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Advice for Franchisees Saving for their Kid’s College; Education Bubble

Are you a franchisee thinking about how to best fund college for your children? Your research will quickly lead you to 529 plans, and in my opinion and experience as a purchaser it is probably the best option for college savings. You will also hear about Coverdale Education Savings Accounts but for tax complications and low investment levels it is probably more trouble than it is worth. 529 Plans are sponsored by states and enable USA-citizens to save after-tax money in an investment account that will accumulate earnings tax free and withdrawals are tax free if used to pay defined educational expenses. Some states offer small income tax breaks for investing in a 529 plan. For example, in Illinois: Individuals subject to Illinois state income tax can deduct from their taxable income up to a maximum of $10,000 per year for contributions made toward the purchase of any College Illinois! Prepaid Tuition Program contract.* Married couples filing jointly can deduct up to $20,000 per year.** This state tax deduction reduces the individuals’ adjusted gross income (AGI) by the amount contributed up to $10,000 (or $20,000 for those filing jointly). Contribution Limits Contributions are included in the annual $13,000 exclusion from federal gift taxes for gifts made to any one person. But, unique to 529 plans, a contributor can give up to five times that amount ($65,000) in one year and treat that contribution as if it were made over five years for gift-tax purposes. Fees; NY direct sold @ .17% is lowest in USA You’ll have to do the math to see if the tax savings in the long run outweighs the higher fees of your state’s 529 plan. A benchmark to use is New York’s direct sold 529 plan which imposes a combined annual fee of .17% starting …

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9 Common Interview Questions That Are Actually Illegal

http://finance.yahoo.com/blogs/secrets-toyour-success/9-common-interview-questions-actually-illegal-201733303.html Interesting perspective on illegal interview questions. Franchisees and the hiring.managers should be aware of these as training guidelines. I think The article can be more clear about what the actual action is that is illegal. Asking the questions or discovering the answer isn’t illegal, only using it as the reason for certain employment decisions is prohibited. But why tread on thin ice with these issues? Just avoid these topics as a general rule.

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[Updated Mar 15, ’12] Pizza Fusion agrees to buyout from Unique Pizza & Subs

Unique Pizza and Subs, a 7-unit pizza-sports bar chain traded on OTC Pink Current tier, has agreed to acquire the well branded Pizza Fusion, an 11-unit organic pizza chain. I think there is more to this story, as Pizza Fusion seems to be a much strong player than Unique Pizza & Subs. It could be seen as more of reverse merger with Pizza Fusion as the driver, whereby Pizza Fusion can now be publicly traded and potentially raise more cash for expansion. [updated March 15, 2012] I found another interesting article about this merger. [more here] It seems there may be some Bacon Raton, FL penny stock promotion linked to this merger, and it’s not the first time Pizza Fusion has flirted with the Pink Sheets marketplace to attract needed capital, as you can read below: Trafford, Pa.-based Unique Pizza, which recently issued news releases about two franchising agreements, also said in January it was in the “secondary stage” of selling its pizza in China. The China announcement, which indicated a financial partner was actually still seeking a distributor in China, was issued by Mirador Consulting via PR Newswire and gave a Boca Raton phone number. Boca Raton is known nationwide as a center of penny stock promoters and penny stock companies, which would include Pink Sheets companies like Unique Pizza. Unique’s Pizza 2007 filing said the company had raised $718,993 of a $1 million offering, so one question is how the current deal will be funded. The news release said the deal is subject to execution of a definitive agreement and other conditions including the availability of working capital. A chart on MarketWatch shows no trading volume in Unique Pizza since January, when the announcement of the China deal and a sports pizza sports bar were made. However, …

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Tim Horton may switch from fresh to premade donuts, judge says

http://www.cbc.ca/news/business/story/2012/02/28/tim-hortons-class-action.html Justice George Strathy of the Ontario Superior Court recently issued a summary judgment in favour of Tim Hortons, dismissing an attempt by some franchisees to argue that the chain was wrongly profiting from a switch in how the company makes its baked goods. Under what’s known as the “Always Fresh Conversion” several years ago, the company stopped making baked goods from scratch in each location every day, and instead started shipping partially baked items that had been flash frozen before final baking in ovens at all Tims locations every morning. The new system has proven very profitable for the parent company, but some franchisees complained it simply downloaded new costs to them while the parent company pocketed the savings. The case also alleged that Tims was requiring franchisees to sell new lunch menu items at break-even prices — or sometimes even at a loss. The plaintiffs allege that’s a breach of their franchise agreements, which states ingredients would be sold to franchisees at commercially reasonable prices. The judge dismissed all aspects of the suit, saying Tims is well within its rights as a franchisor to implement new procedures and technologies to its business model “In order to keep the system healthy and competitive, the franchisor must be permitted to introduce new products, new methods of production or sale, and new techniques,” the ruling reads. “It would not be commercially reasonable to require that the franchisor can only implement system-wide changes … if the proposed change is [demonstrated] to be an improvement that benefits that particular franchisee.” Nearly ever franchise agreement I’ve read allows the franchisor flexibility in specifying what products must be sold, even if this involves a fundamental change in the way the product is produced. I doubt the primary motivation of Tim Horton’s is financial, I’m …

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Franchisors at or near Bankruptcy

Here is a partial list of franchisors that have filed bankruptcy, or are reported near filing bankruptcy recently. Perkins Marie Callender’s Old Country Buffet Real Mex Restaurants Giordano’s Cork and Olive Dial-a-Mattress Bally Total Fitness Friendly’s Souper Salad Sbarro Dippin’ Dots The Little Gym Fatburger (A little controversial -Fatburger parent company not part of bankruptcy, but the two subsidiaries accounted for 72% its total revenue in 2008. The bankruptcy came under pressure from G.E. Capital Business Asset Funding, which Fatburger owed $3.9 million for defaulted loans.) Mrs. Fields / TCBY A bit older bankruptcies.  It shows that some brands can recover quite well, especially Denny’s, Day’s Inn, 7-Eleven and Church’s Chicken: Bennigan’s – 2008 Baker’s Square – 2008 Roadhouse Grill – 2007 Ground Round -2004 Boston Market – 1998 Denny’s – 1997 Church’s Chicken – 1991 Sizzler’s – 1996 Krystal – 1995 Day’s Inn – 1990 7-Eleven – 1990

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Papa John’s Franchisee to Go Public in Germany, Previous Fraud with Investors?

WorldWide Papa’s is going public on the heels of opening up its 5th store in Russia. But, there are people who claim to have invested with WordWide Papa in Russia but were ignored by the company once they received the investment. The whole story isn’t here, but a company that fails to communicate with its investors in a respectful manner must be avoided. I’ve seen a lot of investment fraud as an attorney, and I still am amazed at how often folks will steal from people they know.

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Negotiating a Commercial Lease, Especially Restaurants

I just finished negotiating a commercial lease for a restaurant and thought this would be a good opportunity to relay some real time advice on the topic. Everything is negotiable in a lease agreement.  You simply have to ask for it in a sensible and compelling manner.  But just because everything is negotiable doesn’t mean you should try to negotiate everything.  Pick your battles, and accept some reasonable offers. When you’ve been emailing red-lined lease drafts back and forth with the landlord and you’ve reached a stalemate on several key issues, schedule a face-to-face meeting to hammer out the rest.  It will usually help drive things to completion. Be reasonable.  Don’t try to hammer the landlord on every aspect of the lease.  For example, if the price per square foot is reasonable compared to the market, then offer to pay the full rate and focus on other things like build out assistance, CAM, start of lease payments, hiatus of lease payments for remodeling, personal guarantees, etc.  Some landlords hold dear the price the receive per square foot but will heavily negotiate many other things. List everything in an exhibit what you will take with you at the expiration or termination of the lease, or the landlord will claim it as a permanent fixture or improvement and not let you take it. Most parties routinely start a lease negotiation with a Letter of Intent (“LOI”) to hammer out the big details like pricing, tenant improvements and the like.  A minority of other will recommend not starting off with a LOI, such as the self-proclaimed “Lease Coach” who touts his $1k-$7k services at the National Restaurant Association trade shows.  What’s my opinion?  In a perfect world I’d prefer starting out with the lease but I don’t think in the end it …

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Terminating a Franchise by Krispy Kreme

You’re a franchisee and your financial and operational problems are snowballing out of control.  The result is you’re not operating in compliance and you’re late on payments to the franchisor, and the franchisor decides that you need to stop operating.   How does the franchisor shut down your store using the courts? See Krispy Kreme v Satellite Donuts (franchisee)

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Are Non-compete Agreements enforceable if signed by employee after being hired?

Test time!  Is the following non-competition agreement enforceable? “Frank, a Jimmy John’s franchisee, hired his nephew, Nick, to begin working at his Jimmy John’s franchise in Ohio.  Three months after Nick started working, Frank realized that Nick never returned the noncompete agreement he gave Nick during their initial discussions about the job.  The non-compete agreement states that Nick is prohibited from participating in another sub shop within 15 miles while employed and for two years following employment. Frank has trusted Nick with recipes and procedures that are proprietary and trade secrets of Jimmy John’s, so Frank wants to be sure his entrepreneurial minded nephew doesn’t get any funny ideas about starting his own neighborhood sub shop. When Frank approached Nick about signing the non-compete agreement, Nick said he forgot and promptly signed and returned the agreement to Nick.  Two months later, Nick quits to open up Nick’s Original Gourmet Subs a few blocks away.  It’s modern decor and authentic rocker vibe is attracting Frank’s customers away, and Frank’s sales drop 40%.   Frank sues Nick for breaching his non-compete agreement.  Who wins? Hint:  The issue is whether an employee’s continued employment is sufficient consideration (is it enough benefit) for the employee to make the agreement enforceable. The short answer is… it depends what state you are in.  In Ohio, it would be enforceable.  In Washington, South Carolina, Colorado and Minnesota, the non-compete agreement would not be enforceable because continued employment IS NOT sufficient consideration, courts require more benefit such as a pay raise.  In Illinois, the outcome is uncertain.  Illinois courts have held that continued employment for a “substantial period of time” will constitute sufficient consideration.  The length of time that the employee remains on the job, along with the manner in which the employment ends, are relevant factors for Illinois …

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Brand Positioning Will Help Us, Says Largest Pizza Hut Franchisee

The marketing function performed by most franchisors can mean the difference between a flat year-over-year sales, and 13% year-over-year decrease in sales.   For Pizza Hut’s largest franchisee, NPC, that difference in sales a massive amount of money.  Hypothetically, if the average Pizza Hut does $1.5 million in sales, then we are talking about a $195,000 difference per store.  With 1,150 stores, we’re talking about $22.4 million.  That’s a large distribution check for the owners to miss out on!

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Double Cheeseburgers cost more than $1 to produce and sell

Burger King franchisees are suing their franchisor over being forced to price the double cheeseburger at maximum of $1.  Franchisees’ problem is that it costs more than $1 to make and sell.  I’m sure Burger King corporate response to the loss argument is that the total average sale involving the $1 double cheeseburger turns a profit, because on average people also buy at least a drink and fries.

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Franchisee loses his pizza franchise

A former franchisee of Pizza Pizza in Ontario lost his franchise for allegedly falling behind on payments to the franchisor.  This whole relationships seems to have gone mismanaged by both sides.  The franchisee wasn’t keeping good sales records and delivery drivers were impatient with customers, and the franchisor let bad practices continue for too long. http://news.guelphmercury.com/News/Local/article/524725

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Who Controls the Ads, Franchisee or Franchisor?

source: USA Today Which donut hole do you prefer, the “A Hole” or “B Hole?”  That is ruffling feather of some franchisees. Unfortunatley, there is not much the franchisees can do about it legally.  Franchisees can only voice their opinion, sometimes it works: Burger King recently acquiesced to franchisee pressure to tone down its advertising. In the spring, consumer groups and franchisees said that a kids meal with a SpongeBob SquarePants cartoon character giveaway was too sexy. In the ad, women with square derrieres dance to Baby Got Back. Same-store sales for Burger King are due at the end of the month, but on Monday, its largest franchisee reported a 5.5% sales drop in the quarter.

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Why Franchisors LOVE Multi-Unit Development Agreements

Franchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious. Multi-unit franchisee typically pre-pay a portion of the franchise fees for each potential location.  Similar to a non-refundable downpayment.  Lately, many franchisee haven’t opened their additional locations or have slowed the opening pace, but the franchisor still keeps their pre-paid franchise fees, which is typically $5,000 – $15,000 per location.  For example, if a franchisee signs an agreement to develop 10 units, then he may pre-pay a franchise fee of $10,000 per unit, or $100,000 for the rights to open 10 units.  He still would pay the remainder of the (oftern discounted) franchise fee as each location is opened.  The Development Agreements typically set a timeline for openings, and if you don’t keep to the schedule which is often opening at least one per year, then you lose your pre-paid franchise fee. The parties are negotiating one franchise and development agreement rather than a new agreement upon each new opening. Concentration of stores in one small area will help franchise sales in neighboring areas Generally multi-unit buyers have more reserve cash, so stores are less likely to fail from lack of short-term capital. A multi-unit franchisee is more likely to honor their penalty charges for closing a unit, compared to a single unit franchisee who has less assets.

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Franchise Agreement Checklist

For those looking to familiarize themselves with franchise agreements, this checklist from the Jacksonville, Florida Chamber of Commerce provides a good start. 

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Who Control’s Pricing? Can you discount?

In the United States, resale price maintenance (RPM) is illegal under current U.S. Antitrust laws. In Japan, the Fair Trade Commission’s ordered Seven-Eleven Japan to end its refusal to allow franchise stores to discount bento boxed meals and other food items when the food is close to expiration. This will force all convenience store chains in Japan to review their policy of fixed prices for such products.Hat Tip: Chris Conner @ FranCorp’s Blog 

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