Looks like the R&D team (or their consultants) at Dunkin’ Brands (Dunkin’ Donuts, Baskin Robins, Togo’s) have been hard at work reworking their ingredients. Hopefully this won’t be too much of a burden on the franchisees and no new equipment or costlier ingredients will be required.

About 400 locations nationwide that took part in a four-month test already have made the switch to a new blend of palm, soybean and cottonseed oils. That includes all restaurants in New York City and Philadelphia, which are forcing restaurants to phase out their use of artery-clogging trans fat.

The ice cream chain Baskin-Robbins, another unit of Dunkin’ Brands Inc., plans to be zero grams trans fat by Jan. 1.

…

Dunkin’ isn’t positioning its namesake product as health food – a shift that would involve more disbelief suspension than might be possible for a treat synonymous with portly, doughnut-gobbling Homer from television’s “The Simpsons.”

“The goal was not to make a healthy doughnut, it was really to create a doughnut that was better,” said Joe Scafido, Dunkin’s chief creative and innovation officer. “Certainly, we did not create a healthy doughnut.”

…

This past spring, hundreds of restaurants began taking part in a test to gauge customer reaction to the blend that Dunkin’ ultimately selected. Managers at participating stores were split into two groups, with one receiving conventional cooking oil, the other receiving the experimental oil, and neither group knowing which type they received. Dunkin’ closely watched sales and customer response at restaurants with the experimental oil.

“We got no negative consumer feedback, and we sold 50 million doughnuts in that time,” Scafido said.

What are Dunkin’ Donuts’ competitors up to with the fat?

Dunkin’ is ahead of Krispy Kreme Doughnuts Inc., which has yet to roll out a zero gram trans fat doughnut but hopes to do so. Brian Little, a spokesman for the North Carolina-based chain, said, “We continue to work aggressively with outside supply partners, and our goal is to get to zero trans fatty acids while maintaining great Krispy Kreme taste.”

A call seeking comment from another chain, California-based Winchell’s Donut House, wasn’t immediately returned.

Starbucks Corp., Dunkin’s Seattle-based rival in the coffee shop niche, said in May that it would cut artificial trans fats out of its food and drink by year’s end in stores in the continental U.S., Alaska and Canada.

Dunkin’s announcement follows about four years of research of more than 28 alternative cooking oils and proprietary blends.

If nothing else, this will result in much FREE puclicity for Dunkin’ Donuts…being one of the first movers in a healthy trend does have its advantages.

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

Knockouts, a full-service salon franchise that would make Floyd the barber blush, is busting into New England.Naomi Kooker reports in the Boston Business Journal that Neko Corp., headed by Bing Yeo of Lexington, bought the rights to franchise the salons that have been dubbed the “Hooters of haircutting,” where a scantily clad “specially chosen staff of female stylists” provides professional grooming services, including haircuts, coloring, waxing, manicures, pedicures and massages for men.

Yeo purchased the rights in June to develop the franchises or sub-franchise the stores in Massachusetts, Maine, New Hampshire and Vermont. He plans to open his first store in Greater Boston by the end of this year or early 2008. He is looking in Allston-Brighton, among other areas, to open the first store, though no lease is signed.

The franchise agreement gives him 15 years to roll out 20 stores; but Yeo, a business consultant, said his goal is to roll out that many in five years, focusing on the eastern Massachusetts and southern New Hampshire markets.

Yeo did not disclose the cost of his agreement. Knockouts’ one-time franchise fee is $20,000 per location, with a 6 percent royalty fee thereafter. A 1 percent national advertising fee is also implemented after a store opens.

To date, some Knockouts franchisees have reported brisk business and profit margins exceeding 20 percent.

The concept comes at a time when other salon chains geared toward men are entering Greater Boston. For example, Floyd’s 99 Barbershop opened in Boston earlier this year.

However, none require the stylists’ uniforms that Knockout does.

“I wouldn’t deny the sex appeal,” said Yeo, who lists his wife, Winnie Yeo, as the director of the company on his Web site. “It’s certainly part of the branding.”

Yeo confirmed that the stylists, all women, are professional and certified, yet need to be friendly and attractive. He conceded the short-shorts worn by Knockouts stylists in Texas may not go over well in New England, and he’s deciding on an alternative such as dresses that are worn by stylists in Atlanta. “That outfit works in terms of the girls willing to wear those, and the customers really appreciate them,” he said.

Yeo said the target demographic for customers is men, ages 18 to 55, though women and children are welcome.
Click here to find out more!

The stores, with a boxing theme, are 1,000 square feet to 1,500 square feet and feature eight to nine haircutting stations surrounded by a boxing ring. Each station has a medium-size flat-screen TV. In other states customers are offered a free beer, but Massachusetts’ stringent liquor laws prohibit that service. Complimentary nonalcoholic beverages will be offered instead.

Most haircuts cost $25 or more and include two washes, consultation and head and shoulder massages; other services cost between $3 for a beard trim to $90 for a massage.

Build-outs, which include the lease and remodeling, cost between $15,000 and $40,000. Total startup costs, including equipment, are between $90,000 and $190,000. Each store employs five to seven people.

Retailing expert and lecturer Rick Segel, based on Cape Cod, called the concept “inevitable” given the growth in the adult entertainment industry and extensions of it, such as establishments like Hooters. “If it’s done right and done professionally and tastefully … they’re a huge success. The old line, sex sells — it really does.”

“We’ve done an excellent job of not crossing the line,” said Tom Friday, CEO of Knockouts Management Company LLC, the chain’s parent company, based in Irving, Texas. He founded the concept when he opened the first store in Addison, Texas, in 2003.

Knockouts has nine locations nationwide with 123 franchises, including Yeo’s, slated to open over the next few years.

Texas-based Sports Clips Inc., another sports-themed haircutting chain geared toward men, is Knockouts’ main competitor. It currently has 447 franchised stores nationwide; it employs men and women stylists and does not require them to wear skimpy outfits.

Cross Posted at: Let’s Talk Franchising 

• Same-store sales roundup
• KnowFat Franchise Changes Its Name to UFood
• New Englands own Papa Ginos wants a bigger slice of the national pie!
• McDonald’s chickens out on Boston Market
• Recent Same Store Sales, May 24, 2008

My first post about the topic of there being too many franchise consultant/brokers in the industry now, has prompted a pretty good discussion on a blog I contribute to, BlueMauMau.org, a very popular blog that is targeted to current and future franchise owners. More………

There were over 60 back and forth comments about this topic as of Sunday evening {8-5.} I am quite passionate about this subject, so  are some others in the industry….check out this discussion.
{Please come back here when you are done, to continue reading.}

The biggest problem I have with the amount of new “consultants” coming into our industry, is how they are being sold the bill of goods. Jim Coen, a 25 year franchise industry veteran up in New England, and fellow blogger,  gives one example of a franchise that sells franchises, to those that want to sell franchises. {Confusing, huh?}  See Below:

• No Experience Necessary
• Huge Demand and growing demand for our service
• No Cold Calling Required
• Work with the best franchises
• Tremendous Income Potential, earning up to $25,000 for a single transaction
• Complete Training
• Start from your Home
• Work Part time
• Only $19,900 to get started

$19,900 is quite the bargain, with no cold calling! Some franchises that sell franchises to those that want to sell franchises, have $30k-$50k Franchise Fees up front. To those folks that may be reading this, that are thinking about  becoming a “consultant”, what do you think “no cold calling” means?
What this means, in a nutshell, is that these franchises that sell franchises to folks that want to sell franchises will be sending you somewhat qualified “leads.” Well kind of “leads.” More like what I have been calling them for the last 5 years, inquires. A “lead’ is someone who is fairly interested in learning more about what you offer. An inquiry is a tad more of a casual look-see.
{These are my definitions, others will disagree] Don’t care. It is what is is. {IIWIIS}
A typical call to a  “lead” that you may receive most of the time goes like this:

Us- “Hello, This is Joel Libava {or Jim Coen}, and we are responding to an inquiry you made online concerning franchise opportunities.”

 Lead- “Yes, are you from Blimpie’s Subs“?

Us- “Well, actually no, we are franchise consultants/brokers, and we work with a large number of franchise company’s..blah blah blah…..”

Lead- “Well I specifically wanted information on Blimpie’s, do you work with them or not?!!”
Click.Click.Clickarooni.
Well, that was enjoyable. On a positive note, it only takes about 75-100 internet “leads” to find 2-3 folks that really might work with you, and hopefully one that will actually buy a franchise that you represent.

{End of Part 2}  Part 3 Coming Soon Enough

• Franchise Industry Shakeout Coming?
• Franchise Industry Shakeout Coming? {Part 4 of 4}
• Franchise industry shakeout coming? {Part 3 of 4}
• GameStop to Franchise
• Promises of Business Leads

What happens to a segment of an industry that has too many players?

The segment that I am talking about is one that is very close to my heart…..

Our type of business {Franchise Consulting-Brokering}has been around since the late 1980’s.
Until 2001 or so, our local firm has had very few competitors.
However, our part of the vast franchise industry, like a lot of other industries, is gettingrather crowded. There seems to be a plethora of folks who think what we do is easy.

Simple, and easy stuff, what we do. We try to help those wishing to explore business ownership, get into business! There are just gobs of folks that can write a check for $50k-75k, go to a bank for more, and prepare themselves mentally to possibly not make any money for the first year!

So what we have now is a bunch of “franchise brokering groups” that are themselves selling franchises to folks to sell franchises. HUH?
Folks that are paying $75k-$100k for these “home based” franchises are in for some surprises.First of all, the folks that are buying these unproven franchise brokering franchises are usually folks who have never been in the franchise industry! Their familiarity of the franchise industry consists of eating at burger and donut restaurants…
This is not anything personal against some of the folks that are writing the checks to buy into these franchise concepts, but, this is not “easy money“! What is really going on is that franchising is “HOT”, and more and more folks want to learn more. Learning and doing {writing a big fat check!} are two vastly different things. Sure a nice comfy “home based” business sounds good. But in reality, one is not “home.” One is out networking, and figuring out where these “people” are, that want to buy franchises.One is also spending lots of money advertising, and marketing, and advertising to find a couple of “interested parties.”

{End of Part 1} Part 2 coming soon……

• Franchise Industry Shakeout Coming? {Part 4 of 4}
• Franchise industry shakeout coming? {Part 3 of 4}
• Franchise Industry Shakeout Coming? {Part 2}
• Fresh Casual a new category in restaurant franchises
• Fitness Together Sells its 500th Franchise

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 or purchases as a condition of the franchisor to renew the franchise?

Below are two Auntie Anne’s for sale:

#1 - Worcester County, MA, USA
Asking Price: $175,000 USD USA Dollars
Business for Sale Industry: Food & Beverage: Non-classifiable
Reason for Selling: other business interests
Year Established: 1995
# of Employees: 1FT/8PT
Yearly Revenues: $269,687
Yearly Cash Flow: $70,690
Overview:

Auntie Anne’s Pretzel franchise located in a recently renovated mall. Be part of one of the fastest growing international franchises. Any new owner would benefit from the training offered at both the corp. HQ and on site. With a very reasonable rent in place for the next 7 years this store is ready for a new owner/operator to take it to the next level. A great opportunity for a first time business owner looking for the security of a franchise with minimal expense and maximum potential. Get in now before the busy fourth quarter when things really boom!

#2 - Auntie Anne’s Pretzel Franchise - Massachusetts (MA)

Asking Price: $65,000
Gross: $312,000
Cash Flow: $81,400

Business Summary: Auntie Anne’s Pretzel franchise located in a thriving destination shopping mall. This shop is in it’s fourth year of operation, the rent will remain steady for the next 2 years and there are options available. The rent includes the utilities, trash removal, and all common area expenses. The mall has been updated with stable anchors such as Macy’s and Target and the cinema is being renovated. This is a great opportunity for an owner/operator to both improve revenues and profitability as it is currently run absentee. Any buyer would need to be approved by the company and spend two weeks training in PA, The key to this operation is the very low cost of goods for this product, it is simple, straight forward, and a high margin operation to run. This store is being offered at a reduced rate as the absentee owner is motivated to move on and it is a fantastic opportunity considering a buyer avoids the normal $30k franchise fee. The initial start-up and build out cost for a new franchise is estimated at $275k.

Year Business was Established: 2003

Number of Employees: 1FT/9PT

Both have around $75,000 in cash flow, but one is selling for $65,000 and the other is selling for $175,000. The $65,000 must be a great deal, right!?!?! Not so fast. The owner is selling for $65,000 already sunk in $300,000 in build out and initial costs, and is implying that at the end of last year he had $80,000 in the business’s bank account. I’ll buy $80,000 worth of cash for $65,000 any day, but the owner obviously isn’t that stupid. Something is going on here for the price to be so low in contrast to his capital outlays and claimed positive cash flow. More likely he is just making ends meet, and the headache of managing teenagers who will rob you blind and not show up for work is driving him nuts.What is better = Buy an existing franchise or open up a new franchise? Buying an existing franchise is often preferable if one is available in your area. The risks are much lower because you have a sense of the business economics and customer visits before investing. Also, you avoid the higher franchise fee and sellers tend to discount their upfront build out costs. Of course, most of the time the franchise you desire does not have one for sale in your preferred geographic area, so buying and building a new franchise is your only option.

• The Pretzel Business
• Follow up on the NexCen Pretzel Acquisition
• Miscellaneous Franchise News
• Quick News Notes
• Subway Franchisee Upset

Choice of business entity (partnership, LLC, or S or C corporation) and minimizing your tax obligations can increase your net worth even with a stagnant franchise.

If you own a franchise and do your own accounting and taxes, please read this article. Here is a sample:

Paying the IRS—On Your Personal Income and Dividends

What makes S corporation dividends so attractive? Not only is there no corporate income tax, but the S corporation can cut other taxes as well. By paying the owner and select employee/shareholders with dividends, in addition to salary, the amount of income subject to Social Security, Medicare, and self-employment tax (and employer matches) can be reduced. Paying revenue as dividends removes that income from the Social Security/Medicare tax “pot” (7.65 percent employee/7.65 percent employer). The recipients pay personal tax on the payouts, but at the dividend rate, rather than the ordinary income rate.

Bigger Caveat: The Internal Revenue Service has been looking into S corporations and comparable business entities for possible abuses—including using S corporation dividends to avoid income tax. Under IRS rules, owners (and any other beneficiaries) of S corporation dividends must first receive a reasonable salary before revenue is paid as dividends. The IRS announced plans for a major audit of S corporations last summer, so it is an excellent idea to consult a tax professional and discuss this strategy at your annual corporate board of directors meeting. Dividends are a return on investment, not a substitute for a salary or a tax avoidance technique.

Does a Change Make Sense for a Going Concern?

Thinking of changing from a C corporation to an S corporation or LLC? Or maybe changing from an S corporation or LLC back to a C corporation? Or maybe you want to change between an LLC and an S Corporation? Consider this:

According to Pam Feely, a Lakewood (Col.)-based CPA, “For a sole shareholder the S corporation is an excellent entity choice. As long as the shareholder takes a reasonable salary, some of the business earnings can be taken as dividend distributions.” These dividends are only taxed once, at ordinary income tax rates (unlike the double taxation for C corporation dividends) and there is no self-employment, Social Security, or Medicare tax owed. The S corporation is also a good choice when there are several shareholders and all are actively working in the business, she says.

“In my experience, LLCs are appropriate when there is a disparity between ownership and sweat equity,” Feely explains. “Earnings in an LLC can be distributed out-of-proportion to ownership; this cannot happen in an S corporation.”

Talk with your lawyer and/or accountant on perhaps reorganizing your franchised business. The same goes for selling or buying a business - the legal structure matters a great deal, and getting your “price” so you can reach your “goals” may be a matter of the right combination of legal and financial structuring.

From a legal and tax standpoint - wealth generation (accrue net worth while paying or deferring taxes as much as possible, possibly self-insurance through a captive insurance program), wealth preservation (protecting your assets from law suits), and wealth transfer to your children (transferring non-voting interests in business entities to your children’s entities or trusts on a discounted basis; leveraging the child’s lower tax bracket; etc) are all strategies that nearly anyone can implement now and make the most of what you have. See your tax and estate lawyer for details.

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• When Your Corporate Employer Offers the Buyout
• Raving Brands Litigation
• Dairy Queen Remodeling Fight

The fresh-Mexican chain puts franchised growth on hold in favor of company expansion.  Maya Norris reports in Chain Leader that Camp Fitch the CEO of Tijuana Flats has decided to forgo franchising at Tijuana Flats to concentrate on company growth.

Read MoreCross posted at: Let’s Talk Franchising

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Accord is part of a push by the fast-food chain to raise its urban profile

Keith Reed of The Boston Globe Staff reports that Kevin Faulk, is sweating it out on the field at training camp with the rest of the New England Patriots, but that’s not the only place he’s planning on making an impact this season.

While getting ready to don the pads and helmet for another run at the Super Bowl, Faulk and four other current and former black professional athletes have pooled their money to buy 18 Burger King restaurants in Norfolk and Richmond, Va. The deal represents a new attempt by Burger King Corp., the Miami-based fast food chain, to grow its presence in urban areas. It is also an arrangement that allows Faulk, a native of Lafayette, La., to fulfill a goal of providing jobs to others whose backgrounds he can relate to.

“I watched how hard my mom and dad worked. When you’re young, you don’t realize the value and importance of hard work, but now I appreciate that,” he said. Faulk said he learned about the Burger King deal through a business associate. After looking over the details, Faulk said, he was enticed by the fact that many of the restaurants were in predominantly black neighborhoods, and that other current and former star athletes he knows — like National Football League Hall of Famer Marcus Allen and New York Giants defensive end Michael Strahan — were partners in the transaction.

A reason Burger King was eager to make the deal happen was that all four partners in the deal are black — Caron Butler of the National Basketball Association’s Washington Wizards and Donnie Edwards of football’s Kansas City Chiefs are the other two. The company wants to make inroads both in cities with high minority populations and among minority entrepreneurs, whose numbers it would like to increase among its franchisees.

In the late 1990s, Burger King attempted to address both issues through a deal with LaVan Hawkins, a black entrepreneur in Detroit who rose from being a street gang member to owning a restaurant chain that at one time included as many as 23 Burger Kings. Hawkins had a deal to open up to 200 Burger Kings in urban neighborhoods, but it quickly went sour and by 2001 the two sides were suing each other. They eventually settled, but Hawkins had bigger troubles: In 2005 he was convicted on federal perjury and wire fraud charges unrelated to his Burger King dustup.

Manny Portuondo, Burger King’s director of strategic franchising, wouldn’t comment on the Hawkins settlement or disclose how many of its 7,200 restaurants in the United States are minority-owned. But the company still needs more minority franchisees, he said.

“These communities make up more than 30 percent of the US population. There’s strong minority business growth in the US; these are demographic trends that make it a good business move for us to get these guys in,” Portuondo said. “Regardless of what may have happened with LaVan Hawkins, it’s in Burger King’s best interest to look at how to expand into the minority community, to grow our minority and diversity inclusion efforts.”

That doesn’t mean Burger King will always turn to black celebrities when looking to increase minority inclusion. The company has a minority franchisee in Boston who declined through a Burger King spokesman to be identified or interviewed for this story.

Still, pulling together wealthy athletes may have been one of the few ways to get a large deal like the one involving Faulk done, given Burger King’s stringent financial requirements on franchisees. A potential owner must have a net worth of at least $1.5 million, including a minimum of $500,000 in cash or some other liquid asset, to be considered for one restaurant.

In this case, there were 18 restaurants being sold after the franchisee who owned them decided to cash out and retire. George Miller, a former Burger King vice president, had been looking for financing to buy some restaurants, and he contacted Allen, an NFL Hall of Famer, through Miller’s investment banker brother, Ed. A few months later, the deal was done.

Miller will run the day-to-day operations of the restaurants. Faulk said he wouldn’t have time to visit them during the season, but would try to during the off-season.

Cross Posted at: Let’s Talk Franchising

• Burger King Franchisee Woes
• Quick News Notes
• Franchisee may buy Friendly’s Ice Cream
• Winner of Coffee Taste Test
• Royalty and Advertising fees of sandwich franchises

From a NexCen Press Release:

The combined purchase price for the transaction is $29.4 million, and consists of $22.1 million of cash, and NexCen common stock valued at approximately $7.3 million. These transactions double the number of brands in NexCen’s quick service restaurant (QSR) portfolio, which also includes the premium, hand-mixed ice cream chains MaggieMoo’s(R) and Marble Slab Creamery(R).As of June 30, 2007, Pretzel Time and Pretzelmaker had a combined 376 franchised or licensed units worldwide. Of those, 327 are in the United States, with the remaining 49 international locations located in six countries.

For the trailing twelve months ended June 30, 2007, aggregate unaudited revenues for the Pretzel Time and Pretzelmaker brands were approximately $6.4 million. NexCen estimates that aggregate revenues for the two businesses for the full year 2007 will be approximately $6.7 million. Based upon the partial year of ownership, NexCen expects to recognize approximately $2.7 million of revenue from the businesses for the remainder of 2007. NexCen expects these transactions to be accretive in 2007 and, after integration into NexCen’s operations, to generate combined operating margins of approximately 60%, consistent with NexCen’s expectations for its QSR franchising operations.

First, paying 5x revenue is absurdly high for an established traditional business with low barriers to entry and similar competitors. Most companies would pay 5 times EBITDA (earnings before interest, taxes, depreciation and amortization), and I imagine an organization like Pretzel Time and Pretzelmaker have expenses and obligations or close to the revenue figure. The stock market noticed the same overpriced acquisition along with other trouble at NexCen as the stock price dropped by almost 50% in the past few months:

Not good. NexCen also owns brands The Athlete’s Foot, Bill Blass, MaggieMoo’s, and Marble Slab.

• Two for One Ice Cream Franchise Consolidation
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• Franchisees: Give Your Stock to the Best Employees
• The Pretzel Business
• Papa John’s franchisees average $705K in annual sales?

Pampered pets

This year, Americans will spend an estimated $40.8 billion on pets — almost double what they spent just a decade earlier, according to the American Pet Products Manufacturers Association.

With about 7.1 million U.S. pet-owning households, national brands such as Origins, Harley-Davidson and Old Navy have created pet-friendly lines of clothing, accessories and wellness products.

Entrepreneurs are following suit with an interest in the rising status of the posh pet.

At least a dozen pet-related businesses have opened in the Oklahoma City area within the past few years, including a spa and resort, a home-based pet portrait studio, bakeries, professional poop scoopers and several specialty dog boutiques.

We’ve discussed pet franchises before on this blog. All things being equal (which they never are in real life), it’s easier to be grab market share when the customer base is expanding, and the customers are accustomed to spending for posh accessories and convenience.  Unless your products or services is noticeably unique, competition will rise and prices will drop.

The poop pickup business is very good business and has been profitable for the aggressive entrepreneurs and franchisees. Pet Butler has been growing very fast and is establishing a professional brand and franchise system, Happy Tails Dog Spa enables its customers to watch their pets on a webcam all day long, and Bark Busters helps you spend more quality time with your dog by training it to behave.

• Unique pet franchises
• Kiosk and Cart Franchises
• Revenue to the Franchisor
• We the People, or We the Screwed?
• Panaderia Taza coffeehouse

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 P&G coffee distribution deal.

How to Protect Yourself

The impact of brand leveraging through distribution deals and internet sales by the franchisor is increasing feverishly and should be considered when buying a franchise. There is really only one way to protect yourself. Ask the franchisor to include a cannibalization clause, or more nicely called a “territory commission” in the franchise agreement to credit or pay you as the franchisee a percentage of all sales derived in your buffered territory as compensation for your lost opportunity and lost sales, and to align your interests with the brand regardless of whether the sale transaction takes place in your store or a retail outlet.

I asked fellow New England Franchise Association member his take on the recently announced coffee distribution arrangement with Dunkin Brands and Proctor & Gamble, here is his reaction:

Mark A. Dubinsky, President of the Dunkin Donuts Independent Franchises Owners, Inc. (DDIFO) stated in an email that the DDIFO is diametrically opposed to Dunkin Brands announced program in its current format to distribute packaged Dunkin coffee in retail outlets. DDIFO firmly believes that this program will harm countless franchisees who enjoy the sales of pounds of coffee in their restaurants today.

Notwithstanding DDIFO’s objections, Dunkin’ Brands has opted to contract with Proctor & Gamble to sell Dunkin’ Donuts coffee in mass distribution channels, bypassing standard (franchisee) outlets in the process. This distribution program was created in the name of “increased brand awareness.”

DDIFO believes if the brand wanted to do better expose Dunkin’ Donuts Coffee in unrepresented or underdeveloped markets, this strategy could make considerable sense. DDIFO also feels to do so in New England, Dunkin’ Donuts oldest and mature market (with franchised restaurants approaching one retail site for every 6,000 in population), to be disingenuous, at best, or shear lunacy, at worst.

The following are comments to this program from three DDIFO members:

“It’s my opinion that Dunkin’ is trying to emulate Starbucks whose coffee is offered for sale in supermarkets,
the big difference being that Starbucks is corporately owned and Dunkin’ is 100% franchisees. It appears as if Dunkin’ wants to operate as a 100% company store (scenario) to the detriment of their franchisees.”

“I am shocked though not surprised that Dunkin’ Brands would consummate this deal with P&G. I understand the need to make consumers aware of the brand but I feel that this move will further damage the relationship between the franchisee / franchisor and erode the profitability in each and every restaurant. Dunkin’ Brands should always remember that the franchisees are the ones that made and continue to make this brand the success that it is.”

“The DDIFO should continue to communicate to its members the happenings of this deal and any changes and/ or updates that may arise. Also, I see no problem with going to the media to put our voice and reaction to the public.”

DDIFO urges Dunkin’ Brands to reconsider and correct this ill-conceived marketing strategy.

Great work, Jim!

• Example of making money in the franchise business
• Chipotle Going Public
• Revenue to the Franchisor
• Law Franchise for Sale!
• PuroClean franchise catches fire

The New York Times reported in an article by David Gonzalez that:There really is a John inside Johnny’s Pizza in Sunset Park, Brooklyn — John Miniaci Jr., whose father, John Sr., founded the neighborhood pizzeria in 1968.

There will soon be another John right next door on Fifth Avenue — Papa John’s Pizza, a franchise outlet. John Jr. considers this as an insult to his own papa John, who died just one month ago. Of all the spots the franchise could have chosen, why, he asks, did it have to be on the other side of the wall where two centurion busts stand guard above customers waiting for zeppoles or Sicilian slices?

“This is a neighborhood that has had businesses in the same family for two and three generations,” Mr. Miniaci said. “These big corporations come in and don’t see the value of that.”

That’s why Johnny’s latest delivery is a petition — to Papa John’s corporate headquarters in Kentucky. Some 2,200 people — shopkeepers and customers, including other pizzeria owners — have come to Mr. Miniaci’s defense. They have signed a declaration “to stop the establishment of Papa John’s in our neighborhood.”

This Brooklyn community has been grappling to maintain its character in the face of impersonal economic and residential development. The storefronts along Fifth Avenue near 58th Street have long been home to mom-and-pop stores and restaurants, patronized by the working families who live in the brownstones on narrow side streets. The stores have awnings that announce “Decent Dental Services” or “Spanish and American Food.”

Many were here when the area was down on its luck and real estate values were low, and are determined to keep the neighborhood’s traditional feel, even as they see chain stores and fast-food franchises creeping in.

Read the whole story: Let’s Talk Franchising

• Baking a Pizza in 5.5 minutes
• New Englands own Papa Ginos wants a bigger slice of the national pie!
• Online Ordering
• Papa John’s New Restaurant Strategy
• 2006 First Quarter - Yummy Same Store Sales Increase

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?”

• What to learn from this Subway lawsuit
• Banning employees from speaking foreign languages
• Domain Names that include Franchisor’s Name - OK?
• Subway’s DeLuca loses battle with franchisees
• Arbitrations Clauses

The Boston Business Journal reported today that Boston Market, co-created by Boston-based franchise guru George Nadaff, is being sold to Sun Capital Partners Inc.McDonald’s Corp., the Illinois fast-food giant that owns Boston Market, is selling the franchise to the Florida buyout firm to focus on hamburgers.

As of June 30, 2007, Boston Market’s total assets and total liabilities were $180 million and $89.1 million, respectively, according to Securities and Exchange Commission filings. Boston Market currently has 630 locations in 28 states.

In early August 2007, McDonald’s (NYSE: MCD) signed a definitive agreement for the sale of Boston Market. The company expects to complete the transaction in the third quarter 2007 and does not expect to record a loss.

McDonald’s acquired Boston Market’s operations for $176.2 million in May 2000. Since then, McDonald’s has pared down its partner brands, shedding Chipotle Mexican Grill (CMGB), Donato’s Pizza and its stake in Fazoli’s Italian fast-food restaurants.

“It was more a distraction than anything,” Morningstar analyst John Owens said of Boston Market. “McDonald’s is really singularly focused on the Golden Arches, so this was not a surprise to me.”

Sun Capital, which now owns Fazoli’s, has a portfolio that also includes bakery chain Bruegger’s Enterprises, Garden Fresh salad restaurants and cheese-and-meat retailer Hickory Farms. Two years earlier, Boston Market had run out of cash to pay creditors and filed for Chapter 11 bankruptcy protection.

Boston Market Corp., founded as Boston Chicken in 1985, expanded under the wing of franchise specialist Nadaff, who partnered with the founders in 1989.

Cross Posted at: Let’s Talk Franchising

• New Englands own Papa Ginos wants a bigger slice of the national pie!
• Comfort Keepers Franchise Purchased by a Boston Private Equity Firm
• American Male
• Charitable Goals of Franchisees
• KFC Has the Right Idea

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.

• McDonald’s Snack Wraps a hit during off-peak hours
• Recent Same Store Sales, May 24, 2008
• Making Money as a Franchisee
• Finding Franchise Disclosure Documents
• Franchisee may buy Friendly’s Ice Cream

Chipotle Serves Up Hot Earnings Growth, But Buffalo Wild Wings’ Sales Are Light

Buffalo Wild Wings same-store sales grew 8.1% at company-owned restaurants and 4% at franchised units.

…

Both companies face some thorny challenges moving forward, including rising food costs. Demand for ethanol has pushed up corn prices, which in turn has fattened the cost of restaurant staples such as chicken, beef and produce.

Cost pressure is not a huge issue for Buffalo Wild Wings this year because it locked in a favorable deal with its chicken-wing supplier in March. Analyst Will Hamilton of SMH Capital estimates the company is paying about 30 cents a pound less than the current market price. But that price is expected to go up when the current contract expires.

“The supplier will likely want a higher price,” said Hamilton, whose employer makes a market in Buffalo Wild Wings. “That’s a risk not quite factored in to the stock price right now.”

Another wild card is how consumer skittishness might impact Buffalo’s same-store sales in the second half of 2007.

“I have a general concern about the consumer as gas and other prices go up,” Hamilton said. “Comps will still be positive, but the growth could be slower.”

• Sports Bars Doing Well
• Chicken Wings
• McDonald’s Snack Wraps a hit during off-peak hours
• The Hooters of Coffee
• Prices on Required Purchases