Franchisee’s can sometimes successfully challenge and win in arbitration and court battles with their franchisors.

Subway’s founder Fred DeLuca lost his appeal to overturn an arbitration board’s decision that awarded Rottinghaus and Dowell, two midwestern Subway franchisees, $150,000 each. In 1997, DeLuca apparently didn’t want the two franchisees to be elected to the board of the Subway Franchise Advertising Fund, which distributes advertising money to Subway stores across the country. In 2001, the arbitration panel concluded that DeLuca violated Connecticut’s Unfair Trade Practices Act by pressuring the board to cancel the election and resolve new rules that prevented the two men from running.

It only took 8 years for this grievance to reach a final conclusion 😉

New smoothie franchises seem to be opening as fast as Starbucks and now Chipotle’s. Unlike coffee, a “smoothie” is not a staple of the American palate and never will be. Nonetheless, the smoothie business has been hot lately with the likes of Jamba Juice (who reinvented the market), Smoothie King, Maui Wowi, and Planet Smoothie dominating the marketplace. They’ve been riding the omnipresent “health” wave by using tasty fruits and vegetables and vitamin powders in their potions. But how long will smoothies be perceived as healthy? You should be asking that question if you are thinking of buying a smoothie franchise.

Just as financial markets always returning to the equilibrium, so do businesses. Eventually the product will commoditize, the market will saturate, and prices will drop (See the sub sandwich market).
The process can be accelerated by negative news, just as the low carb movement (which I followed for a while) subsided.

For example, if the national spotlight continues to highlight the high calorie count of smoothies defeating the impression of a healthy alternative to fast food, same store sales will suffer leaving smoothie franchisees with a lot of silent blenders. It’s already happening in the United Kingdom.

Mississippi’s The Sun Herald reports:

Thinking of ordering a smoothie for a healthful light snack between meals? Although these sweet fruity treats can be low in fat and rich in vitamins and nutrients, such as calcium and vitamin C, they can have a lot of sugar and calories. For example, a medium-sized Citrus Squeeze from smoothie chain Jamba Juice packs about five times as much sugar (103 grams) as a regular-sized Hershey’s milk chocolate bar (22 grams). It has 470 calories – more than a McDonald’s double cheeseburger (460 calories). Instead, try a lower-calorie smoothie option like of one of Jamba’s “Enlightened” smoothies.

The Wall Street Journal has an interesting article profiling an in-home elderly care franchisee.

Home Instead and the other senior-care franchisees pay caregivers somewhere between $8 and $12 an hour and charge clients about twice that amount. In the highly competitive Chicago market, the Melingers charge clients $18 an hour, with a minimum of two or three hours a day, or $180 a day for 24-hour care. They also provide a “rise and shine” or “tuck in” service, for $200 to $280 a week.

The Melingers declined to reveal just how lucrative their business is, but FranchiseHelp, a consulting firm in Elmsford, N.Y., provides some guidelines for similar businesses. In 2002, for example, a franchisee of Homewatch Caregivers in Denver, with 60 workers, took in gross revenues of $1,265,324 and paid out $1,141,578 in expenses that included royalties and the franchisee’s salary, leaving a profit of $123,746.

Their isn’t inventory to deal with, which is very nice. But that time is otherwise spent on finding and hiring responsible people they trust enough to send into an elderly person’s home. The franchisee said almost 1/2 the people don’t even show up for the their interviews and many quit after a few days. Ugh!

If you can maintain a steady staff, you can easily open a 2nd conierge style business, which we discussed perviously.

I’m neutral on elderly care franchises right now because they are heavily commonditized business (the market controls the fee level, it’s hard to charge more than $18/hr with all the competition). I am also hesitant when so much depends on finding qualified low wage employees that must work independently (unlike a retail location where managers can monitor what you do).

A few months ago we reported that Lenny’s signed a deal to open 125 Lenny’s Sub Shops in South Florida. Now the company is working on 80 franchise restaurantsin Texas.

The 80 new stores will be developed in Texas’ Fort Bend, Harris and Montgomery counties.

Len Moore (the “Lenny’s” in “Lenny’s Subs”) and his wife Sheila opened the first Lenny’s Sub Shop in Bartlett in 1998. Since then the company has spread like wildfire, making the move to franchising in 2001. The company currently has 63 franchise restaurants, with more than 300 franchises in nine states on the way, hoping for 500 by 2008.

What were you doing in 1998? Going from 0 to 300 franchises in 4 years is quite an accomplishment. How many more sub franchises can the market handle? The founder has extensive franchise restaurant industry experience. He held management positions with a number of companies including Chick-Fil-A, TGI Friday’s, Olive Garden and Ruby Tuesday’s.

We’ve mentioned Lenny’s on Franchise Pundit a few times before.

According to this 10-Q filed with the SEC by Papa John’s, average franchised store sales are 705k annually.

Papa John’s franchisees did increase sales 3.9% last quarter (Jan-March) compared to the same quarter last year.

Average weekly sales of franchised units: $13,563 ($705,276 annually)
Average weekly sales of company-owned: $15,075 ($783,900 annually)
* Why are the company owned stores outperforming franchisees by 11.15%?

The 10-Q speaks of one franchisee who sold his 19 restaurants with total annual revenues approximating $12.0 million ($631,578 per store) to a 3rd party. The restaurant sales were lower than the average by 11% or $70K, enough to obtain a loan writeoff from Papa John’s.

This isn’t good:

Domestic commissary sales increased 6.7% to $100.9 million for the first quarter of 2005, from $94.5 million in the comparable period, primarily due to higher cheese prices that were partially offset by lower volumes resulting from decreased restaurant transactions.

and this:

the first quarter 2004 operating margin was negatively impacted by the increased sales of lower margin promotional products

and this:

One group of 4 franchisees owning 33 franchises generated a $25,000 loss on $5.2 million of revenue, $4.6 million in operating expenses and other expenses (including G&A, depreciation and interest) totaling $600,000. Papa John’s also provided them with a large loan.

I do love their garlic dipping sauce for the crust that is included with each pizza!

Update 6-18-2005: Thanks to “Accountant” who in the comments pointed out my miscalculations. The post has been updated, including the title.

Update 6-19-2005: Thanks to “Ken King” who in the comments pointed out another miscalculation on my part. The post has been updated.

Should you buy a franchise, or start your own business? After reading this you may not be so scared to start your own.

Let’s assume you have decided to start your own "coffee and sandwich cafe" instead of buying a franchise. The franchise fee would have carried a $30,000 and a 7% royalty on gross sales. Here is one way to proceed with your business and fee savings:

1. Take the $30,000 franchise fee and invest $25,000 in the market or real estate. With compound interest of 11% over 20 years, you’ll have over $201,000 nestegg to retire on. Take the other $5,000 and hire a franchise or business consultant to help you build out and set up operations.
2. Let’s assume you’ll spend the equal amount on advertising as you would have with the franchise, say 4% of sales. Assuming your sales are $400,000, that is $1,333 a month on advertising. How about you spend that plus an additional $2,333 ($3,666 total) on local promotions and media buys to build your own brand awareness? You can with 7% or $2,333 royalty you’ll be saving. That can go a long way considering radio spots and many TV spots can be had for less than $100 per spot. Many small businesses would salivate to have a $3,600 advertising budget each month.
3. By cutting out the premiums you pay to the franchisor for supplies and food, you can spend that money on an extra employee to help during high traffic hours or on creative consultants to help with advertising and promotions. In other words, you can invest that money in building a customer base.
4. Take the franchise fee you must pay to renew your franchise every 10 years (some are only 5 years) and invest it in a consultant to help build your business further. Or, if you have been obtaining feedback and outside and you are certain there is nothing left to improve, use the money to pay yourself a bonus.
5. Altenatively, if the business is stable and advertising has proven not to pay off, you can pocket some of the royalty money. But, I’d wait a few years until the business is well established.

What you are giving up by not buying a franchise:

• a method to operating a business and buying inventory that has been shown to work
• existing brand awareness
• pooling advertising dollars with other franchisees
• knowledgable resources (though they are obligated to maximize their profits, not yours)

What you gain:

• Freedom in all aspects of operating your business, from site selection to operations
• Easily sell the asset (your business)
• Lower cost inventory (no franchisor markup or required suppliers)
• Higher rate of reinvestment of gross sales into business
• Investing the franchise fee can provide a nice retirement safety net

One big reason franchises succeed more often than startups is the franchisor requires discipline — discpline in capital requirements, discipline in advertising and operations. If you have the discipline, you can succeed on your own.

We report, you decide 😉

We already talked about Manly haircuts, now lets look at Kids haircuts. You already know that we like salon franchises because they are simple to operate, it’s fairly recession proof, labor costs are low and supplemented with tips, no perishable supplies, brand loyalty has been low in the past with Fantastic Sams and Best Cuts types being identical, and kids "experience" business are here to stay. Getting your haircut is usually not an experience one normally looks forward to, that why we believe themed salons are a great hook.

This is especially true for kids haircuts. Kids are all about the "experience" and have undeserved power in deciding where to go. Here steps in Snip Its. Check out their web site for a sense of how creative the place is designed. They cater to children of course, but also accomodate parents so the whole family can get their haircut simultaneously.

What are some special and creative attractions at this kids salon?

Glamour Parties
Snip-its Glamour Parties make girls gorgeous! A glamour party allows girls to act like divas for a day by offering hair braiding, curling and styling as well as nail polish and make-up application. Dressy clothes are provided to complete the look. The culmination of the party is a stroll on the catwalk followed by cake and favors provided by Snip-its. Snip-its even provides a camera to capture all of the fun.

Style-a-Doll Parties (Launching at Snip-its this summer!)
At Snip-its’ Style-a-Doll Parties, attendees each receive a doll inspired by Snip-its’ trademark characters, the Clipette sisters – Marlene and Charlene. The dolls have been specially created so that birthday guests can style their hair with hair clips and accessories and apply Snip-its’ cosmetics that are designed for use on the doll. Stylists are on hand to help the girls with the styles and teach them about their own grooming and styling. The girls get to bring home the doll as well as the makeup goodie bag as part of their birthday party package.

Upon entering the Snip-its salon, parents and children step into a magical, engaging, cartoon world of adventure characterized by floor-to-ceiling cartoon murals, splashy vibrant colors, music from the Snip-its soundtrack and larger than life animated cartoon characters, including Flyer Joe Dryer, Maranga Mirror, Curly Comb and Snips.

Sounds like a fun place, eh? I cannot vouche for the operations or profitability of a franchise like this, but salon-haircut franchises are typically relatively easy to operate profitably, and this one has an especially timeless and engaging theme that gives Snipits a sustainable competitive advantage. The idea is fun enough to take to local schools and charity events for extra promotions and profits. I think this is easily one of the top franchise I have reviewed so far. I’d buy it!

I rarely deviate from franchise talk, because that is what people come here to read. But, I just watched this heart touching tribute to former President Ronald Reagan on the 1-year anniversary of his death. I recommend people watch it regardless of their own political affiliation. Sometimes we need step back from business and keep perspective about what is truly important in life. Reflecting on great Americans can sometimes help us in that personal journey.

Some franchisors allow their franchisees to conduct their own promotions. Be especially careful of "free" coupon giveaways in whatever form. Subway is ending their free sub card (you need to get a certain number of stamps and you get a free sub).

There are some good Quiznos comments and debate about what are appropriate expenses.

CLICK HERE to see it.

read more Franchise Pundit posts on Quiznos…

Discount hair cutting businesses such as Best Cuts and Fantastic Sams have always been remarkably profitable ventures. Two years ago a lawyer I knew purchased a Sports Clips franchise for his wife to run. He’s a smart and guy and did a lot of due diligence before hand. I can see how a themed hair salon for men featuring sports, large T.V.s, news, and manly decor can attract a steady flow of men willing to pay an extra $5 for a haircut. There’s even one called Roosters Men’s Grooming Centers that describes their business as the following:

Stocked with leather chairs, men’s magazines and TVs tuned only to news or sports…Customers at Roosters get a free beverage of their choice (including beer) and a free shoeshine. For many services such as hair coloring and waxing, separate rooms are used for privacy.

Is a guy more likely to go to a place with big screen TVs blasting sports and news, and specially catered mens attributes? Of course. Is it more fun for a dad to take his kids there for a cut? Yes. I’d strongly consider buying a franchise in this mass appeal niche, especially over the traditionals – Fantastic Sams/Best Cuts/Hair Cuttery/etc.

With the housing market booming, bypassing and undercutting real estate commission is becoming increasingly popular. It’s even catching on in Canada with PropertyGuys.com. In the USA, the leading franchise is probably Help-U-Sell.com with 750 independently owned and operated Help-U-Sell Real Estate offices. Help-U-Sell is a fee-for-services agency that can provide all of the services of a real estate firm, or just select a basic service package for a flat $3,000. The company provides all signage, advertising and negotiations. Sellers are encouraged to show their own properties and hold open houses. There are both fans and critics of the a-la-carte real estate helpers where you pay a flat fee.

Paying a 6% commission to a real estate broker on a $500,000 home is $30,000. Alternatively, for under $5,000, you can hire a real estate attorney to represent you for a $600 flat-fee and pay Help-U-Sell $4,000 for signage, MLM listing and price negotiations. Heck, you can also post a small ad in the local newspaper and on eBay for another $100.

Here are 2 more good articles: One, Two.

I think Help-U-Sell is hot and deserves your attention, especially those interested in real estate. I’d buy it!

According to this press release, Educational Outfitters is opening 6 new stores. We reviewed this franchise before on FranchisePundit.com, and we concluded it was one of the better franchise ideas, focusing on an often ignored and segmented market. We gave it an “I’d buy it” positive rating.

in reference to: Doctor’s Assoc., Inc. v. Stuart

This above case from 1996 illustrates many of the horror stories you read on this blog, particularly site selection and mandatory arbitration clauses.

Site Selection:
Several Subway franchisees sued Subway corporate for basically screwing them on site selection.

First a little insight into Subway’s site selection process described in the court’s opinion.

After a Subway franchise is purchased, Subway helps the franchisee to find a site for the Subway shop. If Subway approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with Subway (red flag!).

In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. Subway corporate allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked Subway corporate for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois.

Subway corporate then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants’ objections, Subway corporate made Defendants locate their second Subway store in Granite City, less than two miles from Defendants’ first store. The opening of this second shop cut into the sales of Defendants’ first Granite City shop.

Subway corporate is your landlord. They can dangle an eviction notice in the face of franchisee to compel desired behavior. If Subway had the franchisee’s best interests in mind, that franchisor-landlord relationship could work in theory. Intuitively, you would think that maximizing the franchisee’s profits would maximize Subway’s profit, right? Wrong. (see The hidden ways franchisors make money off franchisees)

Arbitration Clause:

So you think, "If they try to screw me, I"ll sue them!", right? Well, you can’t because like most franchise agreements, the Subway franchisees agreed to settle disputes using an arbtration service instead of the government courts:

Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by arbitration

Convincing a judge the arbitration clause is unconsciounable is a very high hurdle, but can be done as Rob Boulter has done recently in California representing Mail Box Etc. franchisees.. That means you have to argue your case in front a “unbiased” private arbitration company. Ironically, arbitration companies compete verociously for Subway’s business. If Subway thinks the arbitration company is unfair, it can contract with another arbitration company. In arbitration, there is no jury, few evidenciary and discovery rules, and the outcome is binding. You can sue them if you find a technicality in the contract (which the case above found in the Sublease Agreement which did not contain an arbitration clause like the Franchise Agreement).

It looks like the Quiznos franchisees are not standing by in the face of apparent fraud:

The primary allegations of the complaint are that the franchisees were harmed by the company’s "deceptive recruitment practices" and "failure to deal in good faith" when it took franchise fees from the plaintiffs, but refused to approve locations to open Quizno’s stores. In addition, the complaint charged, Quizno’s has refused to return any portion of the franchise fees, even though the plaintiffs paid more than 18 months ago and are now being threatened with termination.

and more general comments…

Commenting on the lawsuit, Susan P. Kezios, President of the American Franchisee Association, said, "This lawsuit is a classic example of a popular franchise chain using its brand name recognition to deceive hard-working Americans into investing their dollars to grow a franchise. Bob-the talking baby in Quizno’s current media campaign-is definitely talking out of both sides of his mouth in this case."

Added Klein: "It is unfortunate that not enough people are aware of the abuse that franchisees often endure at the hand of their franchisors. Too many entrepreneurs automatically assume that buying a franchise is a safe investment. We are confident that we will prevail in our lawsuit, and are eager to finally bring justice to the franchisees who were victimized while also alerting people who are interested in purchasing a Quizno’s franchise to make an educated decision.

I don’t have a comment from Quiznos, but I’d assume they deny the allegations. Still, Quiznos claims to open a new franchise every 16 hours. Have those franchisees all done enough due diligence to uncover these allegations of fraud? I fear they are too eager to hand over the $25,000 franchise fee.

Even if this lawsuit turns out to represents a relatively small percentage of franchisees, I would never buy a franchise from a company who would keep an entire franchise fee after refusing to timely approve site selection. Perhaps Quiznos has a logical explanation, but I find it hard to believe so many franchisees in the same city would have the identical claims of fraud. Our legal system allows freedom to contract even if the terms are unfair, but those contracts are not enforceable if one can prove fraud or unconscionable terms.

So what is the problem?

• management’s ego and greed
• salesmen training and guidelines
• commission/bonus structure

The salemen’s compensation is composed of mostly commission and bonuses on total franchise fees. There is virtually no regard for franchisee’s site selection wished or oversaturating the geographic market. Management is certainly aware of the complications, but do nothing so long as the franchise fees keep rolling in. These circumstances seem obvious to me. What do you think?

If you want to be a franchisee, understanding the motivations and decisions made by franchisors is important. I came across this article that walks through the general considerations a franchisor must deal with when deciding whether to franchise their business. Reading the article will help franchisees evaluate whether the franchise fees and royalty are a fair exchange for the training and franchise system. The article lays out 13 steps, all of which should be included and considered during a franchisee’s due diligence.

First, the article helps evaluate whether a particular business can be franchised effectively. Franchisees need to understand what makes a good franchise business before evaluating the thousands of franchise oppotunities out there.

The article also describes the intellectual property consideration (mainly trademarks) which will somewhat strengthen the exclusionary power of franchises. It discusses the importance of the business, strategic and execuation plans of the business.

The article further describes how important pro-active operations and training support are to a franchisee’s success and for establishing a consistent brand image.

All of the above are important research points for franchisees, even when the franchisors has hundreds or thousands of units already sold. If a franchisee has weak training, poorly thought out business plan or poor site selection rules, you will find yourself one unhappy franchisee.

update 6-9-2005: Thanks for the link, Dane.