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Bring Overseas Franchises to the USA

There are many popular and unique franchisees outside of the United States. I love reading foreign journals and learning about innovative brands developing overseas. If you are travelling overseas, keep an eye out for business that would work well in the United States. That is what this gentlemen did with a falafel restaurant. I am very skeptical whether this type of restaurant can work even with good branding…I have seen so many of them fail already. Venture, a radically innovative photography and portrait company, is one my favorite United Kingdom concepts…it is supposedly coming to the United States (Boston) soon.

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Franchise Churn, In Australia

Accusations of franchisor misconduct and fraud occurs in every country. Australia, for example, franchise churn is a big issue: At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold. The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track. Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees. Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this. Business failures are easily pinned on the franchisee. … “All you’ve got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on,” Farrell says.

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Becoming a Franchisor

This is an inspirational story of a couple of guys who followed their passion and started small store, and slowly added stores: The customized white vehicle, emblazoned with smiling humans and healthy-looking dogs and the words ZoominGroomin in blue and Mobile Pet Spa in red, leaves little doubt about the reason for the visit. In fact, it was because Carey Takach spotted the van on the road one day that she signed on with the mobile pet groomer. That and the coupon her sister had passed along to her. … Toback said he has 700 regular customers just nine months after starting the venture, along with two vans and five groomers and 100 appointments a week. The former retail executive, who at one point was a vice president for menswear, became a mobile pet groomer at age 56. “I was sick of looking at polos,” he said. “My cocker spaniel is my business adviser and was the catalyst to the whole thing.” Toback said the idea to become a mobile groomer franchisee struck when he considered the amount of time involved in taking his dog to the groomer’s. He would drop him off at 8 a.m. and pick him up at 5 p.m. “He was waiting in a cage for six hours, waiting his turn,” Toback said. It occurred to Toback that many pet owners treat their pets “like children,” noting that a parent would not drop their child off at a barber for eight hours. The average mobile groom session is an hour and fifteen minutes, he said. Is there something you do in your daily life that just takes too long? Perhaps it can “delivered” directly to the customer, such as pet services, home vet or medical care, 20 minutes dry cleaning while-you-wait, high-end group child care. …

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Funding the Franchise through Debt or 401k

Joel Libava, blogger at FranchiseKing and owner of Franchise Selection Specialists Inc. in Cleveland (and invited blogger at this web site), was quoted in a Wall Street Journal article about franchisee funding sources: • Think About Franchising. These days, franchisers are actively targeting boomers because of their deep pockets. Entrepreneurs are generally expected to put up some of their own money to start a franchise, and boomers have lots of it on hand. But you don’t have to bet the farm. “We recommend that you use the smallest portion you can of your own money and leverage the rest,” says Joel Libava, president of Franchise Selection Specialists Inc., a franchise consulting and marketing business in Cleveland. Generally, entrepreneurs should expect to pay about 15% to 30% of the total cost of starting the franchise out of their own pocket, including the franchise fee and working capital, Mr. Libava says. For instance, Louis H. “Gig” Runge of Houston has put up about $80,000 of his savings to open a Martinizing Dry Cleaning franchise. The money has gone toward franchise and legal fees and other necessities. He plans to fund the rest of the business with a $350,000 loan guaranteed by the Small Business Administration. The loan requires him to provide an equity injection of $82,000. “It was a challenge for me to work through the tax benefits of borrowing versus just funding it myself,” says the 47-year-old Mr. Runge, a certified public accountant who has done a variety of financial jobs at JP Morgan Chase for the past 18 years. Mr. Runge decided that the SBA financing would help him protect his personal savings and use it as collateral to invest in other stores down the road. Here are my initial thoughts…. Leveraging (borrowing money) is a good idea so …

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Geek Perspective: Can a Gaming Cafe be Successful?

The tech-savvy community at Slashdot.org in 2006 had an interesting post and comments on the viability of a Gaming Cafe and what branding, culture and services have shown to work. Re:Yes we have one. (Score:5, Insightful) by Orangejesus (898961) on Friday August 11, @11:56PM (#15893072) you have to understand that most people don’t go to gaming cafes for the games perse, they go for the social interaction, they go to play with their friends and be able to yell at them, they go to hang out with people with similar intrests. I have a better PC than the local place I go to game at and so do most of my friends, but it’s easier to spend a few bucks and just go to the gaming place down the street than drag a bunch of computers around and fool with networking them and making sure everyone has the same version of what we want to play and working cd keys and ect. the gaming place I go to is open 24/7 and after 5 hours is free, (5 an hour) So it’s pretty common for us to just go and set up shop and do an overnight there playing till the wee hours of the morning. When I was on break from college one summer about 6 of us litterally lived up there for almost a week straight sleeping on the couches and ordering pizza. I mean we probably didn’t smell very good by the end of the week but it still ranks as one of the most fun times i’ve ever had. The key to a good gaming place is to make it somewhere that people just want to go to hang out and escape and not be bugged. I don’t know how long this place will last …

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Tough Competition: Just Fresh Kitchen Café

On Donnie Deutch I just saw an interview with the new CEO of Just Fresh Kitchen Café, Dana Sinkler, who previously was a chef at a four-star NY restaurant and coincidentally founded and sold for $25 million the Terra Vegetable Chip.  Dana was previously a franchisee and has spent the past year revamping the menu launching the Kitchen Cafe concept, characterizing it as an innovator in Fine Casual Dining. The new Kitchen Cafe menu looks ideal for my increasingly healthy-focused palate (South Beach Diet / Body for Life style diet foods – salmon, shrimp filled omelettes, marinated chicken, veggies…you get the point).  And, it takes the focus off the cookie-bread centered menus.  Last I read there were 73 franchises under contract, mostly the Carolinas and Georgia. The restaurant claims to provide a fresh, great-tasting food and the atmosphere of a table service restaurant with the speed and pricing of a quick service restaurant – all in a setting that’s friendly to the senses and the environment. Why would I spend time writing about this place? Because it shows what can be done when the franchisor-owners are willing to take a risk and let a successful entrepreneur and chef take the lead.  This brand was suffering the past 10 years but now the new Kitchen Cafe concept extention seems to have the right menu, management and financial backing to expand at will, raising the bar above Panera Bread on gourmet fresh food and fine dining food in a fast casual atmosphere.  See below for examples of what the brand and food looks like.

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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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The Franchisor’s Owner Matters

Business are bought and sold with more frequency today than ever. Franchisors tend to receive high valuation based on untapped global growth opportunities, making them more likely to be acquired by other franchisors or private equity firms looking to leverage the brand and generate cash flow. Case in point: Dunkin’ Donuts. Last year, Dunkin’ Donuts was acquired by a group of private equity firms. Their strategy is to position Dunkin’ Donuts as a higher end brand to compete with Starbucks head-to-head, including in the grocery aisles. The primary focus is to increase their return on investment, which doesn’t necessarily align the interests with their franchisees. Grocers to Sell Dunkin’ Donuts Coffee In addition to many small retailers, big-box retailers that will sell the coffee include Wal-Mart Stores Inc., Target Corp., Costco Wholesale Corp. and BJ’s Wholesale Club Inc. Also on board are drug chains CVS Caremark Corp., Rite Aid Corp. and Walgreen Co. But most of the retailers are supermarkets. The list includes Kroger Co., Pathmark Stores Inc., Albertson’s LLC, Shaw’s Supermarkets Inc., Acme Fresh Market Inc., Publix Super Markets Inc., Shop-Rite, Stop & Shop Inc., Giant Brands Inc., Roche Bros., Safeway Inc.’s Safeway and Dominick’s stores, and The Great Atlantic & Pacific Tea Co.’s A&P chain. How much of the franchisee’s sales were derived from in-unit packaged coffee sales? Probably a small portion, and the profit margins on packaged coffee beans are nowhere near the cup of coffee margin of 95%, but with the consumers bypassing the visit for a “cup of coffee” and a “pound of medium-roast beans”, same-store sales will be negatively impacted as a small portion sales shift from the franchisee to grocery. Obviously, the new owners ran the numbers and any slowdown in franchisee’s sales will be more than made up for by the …

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Investment Alternatives

I’ve written several times that investing your $150,000 nest-egg in the public markets and working a reasonably fun job is an underappreciated alternative to applying it towards a franchise. This article cites a study by Vanguard’s founder John Bogle regarding a 25-year study of a diversified portfolio return that on average has yielded 9.5% annual return. What would you hope your franchise is worth in 10 years? Does $372,000 sound good for a selling price, on top of the wages you earn by holding a typical job? The $372k is the approximately growth of your $150,000 investment in the market compounded at 9.5% annually for 10 years. A great article on the lowest cost (0.15%) diversified publicly traded investment portfolio in the world is here http://etf.seekingalpha.com/article/42883 The decision to invest in and hire yourself to manage a franchise is a personal balancing test of many factors – lifestyle, family needs, risk tolerance, job satisfaction, financial goals, etc.  Satisfaction of an entrepreneurial itch is typically not met by franchise ownership because of the operating requirements and restrictions in the Franchise Agreement and Manual, which also constrains your income potential.  Most entrepreneurs want scheduling flexibility, tax advantages, no boss, net worth growth, ability to adapt business to maximize revenue, etc., which is minimal in single-unit franchising.

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Qdoba Wants to Expand Despite Lack of Franchisees

Mexican-food chain to expand in Chicago area “We thought we had more interest from our franchisee base (in Chicago), but we didn’t,” Mr. Beisler said. “But we’re pleased with our existing stores.” Qdoba plans to focus on opening corporate-owned restaurants from the northern border of Cook County down to Indiana. One franchisee has purchased the right to develop Qdobas in Lake County. The company is counting on its established stores in the Indianapolis, Milwaukee and St. Louis areas to boost brand recognition in Chicago. After seven years of same-store sales growth, Mr. Beisler said now is the time for Qdoba to aggressively expand into markets such as Chicago, Manhattan, Seattle and Minneapolis. The company currently has 375 stores in 40 states. … Qdoba — a made-up word that Mr. Beisler said resonated with him — serves burritos, salads, soups, nachos and tacos. “There’s nothing really Mexican about cilantro lime rice, poblano pesto or tortilla soup,” he said. “We’re modern, nouveau Mexican.”

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Quiznos New Leadership

Quiznos CEO puts turnaround skills to work The former Burger King boss is applying his turnaround expertise to the troubled sandwich chain, whose dissatisfied franchise owners have complained about low profits, company operating requirements and the franchisee recruiting process. Since jumping into the fray in January, Brenneman has worked to reduce food costs by as much as 4 percent, improve communication with franchisees and test new products, like a Quiznos taco, to boost profits. … Last year, private equity firm J.P. Morgan Partners became an ownership partner, and Brenneman later became a partner through his company, Turnworks. Through the roller-coaster ownership ride, the chain expanded quickly, to at least 5,000 stores. Today it’s ranked third behind Subway and Arby’s by Technomic, an industry analyst firm.  Although Quiznos does not release much information, Technomic restaurant industry analyst Darren Tristano said Quiznos has average sales of about $425,000 a year per store while Subway has average sales of about $375,000. Quiznos’ success has come with growing pains. Lawsuits by franchise owners in Illinois, Michigan and Wisconsin allege the company draws in prospective owners, who pay $25,000 for a franchise, but doesn’t give them complete facts about restaurant locations and business operations. … Lawyer Justin Klein contends many franchisees sign contracts only to wait a year or more for the company to build a restaurant. The suits also accuse the company of requiring franchise owners to buy all supplies from Quiznos at higher prices than if they bought locally. The company denies the allegations and filed motions to dismiss the suits. Brenneman, meanwhile, has reached out to franchisees and targeted their food and other costs. If he can cut food costs by 3 percent and coupon discount offers by 4 percent, Brenneman believes he can add $25,000 to $30,000 in franchisees’ profits. …

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Franchise or Business Opportunity?

Buying a Franchise versus a Business Opportunity How to tell the difference between a franchise and biz opp and determine which is the better fit for you. The primary differences mentioned by the author are: Common Brand and Operating System Ongoing Support Ongoing Fees Legal Disclosures Basic stuff, but it is what you are paying for as a franchisee. If you feel able to pursue a business opportunity and can do so without piggy-backing on another brand, operating system, and support, then you may be better off going it alone and foregoing the franchise fees, royalty fees, advertising fees, operational constraints, and required purchases. Update 7-10-2007: Good comment by the always alert Michael Webster: The article was terrible. It leaves the misleading impression that there is such a catergory as biz ops which don’t have to prepare a UFOC. Uh, well then how would one account for the fact that the FTC routinely closes biz ops because the failed to comply with the Franchise Rule? Really bad article.”

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Clever Way to Get Free PR

Perry business offers free flags to replace worn ones If the flag you unfurled today looked a little more pink, beige and lavender than red, white and blue, Goin’ Postal wants to help. Throughout July the Perry packing and shipping business is offering a free American flag to anyone who brings in a faded or tattered flag. It’s a companywide effort by the chain, which has 250 locations. Hopefully your franchisor can come up with clever ways to get free PR and get people in the doors.  Free in-store give aways, promos with local radio stations, big donations of products/services – are a few commonly used techniques that will get you noticed.  However, many franchise agreements forbid franchisees from endeavoring on their own public relations efforts, so I would be sure to choose a franchise that gives the franchisee the flexibility to promote oneself in clever ways.

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Franchisee Now Prefers non-Franchised Businesss Route

Despite Sales Awards, Printing Franchisee Opens Second Business, Plans Move Twenty years since Mizerak signed a contract agreement to run an Allegra Print & Imaging franchise in Dulles, he is opting not to renew when his contract expires this year. Instead, the Purcellville resident is going out on his own with, Unity Business Solutions, a similar business he launched in January and plans to move to Leesburg in September. When Mizerak signed the dotted line with Allegra, he said he “didn’t have any experience and normally a franchise gives you backing and cushioning. Franchises normally are successful when a lot [of startups] fail.” Within about five years of running the franchise, Mizerak said he decided “you don’t need it anymore.” A franchise termination fee worth about $75,000 kept him with Michigan-based Allegra. While being a franchisee served him well during his first two years of business, in hindsight, Mizerak said, he probably would not have gone the franchise route because “it’s hard to be entrepreneurial because you have to stay focused on what the franchise dictates. I didn’t particularly care for that.”

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Fresh Casual a new category in restaurant franchises

Fresh Casual is a new segment in the restaurant industry that combines the upscale, quality experience of a casual dining setting with the quicker, faster growing fast casual service. This new model is for those who want quality, fresh food without the fuss. A new website has been launched called FreshCasual.com is an online publication dedicated to covering the fast growing fresh casual segment in the restaurant industry. Some of the franchise brands that would be considered Fast Casual are: Sandella’s Flatbread Vapiano Fresh City Tossed Cross posted at: Let’s Talk Franchising

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Revenue to the Franchisor

Spicy Pickle plots growth curve The above article lays out the revenue for this relative startup franchisor.  $221,643 in franchise fees and royalty in the 1st quarter, but still recognizing a quarterly loss of $538,229.  The loss is mostly likely due to higher marketing, commission, and administrative expenses.  Franchisors make the most money on the front end with the franchise fee – a one-time windfall of $30,000 for the franchisor from which their variable costs involve commission to the sales person and some executive time – with related expenses of manuals/documents, site selection assistance, and training delivered over the next year. A small franchisee may produce $350,000 in gross sales, meaning the 6% royalty will generate $21,000 over a 12 month period plus a few thousand in vendor commissions and other revenue.  With the average franchisor selling 12 franchises during the life of their business, it is easy to see why many franchisors struggle despite the illusion of rolling in the money dough.  The profitable franchisors sell new franchises at a fast and consistent clip.

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