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Bagel Franchises have Reinvented Themselves

In 1996, the bagel business was taking off, with several franchises expanding rapidly across the country. Franchises of Brueggers, Einstein Bros., Manhattan, Noah’s and Chesapeake were selling like hot cakes (bagels that is). The prospects for the bagel business altered dramatically in June 1997 when Dunkin’ Donuts announced that its 2,000 stores would begin to sell bagels. This, in one stroke it became the largest bagel retailer in the nation. At about the same time fresh bagels were being introduced in supermarkets across the country. In 1996 Modern Baking Magazine reported that Fresh bagels sales were up 50% in supermarkets and represented over $125 million in sales nationwide. By 2000 the total was over $400 million. Bagels were now everywhere: big grocery stores, fast-food menus, middle-America cafeterias, even frozen-food sections. In 1988, Americans ate, on average, one bagel per month; in 1993, it was one every two weeks. According to Modern Baking (May 2007), fresh bagel sales are over $500 million dollars per year in supermarkets alone. Some say even the Bagel itself changed, over the years bagels have undergone a transformation from small, dense, and satisfyingly chewy into large, puffy, and a mere platform for sandwiches. Sales dropped, franchises stopped selling and the bagel franchises closed many stores. Brueggers, Einstein Bros, aren’t just about bagels anymore. They all have re-branded themselves as bakery café’s. Einstein Bros. Cafe is just one example of a bagel concept reaching beyond the bagel. Bruegger’s Enterprises Inc., based in Burlington, Vt., also has expanded menu offerings and started redesigns on its 250-unit Bruegger’s chain to place itself in the fast-casual segment. Bruegger’s once famous for authentic boiled and baked bagels, now offer a variety of other stone-hearth baked breads, such as Ciabatta and the exclusive Softwich, a softer, square bagel ideal for sandwiches. …

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‘Seinfeld’ Soup Nazi Franchises Troubled

SoupMan Bid to Turn ‘Seinfeld’ Fame Into Empire Goes Off the Boil David B. Caruso, Associated Press reports: The chef who inspired the Soup Nazi character on “Seinfeld” makes a heck of a crab bisque, but a group of stewed investors says he’s having problems expanding his popular stand into a franchise empire. Soupmaker Al Yeganeh closed his original Manhattan shop, famous for its strict ordering rules, in 2004 to focus on franchising Original SoupMan stores across the country. The company launched around 40 stores in its first two years and introduced its frozen soups to groceries. But disgruntled franchisees say many of the new shops didn’t make it through their first year: At least eight have closed for good. Two more have shut their doors for now, although the company said it has deals in the works to reopen them. Other franchisees told The Associated Press they want out of their contracts because of poor profits or bad relationships with the company. Several have sent the company letters threatening to sue. Kevin Long, whose Original SoupMan franchise in Scranton, Pa., lasted just one winter, accused the company of misrepresenting how much it would cost to open and run the business. He and other franchisees said the company also had early problems with its bowl and cup sizes, which were larger than expected and inadvertently gave patrons more soup than they paid for, and never lived up to promises to provide a product line that would sell during the summers, when demand for hot soups is low. “They are just trying to get as many stores open as possible, and they aren’t supporting them whatsoever,” Long said. Prices of $7 to $11 per 12-ounce bowl also made it tough to attract repeat customers, he added. At least three stores …

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A New Culture to Yogurt Franchises

Valerie Killifer reports in Fast Casual The culturization of yogurt  when a little-known frozen yogurt shop opened in West Hollywood in 2005, Californians from the Valley to the Hills (Beverly Hills) couldn’t get enough.Pinkberry unsettled an otherwise quiet neighborhood and gave health-minded patrons the ability to indulge. It also reinvigorated consumers’ taste for frozen yogurt. Since the launch of the TCBY franchise more than 25 years ago, frozen yogurt has experienced a pop-culture roller-coaster ride of popularity. But with the launch of several new frozen-yogurt concepts, and the success of existing custard franchises such as Culver’s, the segment has completed its latest uphill climb and is once again ready for accelerated growth. Pinkberry’s owner told the Los Angeles Times on Aug. 4, 2007, that she understands the consumer desire for low-calorie, healthy food. And she’s not alone. Concepts such as TCBY and Beautiful Brands International are banking on that same mentality for the success of and launch of their premium and frozen yogurt franchise concepts, Yovana and FreshBerry, respectively. Yovana brand manager Rob Hanson said the concept was created in response to consumer health trends and features proprietary premium and frozen yogurt offerings in addition to yogurt-based smoothies. “Yovana took TCBY’s expertise in yogurt beyond frozen yogurt and presented a healthier alternative to consumers,” Hanson said. “I think it fits very well with where consumers are going.” Yovana has four open locations, two in airport locales and two standalones, but Hanson said the concept is still in the test phase. “Really, we’re refining the concept,” he said. “We’re making sure the menu is right and everything operationally flows the way it should.” FreshBerry as well is in its infancy. The first location is slated to open in October after sitting in concept development for about a year. “The public …

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Krispy Kreme Example – Leases

A Krispy Kreme franchisee is closing several stores citing lease problems. …said it plans to close about half of its 15 Chicago area stores as it reorganizes under court protection. Sweet Traditions LLC, of St. Louis, blamed a lease dispute involving highway oasis for its financial problems, as well as a dearth of new products from troubled Krispy Kreme Doughnuts Inc., which has suffered accounting lapses and a change in managers. The company said it will cut about 110 to 140 jobs from its current payroll of more than 600. Sweet Traditions abruptly closed its three highway oasis locations in May, citing high rent and low foot traffic. Schlegel said the company had been obligated to pay leases at a total of seven oasis location, even though it had shuttered three and had not built stores at the other four. “We were needing to get out of those leases,” Schlegel said. Bankruptcy allows companies to void unwanted leases. So the franchisee filed bankruptcy to get out of those leases – drastic measure for choosing bad locations. I see this problem all the time in my law practice. Leases can bring down franchisees very quickly, and writing that monthly lease check is as painful as writing that royalty check. All successful restaurateurs I have spoken to say a great lease (low price, great visibility and attractive traffic flow, etc.) are one of the important pillars in deciding on whether to open a location. Schlegel said some corporate practices at Winston-Salem based Krispy Kreme had also hurt her company. At one time the company required its franchisees to build large factory stores, where all doughnuts are made on site. The stores cost about $3 million each, Schlegel said, a large capital investment that was difficult to recover. I’ll say. Making up …

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Franchise Valuations, an Auntie Anne example

What is one way to gather sample financial results for franchises when the franchisor refuses to make optional financial disclosures in their UFOC? Check out the classified ads of businesses for sale. While the classified ads will generally disclose very basic and very vague financial information, such as annual sales and net income or cash flow, you will start to get a picture of the going valuations and metrics used (such as a multiple of earnings before income, taxes, depreciation and amortization; or a multiple of free cash flow), all of which will help you understand the financial models and drivers for the business. The financial disclosures in classified ads should be taken with a grain of salt. Why? You need to understand accounting and finance, or hire someone to help you with the valuation and explain the tax and valuation factors used in determining what type of free cash flow and return on your invested capital and time you can expect to reap. You also need to understand finance to know if you are comparing apples to apples. For example, all of these will make a huge difference in what the valuation means to you: Seller’s Loan payments and interest rates Lease payments Upcoming or postponed capital improvements Wages per employee, total wages per day Wages and distributions paid to the owner, if any Competition near location (knowing that there are several competitors in the mall is better, because if there are no competitors you know that sales will mostly drop when a competitors moves in) Your(buyer’s) financing options and interest rates Expenditures for accounting/legal (did they owner do their own accounting, or pay an accountant, what will you do?) Cash/theft rates Franchise renewals – how soon before the franchise agreement expires, and will there be required remodeling …

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Maximizing the financial benefits of your franchise

Choice of business entity (partnership, LLC, or S or C corporation) and minimizing your tax obligations can increase your net worth even with a stagnant franchise. If you own a franchise and do your own accounting and taxes, please read this article. Here is a sample: Paying the IRS—On Your Personal Income and Dividends What makes S corporation dividends so attractive? Not only is there no corporate income tax, but the S corporation can cut other taxes as well. By paying the owner and select employee/shareholders with dividends, in addition to salary, the amount of income subject to Social Security, Medicare, and self-employment tax (and employer matches) can be reduced. Paying revenue as dividends removes that income from the Social Security/Medicare tax “pot” (7.65 percent employee/7.65 percent employer). The recipients pay personal tax on the payouts, but at the dividend rate, rather than the ordinary income rate. Bigger Caveat: The Internal Revenue Service has been looking into S corporations and comparable business entities for possible abuses—including using S corporation dividends to avoid income tax. Under IRS rules, owners (and any other beneficiaries) of S corporation dividends must first receive a reasonable salary before revenue is paid as dividends. The IRS announced plans for a major audit of S corporations last summer, so it is an excellent idea to consult a tax professional and discuss this strategy at your annual corporate board of directors meeting. Dividends are a return on investment, not a substitute for a salary or a tax avoidance technique. Does a Change Make Sense for a Going Concern? Thinking of changing from a C corporation to an S corporation or LLC? Or maybe changing from an S corporation or LLC back to a C corporation? Or maybe you want to change between an LLC and an S …

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Franchising Moves to the Back Burner at Tijuana Flats

The fresh-Mexican chain puts franchised growth on hold in favor of company expansion.  Maya Norris reports in Chain Leader that Camp Fitch the CEO of Tijuana Flats has decided to forgo franchising at Tijuana Flats to concentrate on company growth. Read MoreCross posted at: Let’s Talk Franchising

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Professional athletes form team to buy Burger King franchises

Accord is part of a push by the fast-food chain to raise its urban profile Keith Reed of The Boston Globe Staff reports that Kevin Faulk, is sweating it out on the field at training camp with the rest of the New England Patriots, but that’s not the only place he’s planning on making an impact this season. While getting ready to don the pads and helmet for another run at the Super Bowl, Faulk and four other current and former black professional athletes have pooled their money to buy 18 Burger King restaurants in Norfolk and Richmond, Va. The deal represents a new attempt by Burger King Corp., the Miami-based fast food chain, to grow its presence in urban areas. It is also an arrangement that allows Faulk, a native of Lafayette, La., to fulfill a goal of providing jobs to others whose backgrounds he can relate to. “I watched how hard my mom and dad worked. When you’re young, you don’t realize the value and importance of hard work, but now I appreciate that,” he said. Faulk said he learned about the Burger King deal through a business associate. After looking over the details, Faulk said, he was enticed by the fact that many of the restaurants were in predominantly black neighborhoods, and that other current and former star athletes he knows — like National Football League Hall of Famer Marcus Allen and New York Giants defensive end Michael Strahan — were partners in the transaction. A reason Burger King was eager to make the deal happen was that all four partners in the deal are black — Caron Butler of the National Basketball Association’s Washington Wizards and Donnie Edwards of football’s Kansas City Chiefs are the other two. The company wants to make inroads both in …

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A Neighborhood Balks at a Franchise

The New York Times reported in an article by David Gonzalez that:There really is a John inside Johnny’s Pizza in Sunset Park, Brooklyn — John Miniaci Jr., whose father, John Sr., founded the neighborhood pizzeria in 1968. There will soon be another John right next door on Fifth Avenue — Papa John’s Pizza, a franchise outlet. John Jr. considers this as an insult to his own papa John, who died just one month ago. Of all the spots the franchise could have chosen, why, he asks, did it have to be on the other side of the wall where two centurion busts stand guard above customers waiting for zeppoles or Sicilian slices? “This is a neighborhood that has had businesses in the same family for two and three generations,” Mr. Miniaci said. “These big corporations come in and don’t see the value of that.” That’s why Johnny’s latest delivery is a petition — to Papa John’s corporate headquarters in Kentucky. Some 2,200 people — shopkeepers and customers, including other pizzeria owners — have come to Mr. Miniaci’s defense. They have signed a declaration “to stop the establishment of Papa John’s in our neighborhood.” This Brooklyn community has been grappling to maintain its character in the face of impersonal economic and residential development. The storefronts along Fifth Avenue near 58th Street have long been home to mom-and-pop stores and restaurants, patronized by the working families who live in the brownstones on narrow side streets. The stores have awnings that announce “Decent Dental Services” or “Spanish and American Food.” Many were here when the area was down on its luck and real estate values were low, and are determined to keep the neighborhood’s traditional feel, even as they see chain stores and fast-food franchises creeping in. Read the whole story: Let’s …

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McDonald’s chickens out on Boston Market

The Boston Business Journal reported today that Boston Market, co-created by Boston-based franchise guru George Nadaff, is being sold to Sun Capital Partners Inc.McDonald’s Corp., the Illinois fast-food giant that owns Boston Market, is selling the franchise to the Florida buyout firm to focus on hamburgers. As of June 30, 2007, Boston Market’s total assets and total liabilities were $180 million and $89.1 million, respectively, according to Securities and Exchange Commission filings. Boston Market currently has 630 locations in 28 states. In early August 2007, McDonald’s (NYSE: MCD) signed a definitive agreement for the sale of Boston Market. The company expects to complete the transaction in the third quarter 2007 and does not expect to record a loss. McDonald’s acquired Boston Market’s operations for $176.2 million in May 2000. Since then, McDonald’s has pared down its partner brands, shedding Chipotle Mexican Grill (CMGB), Donato’s Pizza and its stake in Fazoli’s Italian fast-food restaurants. “It was more a distraction than anything,” Morningstar analyst John Owens said of Boston Market. “McDonald’s is really singularly focused on the Golden Arches, so this was not a surprise to me.” Sun Capital, which now owns Fazoli’s, has a portfolio that also includes bakery chain Bruegger’s Enterprises, Garden Fresh salad restaurants and cheese-and-meat retailer Hickory Farms. Two years earlier, Boston Market had run out of cash to pay creditors and filed for Chapter 11 bankruptcy protection. Boston Market Corp., founded as Boston Chicken in 1985, expanded under the wing of franchise specialist Nadaff, who partnered with the founders in 1989. Cross Posted at: Let’s Talk Franchising

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Factors Affecting Profit

Chipotle Serves Up Hot Earnings Growth, But Buffalo Wild Wings’ Sales Are Light Buffalo Wild Wings same-store sales grew 8.1% at company-owned restaurants and 4% at franchised units. … Both companies face some thorny challenges moving forward, including rising food costs. Demand for ethanol has pushed up corn prices, which in turn has fattened the cost of restaurant staples such as chicken, beef and produce. Cost pressure is not a huge issue for Buffalo Wild Wings this year because it locked in a favorable deal with its chicken-wing supplier in March. Analyst Will Hamilton of SMH Capital estimates the company is paying about 30 cents a pound less than the current market price. But that price is expected to go up when the current contract expires. “The supplier will likely want a higher price,” said Hamilton, whose employer makes a market in Buffalo Wild Wings. “That’s a risk not quite factored in to the stock price right now.” Another wild card is how consumer skittishness might impact Buffalo’s same-store sales in the second half of 2007. “I have a general concern about the consumer as gas and other prices go up,” Hamilton said. “Comps will still be positive, but the growth could be slower.”

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McDonald’s Snack Wraps a hit during off-peak hours

McDonald’s introduces another Snack Wrap The product, introduced Tuesday, is the third chicken snack wrap offered in the past year. The wraps have helped McDonald’s bring more customers in during the usually slow afternoon hours and may give it a leg up over rivals like Burger King and Wendy’s, analysts say. “It’s probably one of the better products we have seen in the last several years,” says Larry Miller, an analyst in Atlanta with RBC Capital Markets. “They have really attacked the mid-afternoon as an area of opportunity.” Along with expanded Opinion: Being part of a larger, publicly traded franchisor has its benefits, particular in innovation.  The CEO must respond to negative publicity such as law suits or poor quality control, and it must be able to “tell a story” why the stock price is undervalued.  The CEO’s story is usually that investors are not fully valuing the upcoming improvements in the product or service offerings, such as a new menu item, a new promotional campaign, a faster system of delivering to the customer, etc.  This dance with stock analysts help franchisees by ensuring that there is some R&D and brainpower behind executing better strategies and more profits. Furthermore, being a franchisee where the frachisor is a publicly traded company has other often-overlooked benefits. Disclosure rules and various SEC compliance regulations place a heavy burden on the franchisor to honestly disclose information. For example, most publicly traded franchisors (see McDonald’s, Buffalo Wild Wings, Jack in the Box, Gymboree, Choice Hotel, H&R Block, Regis Corp, to name a few) disclose monthly or quarterly same-store sales results, and disclose some transaction involve the sale or purchase of stores. A potential franchisee can likely reap sales data from these SEC filings and press releases. The franchisor’s executive team must sign-off on these …

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Au Bon Pain franchise eliminates trans fats

BOSTON — Au Bon Pain has announced the 100-percent elimination of trans fats from its menu items, and the launch of a new Web site that provides in-depth nutrition information for consumers. The updated Web site features a “Smart Menu,” where site visitors can search for foods that fit their specific dietary needs, build an entire Au Bon Pain meal and view the nutrition information for that combination of food choices. Users simply select a nutritional requirement to search by, such as low sodium or high fiber, and choose a category of Au Bon Pain products, such as soups, sandwiches or bakery. The Smart Menu then displays the items in the selected category sorted by the nutritional requirement that the user selected, and users can add individual menu items to their virtual plate. The Smart Menu totals up the nutritional value of the items on the plate automatically, providing nutrition information such as net calories, carbohydrates, cholesterol, fiber, protein saturated fat and sodium. The Smart Menu also displays nutritional information for each individual item, as well as a list of ingredients. The Web site’s Cafe Menu also provides the FDA Nutrition Facts panel for each restaurant menu item.

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Sign a Rama First Franchise to Win U.S. Presidential E Award for Exporting Success

Sign-A-Rama, the world’s largest retail sign franchise, has been awarded the United States Department of Commerce’s Presidential “E” Award. Sign-A-Rama is the first franchise company to ever win the award.Commerce Secretary Carlos M. Gutierrez joined President Bush at the White House to present Sign-A-Rama , along with ten other organizations, with the “E” Award for excellence in exporting. The company’s export sales increased 700% in three years, growing from $1.5 million in 2002 to $12 million in 2005. In attendance were president and founder Ray Titus and his wife Andrea. Also in attendance was Tony Foley. Foley is president of World Franchisors which has assisted Sign-A-Rama and countless other franchisors for many years with their global expansion goals. World Franchisors is comprised of an advanced team who helps other franchisors quickly and cost effectively sell master licenses and establish a strong presence outside the United States. Also assisting the franchise with their success in export sales is the U.S. Commercial Service. This government agency is the trade promotion unit of the International Trade Administration and works with companies to help get them started in exporting and increasing their sales to new global markets. The Fort Lauderdale, Florida office was instrumental in Sign-A-Rama ’s export success and subsequently their being honored with the “E” Award. The President’s “E” Award is the highest honor the federal government can give to an American exporting company. The award serves to recognize U.S. firms for their competitive achievements in world markets and their part in increasing U.S. exports abroad. This marks the 45th anniversary of the Presidential “E” Award created by President John F. Kennedy in 1961. “Winning this award was a great honor for our company coupled with the privilege of meeting President Bush in the Oval Office,” says Ray Titus, president of …

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Bruster’s Ice Cream franchise warms to idea of co-branding with Nathans Hot Dogs

After growing a successful franchise selling desserts, Bruster’s Real Ice Cream  is ready to serve up a full meal.Tim Schooley reports in the Pittsburgh Business Times, that the Bridgewater, PA, based ice cream chain recently began a strategy to co-brand its stores with The Nathan’s Famous Corp., the publicly traded New York-based hot dog chain known for its nationally televised Fourth of July hot dog-eating contests. So far, six of Bruster’s 260 locations have become two-in-one Bruster’s/Nathan’s stores, including the region’s first in Dormont, said Dave Guido, vice president of concept development for Bruster’s. Two more area locations are slated for conversions, said Guido, estimating that 15 to 20 Bruster’s could operate jointly with Nathan’s by the end of the year. While Bruster’s only began testing the co-branding strategy in February, and the Dormont location was the pilot store, Guido sees broad potential from early sales tallies, which he declined to disclose. “The results are going to tell the tale. But early on, we’re very, very happy with how it’s gone,” said Guido, adding the company is considering co-branding with other franchises, although he declined to name them. “If we continue to get favorable results, it will be an option for everyone who is an existing store.” Randy Watts, vice president of operations for Nathan’s, sees the co-branding franchising effort as a way for Nathan’s to reach new markets through Bruster’s territory, which extends throughout the eastern United States. “It seemed like a natural synergy for the two brands to use their real estate a little better,” Watts said. “We’re the No. 1-selling all-beef premium hot dog in the world. We definitely think they have a real top-quality ice cream brand.” Co-branding is nothing new for Nathan’s, which also owns Kenny Rogers Roasters. Nathan’s also operates joint locations with …

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Comfort Keepers Franchise Purchased by a Boston Private Equity Firm

The Dayton Business Journal reports that Allied Capital Corp. will pay $45.2 million to support the buyout of Comfort Keepers Franchise by Boston-based private equity firm Webster Capital. CK Franchising Inc., which provides home care around the country as Comfort Keepers, has been sold to private equity investors. Dayton, Ohio based CK Franchising operates more than 500 Comfort Keepers franchises in 46 states and seven countries. “Both companies have long histories of identifying strong companies with significant growth potential and providing guidance and resources for growth,” said Jim Booth, president and chief executive officer of CK Franchising. “This is an ideal marriage for CKFI and our franchisee owners.” Comfort Keepers ranks as the area’s seventh largest home health care agency with $4 million in 2006 revenue, according to Dayton Business Journal research. Cross Posted at: Let’s Talk Franchising 

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