic financial model, making the adjustments to derive an approximate EBITDA. It is not the impossible project that the IFA says it is. 

The reason it isn't thought to be a smart move is that then you would eventually find out which franchise system in any business segment is the most profitable, and once that got out no one would ever buy any of the others in that segment. Nobody wants to be known as tail end Charlie on producing positive cash flow.

The IFA also fears that such activity will one day lead to compulsory financial performance disclosure, which is a distinct possibility only if the IFA lobbying arm, Franpac, runs out of money.

So it is a bit of a dilemma. You really cannot count on the information not getting out. On the other hand, since the franchisees will soon be doing this for themselves, there is little justification for you to deprive yourself of the information. Dynamic financial modeling will enable you to see what the traffic can bear and continue to have positive, meaningful yield potential for your franchisees.

If your franchisees start a lawsuit or arbitration proceeding using dynamic financial modeling to show that you are tearing the financial heart out of the business they invested in, you would have to build your own model to dispute theirs, and yours might have to be rather contrived and convoluted in its attempt to show that theirs is not reliable.

Econometric modeling of markets has been used for decades in antitrust litigation, to positive effect. The government lost its first merger case under Section 7 of the Clayton Act because the target defendant used competent econometric modeling. The same thing soon after that happened when the FTC lost the breakfast cereal oligopoly case. I know because I brought econometric modeling into both those cases.

Financial Models for Franchise Systems

Financial modelling of franchise systems is not more complicated than that.

The universal solvent would be a cooperative project that produces a really high value dynamic financial model. That, as we say in Texas, ain't gonna happen.

Franchisors that operate numerous company stores, if they are going to consider this, should have a separate financial model for the company stores. While it may lack positive sales information potential, the ability to compare company owned versus franchisee owned financial results probably would yield marketing information. It would show what we have always believed to be true, that absent artificially imposed barriers to positive cash flow, franchisees really do better than the company does in producing cash flow.

But the really important value of dynamic financial modeling would be that it would tell you when you are approaching marginalization of the franchisees through add on extraneous periodic charges. If you went just one step further, you would also know your franchisees' debt structure profile and would be able to determine what they can afford in terms of remodeling the stores and even to prearrange the financing of large projects before you impose them.

Lenders pay commissions to those who bring them large deals like that.

In this interim before everyone is doing it, you can designate all information regarding financial modeling to be a highly secret body of information and treat it as such. If you designate it secret but everyone in the company has access to it, you are just kidding yourself. If more than five people have access to it you can forget confidentiality. The grunts who churn the basic data can be controlled if you don't fire them every now and again.

Attitude Issues

No franchisor is ever going to be loved by her franchisees. That is axiomatic. Within a year or two of becoming anyone's franchisee, the attitude becomes one of disbelief that there is anything special or unusual in being your franchisee.

They believe your support sucks and that they are getting little or no value from being affiliated with you. How virulent this attitude is will be the only variable. If you don't have a competent information management protocol in place your franchisees will rob you blind. There are just as many cheating franchisees as there ever were dodgy franchisors.

Back in the days when franchisees filled out monthly paper sales reports, the audit of their actual performance was their biggest fear. Of the literally hundreds of depositions I took in cases having to do with under reporting terminations, not one franchisee was ever under reporting unintentionally.

Some of the stories of whining franchisees and what they were charging to the business would make your eyes roll back. One franchisee in Florida was writing off a twin engine airplane against the revenue of a print shop with a three mile territory. His lawyer went ape when that part of the examination happened. Lawyers rarely make the effort to understand the finances of their clients before the horse leaves the barn, and clients never tell you where the bad stuff is hidden. If you don't find it yourself, you can usually bet that your opponent will.

Since you will never be loved in franchising, your contentment will come in providing a working positive cash flow franchise model from which you will become wealthy. If you need more than that, well, be prepared for large legal bills.

The Ultimate Franchise Solution

The ultimate franchise solution for anyone wanting to begin or expand a franchise system is to provide a concept that you have field tested and proven to be revenue credible in a franchise mode, and then to continue to measure its financial performance through dynamic modeling. To be sure, you will also have to improve its appeal to its customer base, but that is what you tell your franchisee prospects that you do best. It helps is that is true.

(I am publishing another article about the risks of becoming a franchisee. If you read that you might be offended. Franchisees who see that I drive both sides of the franchise road often criticize me for that, and some franchisors wouldn't touch me with a stick because I represent franchisees too from time to time. I never worry about that, but be aware that I see this business from both sides all the time, every year, year after year. My feelings about franchising are really love - hate, but that is because I wish I could make it better and that people could more safely invest in franchise opportunities.)

As always, you can call me, Richard Solomon,  at 281-584-0519.

Two and half years ago, I wrote about the class action in Tim Horton's -part based on interviews with the class action representatives.

Now, that Burger King intends to buy Tim's, I thought it was useful to revisit the post.

Because the Burger King has an independent franchisee association, while Tim Horton's does not. Yet.

The result of the franchisee's class action lawsuit being dismissed is that Tim Horton's, the franchisor, lost a major business battle. In a rare summary judgment motion., the reasons for the judgment, part 1 and part 2 can be read here, a motions judge dismissed the franchisee's class action.

But, now Tim's will now struggle mightly to get same operator expansion as a result of this legal victory.

Like any mature franchisor, Tim's relies upon same operator expansion for its growth. It is fortunate to have a substantial number of operators who have grown with the system from near the beginning.

Sophisticated operators know that franchise operations need modification and changes. And Tim's is no exception. This type of operator needs to know how to plan and budget for such changes, paying for them in part by the expected increased return.

But, now that planning process is riddled with uncertainty.

In 2002, after considerable debate with its franchisees, Tim's introduced a centralized baking system. Tim's baked centrally and shipped frozen products to its stores. (Only in Canada could one say with a straight face that these baked goods were "Always Fresh".)

The par baking facility was funded by the TDL Group and constructed by its joint venture partner, IAWS. These joint venture partners contributed approximately $95 million (US) in 2002.

During 2002 to 2009, the 3,000 franchise owners collectively contributed approximately $100 million (Can.) for store modifications, without which the joint venture partner's par baking facility would be useless.

At issue in the class action lawsuit, was whether either the franchise contract or the equity of fair commercial dealing required that the return on the joint venture partnership be commensurate with the return on the franchise owners collective investment.

This would appear to be a difficult question of fact and law requiring a trial.

But, the motions judge handed Tims and TDL, a complete legal victory yet possibly a business disaster.

As reported by Robert Thompson, who wrote Ron Joyce's biography, the founder of Tim Horton's,

"Stores had once made upwards of 20-percent margins, a windfall for the mom-and-pop shops that were often operated by pioneers who entered the business in the early 1970s. Margins fell under Wendy's management, and Joyce was concerned they would continue to decline after the IPO, which is exactly what Jollymore alleges was the case.

These days, those close to Joyce say stores are lucky to make 13 percent, a steady decline from a decade earlier."

Sophisticated operators like the representative plaintiffs, the Jollymores, know now that the franchise contract doesn't require any equitable sharing on the returns made as the result of the franchisee's collective investment of new capital.

The Court sanctioned unfairness will make it difficult for Tim's to continue to grow with same operator expansion.

Analysts of the public company may wish to reflect on another franchisor who spurned same operator expansion - Jackson Hewitt. Bankruptcy looms nearer when the experienced franchisor operator as a group doesn't expand. The Jackson Hewitt franchisors did not share equitably with the franchisees the fruit of the Refund Anticipation Loan program, "RAL". The franchisees refused to expand the system, and so when the franchisor needed their support it wasn't there. The franchisor needed the franchisee's support for expansion when the RAL program was gutted by the IRS.

We can hope that the Jollymores, Ron Joyce, and the other franchise owners will now see the wisdom in what Colonel Sanders saw many years ago when he imbude his franchise owners with real protection - for the betterment of the franchise system.

"When Colonel Sanders sold Kentucky Fried Chicken, he feared his franchisees would lose control of their own businesses and the future that they were working toward and in which they had invested.

So he encouraged them to unite to protect the franchisees that he considered part of his own "family" and to give the franchisees a voice in the future development of a concept which would prove to be far greater than was envisioned at the time.

This brought about several small meetings with early franchisees and in 1965 the Southeastern Kentucky Fried Chicken Franchisee Association was formed and formally organized in Atlanta, Georgia.

Ten years later, the AKFCF (our national association) was incorporated in the same city.", from the Association of Kentucky Fried Chicken Franchisees website.

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First up, I need to congratulate Greg and his team. The Franchise Excellence Research Report is clearly the result of a mammoth research effort. In turn, the output has significant implications for profiling, targeting, selecting, supporting, managing and leading franchisees.

The research pulls together dimensions of four key concepts; namely franchisee performance, franchisee satisfaction, franchisee psycho-social factors, and franchisee bio-data (a mixture of franchisee demographics and operating facts). Bottom-line, the report seeks to better understand the drivers of franchisee satisfaction and performance.

Each concept comprises a multitude of variables. As examples:

Franchisee performance gives consideration to financial achievement, customer experience, and the extent to which the franchisee behaves constructively within the network;

Franchisee satisfaction comprises 10 different measures ranging from work satisfaction, and franchisor trustworthiness to intentions to remain;

Franchisee psycho-social attributes comprise 16 variables including, for example, brand passion, pro-activity, sale orientation and vigour; and finally

Franchisee bio-data, ranges from age, gender and education, to franchise tenure, hours of work, literacy and original franchisee motivations.

In total there are more than 45 variables, giving rise to lots of interesting correlations to consider. I also have to acknowledge the considerable work on scales underlying each variable. Not a 5-minute job by any stretch.

The dataset comprised just upward of 1,800 mostly Australian [and a few New Zealand] franchisee responses covering measures of franchisee satisfaction, psycho-social and bio-data factors. These were then matched with circa 1,600 franchisor responses categorising individual franchisee performance, behaviour, and, the likelihood they would be selected again (by the franchisor).

Overall there are over ten separate chapters exploring the impact of one category of variables on another. I have to admit, my appetite was firmly whetted by the half way mark.

With such a large array of concepts, dimensions and variables, I'd describe the report as a data mining exercise - with a focus on identifying and displaying significant relationships.

Three chapters I found particularly interesting include:

Chapter 5: The relationship between psycho-social attributes and performance. Here we find especially interesting correlations between franchisee self-reported measures of brand passion, family & social support, positive outlook, sales orientation and pro-activity on franchisee performance and/or the franchisor's decision to re-select the franchisee in hindsight.

Brand passion, in turn, was interesting because franchisees with low brand passion were, amongst other correlates, less likely to participate in franchise network activities, comply with operational systems, and, promote their businesses locally.

Chapter 9: Impact of background and demographic factors on performance and satisfaction. Here you might be interested to know that male franchisees make more money than women franchisees and are more satisfied with their financial performance.

Meanwhile, female franchisees make better franchisee citizens and are rated higher on measures of constructive participation. In another separate example, we witness the significant and important impact English as a Second Language can have on each aspect of performance.

Chapter 13: How franchisees differ by industry type. Whilst the six industry categories discussed (Retail Food, Retail Service, Retail Product, Mobile Sale, Mobile Service and Business to Business) no doubt roll up a diverse range of businesses, and the data sets were sometimes individually small, there were some very interesting insights.

Many of the insights related to demographic or bio-data like, as examples, the facts:

22% of responding Retail Food franchisees worked more than 60 hours per week, compared to the next highest, Retail Product at 15%.

Mobile Service involved the least at 5%.

Retail Food on average hired 25.2 staff, compared to 9.9 in Retail Product.

Analysis of franchisee psycho-social factors and performance by industry also yielded interesting differences. As examples, brand passion, family & social support, and intrinsic motivation were the top discriminating factors differentiating between high and low performers for retail food.

By contrast, for Mobile Sales, key differentiators were leadership potential, comfort with technology, and intrinsic motivation.

But no finding hit me between the eyes like this one: That is the finding that franchisees with postgraduate university qualifications make significantly less money than franchisees featuring a high school only education. Clearly no franchisor in their right mind would select me.

This isn't a book for the light of wallet. The price is AU$790. However, you do need to expect that given the density of information.

Those deeper thinking Franchise Geeks will get more out of the book, as it does requires some interpretation, consideration and contemplation. Some ideas may also require consultation before application.

Congratulations again to Greg and the team at FRI. With more than 70 charts (often comprising multiple variables), and considerably more analysis to boot, this is a monumental and valuable piece of work.

You can purchase the book here

Jeff Johnson of Fran Survey has a short executive summary of their recent review of franchisee satisfaction at Comfort Keepers.

"The survey asked Comfort Keepers franchisees to rate their franchisor through a series of questions regarding overall growth potential, quality, support, communication, and other important areas. 

The results, according to Johnson, show that Comfort Keepers has an enthusiastic, energetic franchisee community of which 92 percent agree that their franchisor understands that if the franchisee is successful, they will be as well. 

According to the FranSurvey system, Comfort Keepers achieved a positive rating from 94 percent of its new franchisees for 'initial opening support,' while 95 percent rated the 'initial training' provided by the franchisor as positive. 

"It takes a quality franchise system to achieve this high level of results," added Johnson."

I would encourage individual interested in this system to spend the $25.00 and obtain the entire survey. 

Then my preference would be to de-construct it by focusing on only two answers: the best and worst.  Aggregating survey answers is often misleading.  The difference between awarding a franchise a top mark, say a 5, versus the next top mark, say a 4, is very large.  Looking a raw scores of best/worst and how they vary overtime gives a broader view of franchisee satisfaction.

Franchisee satisfaction surveys should be conducted by the independent franchisee association as another method of gaining valuable intelligence with which to communicate to the franchisor. 
 
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