Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada.

The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO.

Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

Why does this site often post negative horror stories about franchisees who don’t do enough due diligence or franchisors who appear to take advantage of naive entrepreneurs? Because the “scared straight” method often works, and you’ll be happy you spent a little extra time researching the financial and legal aspects of the business. The franchise salesman and commissioned consultants rarely fully apprise the franchisee of the risks and obligations from entering into a legal contract that could potentially have the franchisee on the hook for hundreds of thousands of dollars.

Franchising can be wonderfully prosperous and rewarding endeavor, or it can be an angry and bankrupting experience. The later can usually only be controlled BEFORE you pay the franchise fee and sign the franchise agreement. For example, if your franchise agreement grants the exclusive territory in such a way that another location can be theoretically constructed 2 blocks away, perhaps you are best to walk away if this will obviously overly dilute your customer base to the point of unsustainable sales. Franchisors are notorious for milking profitable locations by stacking franchises as close as legally possible. Why? Because franchisors make more money from each additional $25K franchise fee plus the additional gross revenue, and two stores will always gross more than one. Some poorly organized and managed franchisors get themselves into a virtual Ponzi scheme where the company must keep earning increasingly more franchise fees to support their growing franchisor operations that is not sustainable by royalties alone. If the franchisor won’t carve out a territory big enough for you to make a comfotable profit, you don’t have to ask why, you know why.

Here is an extreme example (Caught in a Franchise Fiasco, The Toronto Star, Mar. 14, 2006) of what can happen when the franchisor-franchisee relationship evolves in unanticipated ways.

From the forum:

March 20 ‘06 issue of NRN cover story states that KFC franchisor-mandated remodels ($250-500K per unit) may force smaller franchisees to sell; www.nrn.com

When buying a franchise, remember to ask about any upcoming mandated capital improvements. Particularly in the hospitality industry, many franchisors have a schedule for upgrades/remodels; this is necessary to keep the brand image fresh.

What appears to be a “bargain” price from a selling franchisee may cost more than an “expensive” alternative outlet if the higher-priced outlet has the current decor and the cheaper outlet will be needing a facelift.

Hat Tip: Paul Steinberg

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being

1. how much you can charge customers (and margins) before customers will just order restaurant takeout?
2. is the change of behavior and lifestyle too much to create a solid base of loyal customers?
3. how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu?

A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit.

And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year.

Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

A banker answers questions about the SBA’s guaranteed loan program @ Franchise Times. Here is a summary:

1. When is a SBA loan a good choice for borrowers?
• anytime
  
2. What can I finance with a SBA loan?
• any legitimate business need
3. How much down is typical?
• 10%-30% (higher for startups)
4. What do I do first?
• write a business plan and see your banker
5. What are some basic term guidelines for an SBA 504 and 7a program?
• 7a: These are general small business loans. The term of the loan tends to mirror the use of funds (how long you can amortize the asset, length of equipment loans are based on the life of the equipment). They’re one through the bank but SBA guarantees a portion of the loan.
• 504: These are restricted to expenditures that will spark job creation or retention. Generally used for long-term fixed assets and facilities (not working capital). Max net worth of applicant must be under $7.5 million.
6. Can they be used together?
• Yes.
7. Can you give me an example of a deal that works with both 7(a) and 504?
• restaurant
8. How does a construction loan work?
• Short-term loans that typically require interest-only payments during construction and become due upon completion.
9. How is the money I borrow actually disbursed?
• The bank distributes the money as needed and planned. The contractor will submit a draw request monthly to cover the labor and materials for work completed to date.
10. How long does the draw approval process take?
• Ideally 3 days
11. How long does it take to obtain a construction loan approval?
• No timeframe given