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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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Behavior Around Disabled Employees

This should be obvious to franchisees, but do not act or allow employees to act, point out, or otherwise draw unnecessary attention to an employee’s disability. As the below Subway franchisee discovered, it cost him $166k in court awards plus (I’m guessing here) another $75,000 in legal fees. Subway Franchise to Pay $166,500 for Disability Bias, Jury Rules in EEOC Lawsuit The Dallas jury of five women and two men awarded former area supervisor Tammy Gitsham $66,500 for lost wages and emotional harm and an additional $100,000 in punitive damages in the EEOC’s suit under the Americans with Disabilities Act of 1990 (ADA) in U.S. District Court for the Northern District of Texas. The EEOC charged in the case that Subway Owner Robert Suarez and one of his managers subjected Gitsham to a disability-based hostile work environment, including teasing and name-calling, because she is hearing impaired and wears hearing aids. EEOC presented evidence that Gitsham was forced to resign her position after both the owner and human resources/training manager repeatedly mocked her privately and in front of other employees, creating a hostile workplace, with taunts such as: “Read My Lips” and “Can you hear me now?” and “You got your ears on?”

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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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Early Termination and Liquidated Damages

Fair Franchising Is Not An Oxymoron: AAHOA’s 12 Points of Fair Franchising Looks good and worth a read to understand the legal aspects of the franchise agreement. Point 1 is discussed in this articles, which encompasses: A. Voluntary Buyout or Involuntary Termination and Liquidated Damages B. Windows Provisions C. Early Termination for Underperforming Properties Here is sample analysis on windows provisions: In franchise agreements containing “windows” or “additional termination right” provisions, the types of “gotcha” clauses that are most unfair are those that explicitly state a franchisee’s rights will automatically terminate, without notice, (1) the franchisee fails to cure any default under the franchise agreement within the time permitted, if any, in the notice of default sent by the franchisor, or (2) the facility receives a poor score on a QA inspection, and then does not receive a higher predetermined score set by the franchisor during a re-inspection of the facility.

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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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Franchisee Won’t Sell Certain Foods, Says Against Religion

Muslim Dunkin’ Donuts franchisee can sue over anti-pork stance The decision reversed an Illinois federal court judge’s 2004 ruling that rejected Walid Elkhatib’s argument that Dunkin’ Donuts discriminated against him based on his race by making the sale of breakfast sandwiches with bacon, ham or sausage a mandatory part of his franchise agreement. According to court papers, Elkhatib, a Palestinian Arab, has been a Dunkin’ Donuts franchisee since 1979, before the company began selling any pork. Once breakfast sandwiches were introduced in 1984, Elkhatib’s Chicago-area outlets sold them without bacon, ham or sausage for nearly 20 years. The company did not object, even providing him with a sign that said “Meat Products Not Available.” Who will win? My guess is the franchisor, as Dunkin’ Donuts has full discretion in deciding whether to renew the franchise agreement.

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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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You Must Source Goods From Our Country [India]!

FIPB faces franchisee fan fury-Policy-Economy-News Finance ministry officials are of the view that the move will lead to discrimination since many foreign brands such as Chanel, Marks & Spencer and Tommy Hilfiger are already present here, and restrictions will deny a level playing field to those who are waiting to enter the Indian market. The food processing ministry is worried that infusion of technology brought in by brands like Pizza Hut and McDonalds—which operate here through franchisee arrangements—will be hampered. Similar is the concern of the textile ministry since a number of global brands operate here through franchisees and their arrival here has led to introduction of modern technologies. Protectionism is a fact of life in foreign countries, but rarely works out for the best in the long run. The economic benefit is usually muted by higher prices.

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Franchisee Pays ~$200,000 in Damages for Gender Bias

Taco Bell franchisee loses gender bias lawsuit Katrina Hillis and Diana Pepper, who were store managers at Taco Bell restaurants in McMinnville and Sparta, were awarded $93,000 in damages …. The lawsuit claimed that a “glass ceiling” at Management Resources (franchisee) kept most women from rising above store manager into upper management. The suit said 60% of Management Resources store managers were women but only 15% of its higher-ranking executives were women.

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How to Blow the Franchisor’s Business Model

Domino’s Must Give Franchisees Choice A federal district judge ruled that Domino’s Pizza Inc. franchisees have a choice of vendors for a computer system the company developed. In his ruling Wednesday, Judge Richard H. Kyle, sitting in Minneapolis, said the chain’s franchise agreement allows franchisees to buy the hardware and software that would meet Domino’s specifications from any source. After developing a computer system in-house, Domino’s mandated that the hardware be purchased from International Business Machines Corp. and the software from itself, the judge’s ruling said. Some franchisees balked, contending that the only reason the company had imposed that requirement was to generate more franchisee revenue. The plaintiffs argued that they should be able to buy the system from any source as long as it met specifications.

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Quiznos Case Proceeds To Trial

Death of a toasted sandwich salesman Quiznos had sought to strip eight franchisees of their franchises after a franchisee gripe site posted the suicide note of a Quiznos franchisee on its website. The note blamed the Quiznos Corporation for ruining his business and his life. The franchisee, Bhupinder “Bob” Baber, was found dead last November in the bathroom of a Quiznos restaurant in Whittier, California, after pumping three rounds from a .380 caliber handgun into his own chest. …. Another group of angry franchisees, the Toasted Subs Franchisee Association (TSFA), took up his cause, and posted his suicide note on its website to raise money for the Baber family. Quiznos quickly responded by yanking the franchises of the eight directors of the TSFA, and the TSFA responded by filing for an injunction in federal court in Denver seeking to hold onto their franchises until the defamation allegations filed by Quiznos could be litigated.

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When It’s Time to Walk Away From the Franchise?

Baskin-Robbins losing two shops Most franchise agreements have a term of about 10 years with options to renew. If the franchisee wants to renew, they must sign the then current franchise agreement, which may require upgrades to the building, menu, operations, adherrence to the new operations manual, etc. Sometimes those required upgrades just don’t make economic sense for the franchisee because the economic realities show that you won’t make that money back over the next few years. If you are already netting less money than you hoped (say $40,000/year), do you invest the $70,000 to keep the franchise? Or, do you walk away from your entire investment, all the machinery, investment in the fixtures and local brand, the relationships? One longtime Baskin-Robbins franchisee in Champaign, Illinois faced such a decision, and decided to not continue. Panchal has operated the store since 1991, but said Baskin-Robbins wants him to spend $70,000 renovating the shop. He said if he were making $300,000 a year, he might do that, but the revenues and location haven’t been that strong. … Stover figures he sells about 3,000 gallons of ice cream a year. The ice cream, made by Dean Foods for Baskin-Robbins, comes in 3-gallon tubs that yield about 72 scoops each. About 60 percent of his revenues come from ice cream sold by the cone or the dish. Desserts, such as ice cream cakes and pies, account for another 20 percent. The remainder comes from miscellaneous products, such as prepackaged ice cream.

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More Trouble for UPS

UPS Store franchisee files suit against UPS – The Business Journal of Milwaukee: The suit, which was filed in U.S. District Court in San Francisco, accuses Atlanta-based UPS (NYSE: UPS) of wrongly profiting off of UPS Store and Mail Boxes Etc. franchisees by billing them for differences in shipping rates. According to the complaint, franchisees weigh and measure customer packages in their stores, and charge customers accordingly. They then ship the package to UPS, where the company re-measures the package and charges the store owners for the difference. The lawsuit argues that franchisees have no ability to contest the revised measurements and can’t reassess customers for the additional charges. It also claims that UPS uses “inaccurate” methods of measuring the packages.

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Raving Brands Litigation

Raving Brands Faces Copyright, Employee Litigation COPYRIGHT CL AIM: Raving Brands’ legal troubles go beyond three franchisee lawsuits that allege fraud, misrepresentation, and undisclosed kickbacks. The holding company, which recently sold Moe’s Southwest Grill to FOCUS Brands, faces copyright and former employee disputes. In January, under the radar, federal courts ruled in favor of artist Janie Atkinson, who claimed Moe’s used her paintings—“Lady John” and “Sir John”—without permission. Both sides are currently arguing damages. EMPLOYEE LITIGATION: In August 2005, former franchise sales director Anne Wheatley filed suit, alleging she was denied promised stock options in Moe’s and Mama Fu’s… Wheatley requested 50,000 shares of Moe’s stock and 50,000 shares of Mama Fu’s stock. According to her 2004 Schedule K-1 (IRS Form 1120S), Wheatley indeed had deductions taken from her accounts, with a 0.43 percentage of stock ownership for the tax year. The tax documents do not say, however, whether the deductions were for restricted stock. In February 2005, two months before Wheatley requested her dividends, Raving Brands’ tax accountant advised management to revise shareholder options to help franchise expansion goals.

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Franchisor sues Franchisee for Hiring Illegal Aliens

Dunkin’ targets illegals: Sues West Concord franchisee A spokesman forDunkin’ Donuts said it doesn’t comment on pending litigation. But hesaid that last June, Dunkin’ agreed to voluntarily participate in the so-called “basic pilot” computer system that allows employers to verify whether workers are legally in the country and have Social Security numbers. …. In its suit, Dunkin’ says West Concord Donuts “knowingly and purposefully breached” its franchise agreement by “violating” federal immigration and employment laws at its shop. The suit said owners “knowingly accepted false identification documents” for hiring purposes. Dunkin’ also said the company failed to keep up its franchise fees, or the percentage of the shop’s total gross sales.

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Jackson Hewitt PR Problem

Jackson Hewitt Launches Internal Review of Allegations Against Franchisee Jackson Hewitt Tax Service Inc., a leader in the tax preparation industry, today announced it has launched an internal review of allegations made against a franchisee of the company. The review is being led by Fred Goldberg, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom LLP. Here is background on the IRS allegations The government filed lawsuits against several corporations that operate 125 Jackson Hewitt offices. These offices in four states — including Michigan — are owned by one franchisee. The Justice Department says they were cheated out of more than $70 million after franchise managers and employees took kickbacks for filing fraudulent returns. another article: Feds sue Atlanta franchisee of tax prep firm S&P Downgrades Jackson Hewitt to Hold

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