Entrepreneur magazine seems to always figure out new ways to publish the same “tips” on starting a business or buying a franchise. Nevertheless, the most recent “How to make a lot of money as a franchisee” is worth a quick scan.

This item is most important in my opinion if you are looking at franchising primarily to increase your net worth (as compared to a ‘lifestyle’ business):

4. Reinvesting to achieve your absolute goal. If you find an opportunity that fits well for you and has a great return on investment, and you’ve got your first unit up and making a lot of money, you can reach your absolute number goal by acquiring additional units. This can either be done through further out-of-pocket investment or through the reinvestment of the profits you’re making into growing the business. I have a good friend who owns more than 40 haircutting franchises. The return on investment in each unit is great, but the absolute dollars in any one unit don’t meet his overall total income goal. He found that by adding additional units over time through the reinvestment of profits, he could realize a total income far in excess of what his absolute goals were when he started the business. In the example mentioned in the first point, if you want to make $100,000 per year, make four of the $5,000 investments and you’re there.

• Investment Alternatives
• Are you thinking of Franchising your Business?
• Christmas Franchise
• Part-time Work = Part-time Profit?
• The hidden ways franchisors make money off franchisees

You are not going to believe this…

Consumer Reports conducted a coffee taste test, and the winner was [drum roll please]….Cuppy’s Coffee!!!…..OK, I kid. The winner was McDonald’s, who beat Dunkin’ Donuts, Burger King and Starbucks (I’m sure Starbucks loves being lumped into that group).

McDonald’s coffee “beat the rest,” according to Consumer Reports. It was “decent and moderately strong. Although it lacked the subtle top notes needed to make it rise and shine, it had no flaws.”

I agree.  I like the new protruding sipper lids.

As for Starbucks, its coffee “was strong, but burnt and bitter enough to make your eyes water instead of open.”

I somewhat agree.

I’m a big fan of coffee (with cream please). But, a friend of mine ruined my coffee drinking experience with one statement. He said “coffee looks and tastes like muddy water”. Now, when I drink my daily coffee with cream, I look into the cup and damn it, it looks (and sorta tastes) like muddy water!

- - - -
On a different note, do you want to know what investment bankers and M&A/LBO guys think about when they look at franchisors? They often look at breakup value and leveraging assets (primarily real estate of their company-owned stores) on the balance sheet.

• McCafe = Coffee + Soups +Sandwiches + Pastries
• Wendy’s Following McDonald’s Lead on Coffee Bistro
• The Hooters of Coffee
• Relief to McDonald’s Franchisees for New Coffee
• Smoothies Competition from McDonald’s

“Flatbread Sandwiches” and “Grab-N-Go Pizza” is on the new prototype menu being tested in Sarasota, FL.

Meanwhile, every detail of this breezy-feeling building is designed to reinforce the brand.

Customers waiting for their food at the drive-up window gaze through glass walls at the interior, and they also have a good view of the coffee-by-the-pound, shelved up high and directly opposite the glass wall.

the Flatbread Sandwich is a key item at the new Dunkin’ at Stickney and Gateway Avenue. Priced at $2.99, the sandwichof the future comes in three versions: turkey, bacon and cheddar; ham and swiss; and three-cheese…Delivered frozen and crisped up in expensive new ovens that combine convection with microwave, the Flatbread is a cross between a Cuban and a pita sandwich…These convection-plus microwave ovens, which are all the rage in the fast food industry, give the bread a toasty, fresh-baked finish while getting the innards nice and hot, and they do it all in a minute.

Same for the next item down under the heading “Anytime Snacks” — the “Grab-N-Go Pizza” — and for another new hand-held meal, the “Chicken Biscuit.”

I like what I’m hearing…

Right now, Kaplan is doing at least 60 percent of his business between opening and noon.

I’m a bit surprised. I thought they’d do 75%+ before noon.

The average Dunkin’ Donuts store churned out $915,000 worth of coffee, donuts, cappuccino and Coolattas during 2005, a figure that was 8.3 percent ahead of 2004.

The $915k sales number is strong, and the margins have progressively increased, helped by nearly matching Starbucks’ coffee prices.

• Dunkin’ Donuts - New Restaurant Design
• Dealing with Local Government Planning Boards
• Franchisee Won’t Sell Certain Foods, Says Against Religion
• Dunkin’ Donuts going free of trans fat
• The Franchisor’s Owner Matters

BusinessWeek documented Bhupinder “Bob” Baber founding of the Quiznos Subs Franchise Assn and its litigation soap opera.  The independent franchisee associations of Diary Queen, Subway, and few others are also mentioned along with their individual legal battles with the franchisors.  For example, Dairy Queen franchisees litigated over the new DQ Grill ‘n’ Chill concept, and Subway franchisees litigated over a potential loss of influence over an advertising fund.   Toasted Subs Franchisee Assn members pay $50 per store per year for membership - well worth it in my opinion.

• Dairy Queen Remodeling Fight
• Royalty and Advertising fees of sandwich franchises
• Quiznos Case Proceeds To Trial
• Quiznos Claims More Profits for Franchisees
• What to learn from this Subway lawsuit

About 25 Original SoupMan Cafés have opened (plus a wholesale business) since Yeganeh began to franchise his restaurants last year based on his original Soup Kitchen International in New York. One blogger feels that $7.95 for a bowl of soup from the Soupman (Soup Nazi from Seinfeld) is too pricey. He posted some pictures too.

Considering I paid about $5 for a grande, sugar-free Cinnamon Dolcé Latte at Starbucks today, 3 more dollars for hearty veggies and/or meat seems with the reasonable range.

Previous mentions of Soup Nazi

• Follow up to the soup franchise idea
• Soup Nazi for $30K
• The Original SoupMan and Cold Stone Creamery Franchises Team Up
• ‘Seinfeld’ Soup Nazi Franchises Troubled
• Soup franchises

Imagine this -

You are a Subway franchisee and you are believe that you are being cheated by the franchisor over payments relating to the transfer of leases and equipment costs. So you set up a web site, SubwayUncovered.com to vent your frustration and tell the world of your experience. Subway, of course, will will try to protect its brand through the legal system. In this case, Subway is claiming trademark infringement from using the Subway name in a domain name. Trademark infringement complaints in these cases usually involve the claim that there is a strong likelihood of confusion in the reader’s mind that this may indeed be an official Subway property, and that confusion will dilute the brand’s goodwill. The final arbiter of domain names is usually the World Intellectual Property Organisation (WIPO), and the organization hasbeen permitting the use of trademarks in domain names when the site comments on the company. This Subway dispute happens to be taking place in the UK but the concepts are relevant in the US.

The operator of PayPalSucks.com has some great advice for those of you interested in this topic. It gives good advice on how to setup a protectable “complaint” site with the company’s name in the domain, and it illustrates the point with the actual letters from the attorneys on both sides of the PayPalSucks.com dispute (which he won).

• What to learn from this Subway lawsuit
• Subway Franchisee Upset
• Subway’s DeLuca loses battle with franchisees
• Behavior Around Disabled Employees
• PR Through Surveys

KFC is shifting its design strategy to more upscale. Here is the experience from one franchisee:

The restaurateur has spent more than $3 million renovating all the restaurants, but only a location in Claremore and now the southeast Tulsa store boast the new image.

“The idea was to bring KFC up to casual dining,” Schoenhofer said. “We’ve gotten away from the fast-food look.”

KFC and its parent company, Louisville, Ky.-based Yum! Brands Inc., are in step with an evolution inside the quick-casual food industry — new images for many longtime chains, including fast-food giant McDonald’s.

“It’s a trend and, obviously, it’s working,” Schoenhofer said.

At KFC, hard plastic seating, bright primary colors,and old menu boards and lighting have been replaced with high, open ceilings, glazed tile floors, padded booth seating, upscale tables and chairs, and improved restrooms and lighting — all in a Tuscan color scheme of gold, rust, blue and brick red.

The restaurant also features a colorful, revamped menu board above the service counter.

With inflation, “We’re asking people to spend more money on food, and we want to give them the environment they want,” Schoenhofer said. “We want it to be a nice experience for them.” KFC is also making its menu healthier.

…And after the renovations, business soared, he added. “Since we took the stores over, our sales went up 150 percent.”

Most of the fast-food chicken brands such as Popeye’s, Church’s, Boston Market, El Pollo Loco, Pollo Tropical, Bojangle’s Chicken, Chick-Fil-A, and Chicken Kitchen, have relatively common cheap chair/booth style look. Improving the quality of the food and restaurant design is a smart, and very likely to be successful strategy. One strategy to capitalize on this new initiative is to buy an existing KFC franchise from an owner who does not have the cash to upgrade to the new design. I’d buy it!

• Fresh Casual a new category in restaurant franchises
• Tough Competition: Just Fresh Kitchen Café
• Dunkin’ Donuts - New Restaurant Design
• Blimpie changes logo and interior after sales drop 20%
• Delivery-only Restaurants

While some claim any free PR is good PR, that doesn’t hold true in the franchise world. I would wager that the vast majority of people before they become franchisees do some searches on the Internet (or their loved ones will do it for them) about the franchise. Blogs come up high in search engines because, in part, to frequent postings and incoming links. They serve as a powerful self-disinfecting spotlight. But, this spotlight can be abused by franchisees who failed because of their own fault. Nevertheless, franchisees will flood towards franchisors that are committed to ethically maximizing both for themselves and franchisees.

The Java Jo’z / Cuppy’s Coffee story

• There has been a lot of negative blogger buzz with shark ferocity surrounding Cuppy’s Coffee and Java Jo’z. Apparently, Cuppy’s Coffee (formed in May 2006) purchased the assets of Java Jo’z Coffee & More, LLC. Allegedly, Java Jo’z orally promised a return of the $20-30,000 franchisee fee if the franchisee did not build out. However, things turned bleak - the CEO was sent to the pokey for tax issue, the assets were sold to Cuppy’s Coffee, and now there is supposedly no money to return the franchise fees. The Franchise Agreement does not provide for a refund of franchise fee, but allegedly oral promises were made to franchisees by Java Jo’z and its CEO, Roy Snowden. The asset sale under impending bankruptcy is suspiciously ill-timed and no one has released dollar amounts to determine whether fair value was paid. And if it was, where is the money?
• Should people be concerned about the ethics of Cuppy’s? Probably not at this point. Many details are unknown and just because people lose money does not mean anything unscrupulous occured.

I have a few questions:

1) Why did Aaron Weinstock from a few miles outside Fort Walton Beach register in Florida the business: CUPPY’S JAVA JO’Z COFFEE & MORE, INC. ? Is Aaron Weinstock related to Kristin Weinstock who name appears on blog spamming, and it always reads:[update 1-25-2007: this text has been deleted] As both an Employee and an Owner, I get to experience Cuppy’s in a way that not everyone can. I love Cuppy’s because of the dedication of the employees, to each other and to the Franchisees and Licensees. I also love having the chance to work with our owners every day, and learn from their experiences to help me in the process of opening my own store.

2) If Doug Hibbing, President of Cuppy’s Coffee, never had a legal relationship with Java Jo’z, why did a Russell Hibbing register “Java Jo’z International, Inc.” in Nevada last year?

For fun - what are the possible claims/theories of liability based on the allegations that have swirled around?

1) fraudulent conveyance/transfer:
As attorney Paul Steinberg pointed out, and Cuppy’s objected via a tersely worded letter from their attorneys, the asset sale may be unwound if under the Uniform Fraudulent Transfer Act, if Cuppy’s received or bought assets from Java Jo’z and Java Jo’z

(1) intent was to hinder, delay, or defraud creditors (pay back the franchisee their deposits),
(2) Cuppy’s did not receive a reasonably equivalent value in exchange for the transfer or obligation, and the debtor

(a) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(b) intended to incur or believed or reasonably should have believed that the debtor would incur debts beyond the debtor’s ability to pay as the debts became due.

Under the Bankruptcy Act, an aggrieved party may bring suit against those persons who received transferred property and may recover from the transferees the value of that property if they have subsequently converted the property.

2) criminal conspiracy
US Code Title 18, Part I, Chapter 19, § 371. Conspiracy to commit offense or to defraud United States:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.

3) civil RICO statutes
Most civil RICO claims are filed under Section 1962(c), which makes it unlawful to “conduct or participate, directly or indirectly, in the conduct” of an enterprise through a pattern of racketeering activity. The four primary elements are “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”

4) civil conspiracy
The typical elements for civil conspiracy include: (1) an agreement (2) by two or more persons (3) to perform an overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another.

Hat tip: The Usual Suspects = Paul Steinberg, Blue MauMau, FranBest, Ben Scoble, Franchise Pick, and probably others that I forgot (sorry!)

• The AAFD Awards Cuppy’s Coffee Franchise with Contract Accreditation
• Winner of Coffee Taste Test
• Relief to McDonald’s Franchisees for New Coffee
• Wendy’s Following McDonald’s Lead on Coffee Bistro
• The Hooters of Coffee

What happens when your franchisor sells in alternative sales channels that chip away at a franchisee’s sales? You’re screwed.

For example:

A Blockbuster franchisee filed suit in federal court claiming that because Blockbuster now allows customers to buy and rent videos online, the group’s local franchise agreement has been undercut. This was on top of the “no late fee” promo Blockbuster was running. What’s a franchisee to do? Well, there is not much you can do. Most franchisors expressly provide in the Franchise Agreement that they are authorized to sell their products online and in other venues that encroach on your territory.

Another example - The Dippin’ Dots franchisors reserve an exclusive rights to sell their goods online, at special events and venues no matter where a franchisee is located.

• GameStop to Franchise
• Online Ordering Systems
• Online Ordering
• Litigation disclosures in the UFOC
• Dippin’ Dots decent

…there were a few problems with our web host, but everything is now up and running.

• Will post again in a few days
• Stone Cold Sales
• Quiznos Franchisee Grumblings
• Franchisees: Another horror story
• Secrets to Arby’s $3.5 million/year Store

About 60 percent of Pizza Patrón customers and 45 percent of the franchisees are Latino. As a convenience to its mostly Latino customer base who often have have leftover pesos from Mexico, Pizza Patron will accept foreign currency in exchange for pizza.

On an unrelated note, did you know that Patron tequila (which I love almost as much as Casa Noble) also co-founded Paul Mitchell, the haircare products company?

• Pizza Styles
• Pizza Hut Stagnant
• Journey of a Franchisee
• Panera Pizza
• Cheese Price Increases are Grating to Pizza Franchises

Pizza Inn is ~400-unit buffet, delivery, carryout, sometimes-drive thru pizza chain in the soutwestern United States with a drama filled past few years that would make some soap opera’s jealous.

In 2002, the then-CEO Rogers of Pizza Inn borrowed about $2 million from the company to buy company stock. The stock sank and Rogers couldn’t pay back the company’s cash loan. Rogers was fired as CEO and Pizza Inn wrote off the debt and moved Parker, then President, to CEO.

Shortly thereafter, ex-CEO Rogers sold his 27% stake in Pizza Inn to a private investment firm escaping with a tidy profit. With the private investment firm holding a controlling interest, the current executives sought to protect their jobs by writing employment agreements with Pizza Inn. The employment agreements provide that if the four executives left for “good reason” or were removed from their posts, they would receive payouts totaling $7.4 million (Parker would have pocketed $5.4 million, Olgreen $630,000, Clark $605,000 and Preator $597,000), more than twice Pizza Inn’s 2003 profit of $3.1 million, which would have surely bankrupted the company.

Eventually the private investment firm got their wish and the shareholders elected new candidates to the board of directors. Parker, the CEO with the parachute employment agreement, resigned and claimed this trigger the parachute and the company owed $5.4 million (he sold 98,000 shares a few days before). He eventually won a settlement of $2.8 million. Pizza Inn even sued its former legal counsel for its role in advising the company on the huge severance packages (the lawyers were supposed to work for the best interest of the company, not the executives). In the meantime, revenues of the franchisor fell due to lower franchisee sales which resulted in the franchisor suffering less royalties and less revenue from the franchisor-owned supplier. Pizza Inn also settles an unrelated law suit with PepsiCo for breach of contract and agreed to pay to PepsiCo $410,000. Drama!!

(links to many articles on the subject at Pizza Marketplace)

So, with all these distractions supposedly behind the mind the executive team, will Pizza Inn salvage the business and work on a profitable model? The pizza is above average, usually gathering positive reviews on Citysearch and other local city guides. The franchisee association (I would have loved to have been a fly on the wall at those meetings during over the past 5 years) claims it is pleased with the new direction of the company and looks forward to the more collaborative style of management. Pizza Inn recently sold it’s headquarters to pay off debts and is outsourcing distribution services previously operate by a company-owned division. Pizza Inn will probably turn the corner and further improve operations. The lower food costs will certainly help franchisees and hopefully dampen the store closings.

Would I buy it? While I like the quick buffet style restaurant rather than the small-box take-out/delivery, with even Papa John’s recently looking to convert to small eat-in areas, I’d be more inclined to buy the stock than buy a franchise during turnaround when cash is tight.

• Pizza Styles
• New Englands own Papa Ginos wants a bigger slice of the national pie!
• Unique Strategy to Franchising
• Pizza Hut Stagnant
• Cheese Price Increases are Grating to Pizza Franchises

The employee of a franchsee wrestles with a customer over a hot coffee pot.  The coffee spills on the customer burning him.  Is the franchisor liable (the franchisee obviously is liable)?  No, not in New York.  The franchisee is obviously liable, but not the franchisor.
7-Eleven argued in court that there is no evidence of negligence on its part and that the existence of a franchisee/franchisor relationship is insufficient to impose vicarious liability on 7-Eleven for the acts of an individual employed by an independent franchisee.

In Nickola v. 7-Eleven, 03-13494, Doyle explained that in determining whether a franchisor may be held vicariously liable for the acts of its franchisee, the most important factor to consider is the degree of control the franchisor maintains over the daily operations of the franchisee.

Here, the judge found, 7-Eleven exercised no control over the activities that led to Nickola’s injury. “Thus, in the absence of a principal/agent relationship, or proof that the franchisor exercised a high degree of control over the franchisee, there is no basis for holding the franchisor responsible for the franchisee’s misconduct,” Doyle said.

• Franchisors vicariously liable for their franchisees?
• 7-Eleven Gets #1 Rank from USA Today
• Lost the Game of Chicken
• Quiznos Franchisee Grumblings
• Thoughts on Due Diligence & Exclusive Territories

Telling nugget of information in this article about Stone Cold Creamery:

So far per store sales at its 12 international stores in the Pacific Rim are running at about $1 million annually, about three times higher than at U.S. stores.

(In the U.S., stores have two to three workers on a weeknight shifts and five to seven on weekend nights).

Pulling in $300,000-$400,000 in gross sales per store is below what most franchisees would consider a fair return on investment.

If labor costs are 30% of your overall costs, this infers that your costs are about 3.33 x $152,500 = $507,825

That seems extraordinarily high but its hard to be more accurate without more data.

—- Discussions on Stone Cold Creamery in the discussion forum

• The Original SoupMan and Cold Stone Creamery Franchises Team Up
• Recent Same-Store Sales Rundown
• Is caring for the elderly a profitable business?
• Burger King Franchisee Woes
• Franchisee Mistakes