[Post prompted by a comment on this blog]

Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO - thus the prior art was obvious. (read the court’s ruling here )

Today, there are two main competitors of Dippin’ Dots - MiniMelts and MolliCoolz .

• Dippin’ Dots decent
• Fastest Growing Franchises and other data
• When Franchisors Compete Against their Franchisees
• A New Culture to Yogurt Franchises
• Franchisor as exclusive supplier

“We cannot provide you with any financial results of our existing franchisees because the FTC and/or state law prohibits it.”

I can’t count how many times I’ve heard directly from franchisors that they choose not to disclose financial results or franchisees because they are prohibited by law. That is an outright lie, and at the very best, extraordinarily misleading. The FTC wants to encourage franchisors to provide as much financial guidance as possible, but that guidance must be delivered in a consistent and regulated manner so as not to mislead the potential franchisee.

On Michael Webster’s BizOp blog, he looks at Romp ‘n Rolls bogus claim that they do not provide the financial results of their franchisees because FTC prohibits it.

• Litigation disclosures in the UFOC
• Financial Performance Representations
• More Franchise Disclosure is a Good Thing, but Waiting another 30 years is Not.
• 10 Signs of Great Franchise
• Finding Franchise Disclosure Documents

Franchisors are always protecting their butts to the fullest extent possible, and that is often what franchisors hire me to do as their attorney. But, franchisees should be aware the rights they are giving up when signing a release, such as the one below from the 2007 UFOC of Snap Fitness.

The release requires the franchisee to give up any right to sue for any reason. Many U.S. states reserve certain legal action by franchisees to protect their financial investments from fraud, making the release unenforceable under certain circumstances. But signing a release does in many situations prevent a franchisee from using the courts to enforce a right or to protect themselves. And if you can’t sue, the franchisee will have little leverage over the issue when dealing with the franchisor.

Below is the release from Snap Fitness.

• YAFF = Yet Another Fitness Franchise
• Fitness Together Sells its 500th Franchise
• Copycat franchises
• Which way is Curve curving?
• Bally’s Total Fitness tries more franchising

Dairy Queen franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed law suits to halt required remodeling:

Dairy Queen franchisees’ arguement:

The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits.

“No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill & Chill concept was such a promising new concept, then the free market would solve this problem.”

That hasn’t happened, according to the lawsuit.

As of December 2006, the complaint says, just 105 Grill & Chill restaurants had opened in the United States. Some have performed poorly, and two have closed.

Dairy Queen franchisor’s argument:

Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says.

“It is not making somebody spend hundreds of thousands,” he argues. “And it is not forcing somebody to go to another concept.”

Mooty said it is the franchise-owner associations, which compete with the corporation to supply the restaurants, that are stirring up trouble. Dairy Queen is cutting margins on its supply business, which is hurting the associations, he contends.

“They are losing membership, they are losing market share and they are having to take more drastic measures in creating fear and concern.”

• Independent Franchisee Associations
• Today matters
• Great Set of Franchising Articles
• Quiznos franchisees file class-action fraud lawsuit
• QSRs see small sales increases

This Plato’s Closet franchisee in Colorado found an often overlooked solution to a common problem - give outstanding employees equity ownership in stores (more precisely, stock in the franchisee entity or management company of the franchisee that owns the stores).

What if the franchisee is not willing to accept new owners?

Offering a “phantom stock” or “stock appreciation rights” may be an attractive alternative for franchisees in granting stock to employees. A corporate attorney with experience in this area should be able to set this up for you….I have set these compensation plans in my legal practice.

A “stock appreciation right” is granted to employees and enables the employees to profit from the appreciation in value of a set number of shares of company stock over a set period of time. The valuation of a stock appreciation right operates exactly like a stock option in that the employee benefits from any increases in stock price above the price set in the award. The stock price for private companies is determined by a set valuation formula or outside firm selected by the company’s management. However, unlike an option, the employee is not required to pay an exercise price to exercise them, but simply receives the net amount of the increase in the stock price in either cash or shares of company stock, depending on plan rules. If the employee’s employment is terminated, the stock appreciation rights are revoked.

• Raving Brands Litigation
• eBay Drop-offs
• Bally’s Total Fitness tries more franchising
• Employee Management - constant, gentle pressure
• Quiznos lawsuits (Part 21,412,219)

Franchisors must keep their UFOC’s up-to-date, and at a minimum, must be updated when:

1. The information contained in the UFOC document must be current as of the close of the franchisor’s most recent fiscal year. After the close of the year, the franchisor must prepare a revised disclosure document within 90 days.
   
2. The franchisor must update its disclosures to reflect any material changes within a reasonable time after the close of each fiscal year quarter. A material change is generally “any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to a named franchised business or which has any significant financial impact on a franchisee or prospective franchisee.”  Examples of a “material change” include:
   • changes in the franchisor’s management, corporate structure, address or interim financial statements;
   • changes to the offer itself;
   • closing or failing to renew a significant number of franchisees; and
   • the filing of material litigation or administrative proceedings.
3. Third, the FTC Rule contains specific updating requirements if a franchisor makes earnings representations. A franchisor must notify prospective franchisees of any material changes in the information contained in its attached earnings claim document prior to entering into the franchise relationship.

• Financial Performance Representations
• Finding Franchise Disclosure Documents
• More Franchise Disclosure is a Good Thing, but Waiting another 30 years is Not.
• Connecticut Law: Renewal of Franchise Relationships
• 10 Common Mistakes of Prospective Franchisees

http://www.bizjournals.com/memphis/stories/2008/01/28/story4.html

Serve Holdings LLC, the largest franchisee of Captain D’s restaurants in the country with 26, has filed for Chapter 11 bankruptcy to, in part, avoid payment of $245,000 to the franchisor.

[note: post title amended on 2-1-2008 to more accurately identify the zee as filing….hat tip: FuwaFuwaUsagi and Michael Webster in the comments]

• Story of a Bankruptcy: Jiffy Lube franchisee
• McDonald’s chickens out on Boston Market
• Dubious Franchise Salesmen
• Lenny’s adds another 80 franchise restaurants in TX
• When Blogs Attack - Cuppy’s Coffee & Java Jo’z

Getting permits and approvals from local boards can be tedious and overly political.  I used to work at a real estate development company that hired “expediters” to get local planning approvals pushed through. 

A Farmington, NY Dunkin Donuts franchisee is finding out the hard way what a pain this process can be.

By Billie Owens, staff writer at the Daily Messenger

Now that the old Pizza Hut building on Route 332 has been razed, it’s going to stay like that for awhile.

A Dunkin’ Donuts is planned for the site, but on Thursday code enforcement officer Floyd Kofahl put the brakes on the project.

He slapped a stop-work order on franchisee David Francisco of Canandaigua because the project differs vastly from what the permit allows. The property is owned by Farmington Realty LLC.

Francisco disputes the notion that the project differs a lot from what his permit allows. He said the only sticking point is a glass wall that he wants to put in instead of a regular one.

The permit allows renovation of the existing building to accommodate a bakery to make doughnuts and sell them. Not all Dunkin’ Donuts franchises have a bakery; most of them have the baked goods delivered from a Dunkin’ Donuts that does operate a bakery.

A bakery for doughnuts and one for pizza, as in the case of the building’s former occupant, is the same under state law. For that reason, Francisco’s plans did not require review by the Planning Board unless more than 1,000 feet were to be added to the building.

But last week, Kofahl said, Francisco informed him it would not have a bakery.
Francisco disputes this claim, too, saying he and corporate officials will make the bakery decision jointly over the next two weeks.

• Government Regs
• Need to buy a license from your state to sell on eBay?
• Copycat franchises
• Fall Into the Gap
• Patriot Express SBA Loan Initiative

Things will probably work out for Heartland Automotive Services Inc. of Omaha, Neb, a 438-unit Jiffy Lube franchisee filing Chapter 11 bankruptcy as it will probably sell/close underperforming and money-losing units.

Chapter 11 bankruptcy, the business filing usually continues to operate while a bankruptcy court supervises the “reorganization” of the company’s contractual and debt obligations. The court can grant complete or partial relief from most of the company’s debts and its contracts, so that the company can make a fresh start. Often, if the company’s debts exceed its assets, then at the completion of bankruptcy the company’s owners (stockholders) all end up with nothing; all their rights and interests are terminated and the company’s creditors end up with ownership of the newly reorganized company. The other type of bankruptcy is chapter 7, whereby the business ceases operations and a court appointed trustee sells all of its assets and distributes the proceeds to its creditors in accordance with statutory defined priorities.

The large franchisee most likely negotiated favorable terms when faced with closing or selling units, such as reduced transfer fees, low or no penalty for closing a certain number of units, delays in royalty payments when filing bankruptcy, etc.

According to a statement on Heartland’s Web site, the company filed for Chapter 11 because of what it calls a “breakdown of negotiations with Jiffy Lube International to resolve long-simmering disputes regarding the companies’ relationship” over advertising and marketing, and support from the franchisor, product pricing from JLI’s parent, Shell Oil Co., and expansion strategies.

Economic pressures in the volatile gas and oil market were also cited as reasons for the filing.

Heartland said it anticipates going back to the negotiating table with JLI after the initial stabilization phase of its reorganization, which was to go heard in court on Jan. 23. If settlements still can’t be reached on the issue, Heartland said it will seek a rejection of its franchise agreements and rebrand the business.

Heartland said in the statement that it had $8 million in cash on hand at the time of the filing.

• Chipotle Going Public
• Mobile Oil Changes
• Captain D’s Largest Franchisee Files Chapter 11 Bankruptcy
• Jackson Hewitt PR Problem
• Turnover

Local government regulations can be an expensive pain to comply with, as this Lamar’s Donut franchisee found out with its sink:

•When is the Lamar’s going to open on Johnson Drive? A sign has been up since this summer.

An area Lamar’s Donuts franchisee took over the spot at 5901 Johnson Drive in May but was slowed down dealing with city regulations, such as fitting in a three-compartment sink to a 600-square-foot spot, along with other plumbing issues.

The “satellite store” opened Friday. Doughnuts are made at the midtown store and then taken to Mission.

The franchisees, Alan and Kimberly Foster, own the Lamar’s at 3395 Main St., as well as locations in Lee’s Summit and Greenwood, Mo.

• Need to buy a license from your state to sell on eBay?
• Eating in the Car
• Papa John’s New Restaurant Strategy
• Secrets to Arby’s $3.5 million/year Store
• Ground Round on Rebound

From the FTC:

Twenty-six states have business opportunity laws. Most of these laws prohibit sales of business opportunities unless the seller gives potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency.

State business opportunity laws typically cover every imaginable type of business opportunity that might be offered. If a business opportunity seller is not required to provide pre-sale disclosures by the Franchise Rule, these disclosures will almost always be required by the laws of the states listed below.

The disclosures required by state business opportunity laws differ, and usually provide more abbreviated information than the FTC’s Franchise and Business Opportunity Rule requires. However, most of these laws provide important rights and remedies for business opportunity investors, including required security bonds to cover investor losses.

If you are considering purchasing a work-at-home or other business opportunity, and reside in a state with a business opportunity law, we encourage you to find out more about the protection provided by your state statute before you invest.

Alaska, California,Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, Washington, Wisconsin

• Franchise or Business Opportunity?
• Finding Franchise Disclosure Documents
• Managing Staff, Help from Franchisors
• Fall Into the Gap
• Connecticut Law: Renewal of Franchise Relationships

Accusations of franchisor misconduct and fraud occurs in every country. Australia, for example, franchise churn is a big issue:

At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold.

The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track.

Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees.

Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this.
Business failures are easily pinned on the franchisee.

…

“All you’ve got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on,” Farrell says.

• Franchisors Not Liable for Negligent Franchisees
• Litigation disclosures in the UFOC
• More on the Quiznos Class Action in Wisconsin
• What if franchisor is slow supplying inventory?
• Talk to Franchisees Before You Join the Club!

From the Columbus Dispatch:

DavCo Restaurants Inc., a Maryland company that owns 160 Wendy’s restaurants, contends that Wendy’s required franchisees to buy only Coca-Cola products, set a price higher than market value for those products and used the funds for advertising.

Dave Norman, DavCo’s chief financial officer, said his company believes its agreement with Wendy’s allows DavCo to suggest alternate suppliers.

Further, Norman said, Wendy’s didn’t give DavCo a credit against its required contribution to the national advertising campaign. Both constituted breaches of the franchise agreement, he said.

Franchisors will claim that the mandatory vendors are passing on savings to franchisees through volume discounts it can achieve through negotiations. Franchisees will claim that the vendors prices still are inflated partly because of the rebate paid to the franchisor.

There’s a “very significant difference” between the cost of products in Wendy’s contract with Coke and the price an open bidding process would bring, Norman said.

Competition and competitive bids almost always produce lower prices and better service. Franchisees should look for franchisors that are flexible with their vendor requirements, permitting the franchisee to select their own suppliers and vendors so long as the quality is the same as the required vendor. If this is important to you, there MUST be language iinserted into the franchise agreement stating that such supplier substitutions are permitted and permission will not be unreasoably withheld.

• Wendy’s franchisee bids for company
• Dairy Queen Remodeling Fight
• Quiznos lawsuits (Part 21,412,219)
• Factors Affecting Profit
• Royalty and Advertising fees of sandwich franchises

Uniform Franchise Offering Circulars, known as UFOCs, was a response to some unethical behavior in the 1960’s and 1970’s. Today franchises are regulated by federal and some state laws. The Federal Trade Commission (FTC) requires that certain information be disclosed to potential franchisees before a contract can be signed or any payment made. The information is presented to the prospective franchisee in the form of a document — the UFOC.The UFOC, contains information franchisors must provide to franchisees by law. UFOCs are deemed to be reliable and if the information provided is false, franchisors are subject to civil penalties. However, the FTC does not require filings. There are 13 states that do keep UFOCs on file, and 23 states that require business opportunity disclosure filings.

The UFOC is designed to give prospective franchisees all the information relevant to a franchise offering. It is made up of three basic parts: 23 sections (called Items) describing various aspects of the franchise program; a set of the franchisor’s audited financial statements; and a copy of each form or contract a franchisee is expected to sign if he/she intends to buy the franchise.

The UFOC is similar to a securities prospectus. It can provide the information you need to evaluate a company. An accredited franchise company, whether publicly traded or privately owned, must provide this disclosure document.

The UFOC is most valuable for potential franchisees, potential franchisors, franchisors, investors, financial companies and suppliers to franchisees.

You can obtain UFOC’s directly from the franchisor usually for free, from the California state franchise document portal, and from several online sources such as FreeFranchiseDocs.com which downloads and scans the documents from the California database.

Cross Posted at: Let’s Talk Franchising

[edited by Ryan on on Oct 20, 2007 @ 10:15PM]

• Sample Uniform Franchise Offering Circular
• Franchise Earnings Claim Hall of Fame: Papa Gino’s
• UFOC Explained
• Is that UFOC Updated?
• Financial Performance Representations

Are the number of Franchise Consultants, and Brokers going to continue to grow? Or, as I predict, will this part of the Franchise industry start consolidating?…….

In the last 3 articles I have written about the phenomenon that is taking place..Too many consultant/brokers in the franchise world, and the  plethora of  new ones just entering an already crowded field. Here are links to Parts 1, 2, and  Part 3, just in case you wish to refresh your memory.

Am I writing about this just because I am a franchise consultant? Am I writing about this  because I do not want more competition? Am I writing about this because I just left a Franchise brokerage group that I really am not feeling the love for?
I am writing this to open up a discussion. I want to know how consumers feel about us. I want to know how franchise company execs feel about us. I am also writing this so that some prospective franchise brokers that are being courted by the franchise brokerage groups to buy their franchises that sell franchises to others, can take a breath..and find out before they buy, just what  it is that they are buying.

Janet Sparks, a veteran franchise industry writer, just wrote about one such wonderful franchise company, “The Entrepreneur’s Source” that once again is  is the position of defending itself against a class action lawsuit brought on by former franchisees. Article
They have a large number of franchisees, and at one time in little old Cleveland,Ohio, had 3-4 franchisees at the same time.
{As of this post, I only know of one franchisee in Cleveland who remains in business}
So, if “The Entrepreneur’s Source” as an example, has no problem selling 3 or 4 franchises in a shrinking metropolis like Cleveland, Ohio, multiply that by another 6-7 franchise brokerage groups that are trying to sell franchises of their own franchise brokering franchise, and you have some future headaches.

If you are reading this blog because you are thinking one day of investing in your own franchise as a way to “get where you want to go”, getting some advice and help makes sense. After all,there are over 3,500 different choices out there currently in franchising, and it does get quite confusing.
Here is the $100,000 question.  Would you want to work with:
A. A franchise consultant/ broker who like you, just lost his or her job, and is now a “franchise specialist” after a 2 week training program/
Or
B. A franchise consultant/broker who possibly either owned his or her own business before, or one that came from the franchise industry, and is now in another part of the industry?

If you chose A, are you really going to be comfortable working with someone who is new, and who is really learning about franchising at the same time you are? Are you really going to be comfortable with
their suggestions on how you should invest your $150+  in this new business venture?

If you chose B, at least you have access to a large number of folks who have already worked with this experienced franchise consultant/broker, and can share their personal  experiences with them.
However, working with an experienced  franchise consultant broker won’t guarantee success. Just like in any industry in which consultants get paid for a sale is the model, stuff can happen.

The bottom line is that if you are thinking about getting into franchise ownership, and you don’t want to do it on your own, using the right person can be very productive. Get references.

If you are thinking about buying a franchise brokerage franchise, make sure you know what you may be up against. {An industry that is getting ready to consolidate}

I really enjoy what I do. I get to help others with their dreams of business ownership. I get to do a lot of public speaking. {I was graced with good pipes..Here is a radio interview }
I get to meet some really smart people! All in all, my life is pretty darn good……

• Franchise industry shakeout coming? {Part 3 of 4}
• Franchise Industry Shakeout Coming? {Part 2}
• Franchise Industry Shakeout Coming?
• Discount Real Estate Broker Franchises
• Example of making money in the franchise business

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

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

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 disclosures, and releasing false information can result in jail and huge fines imposed by the government. Instead of pursuing a franchise with a private franchisor who refuses to disclose any earnings claims, perhaps limiting your evaluations to publicly traded franchisors is a prudent decision. For the same disclosure reasons, many investors limit their investments to publicly traded securities rather than delve into the restricted world of private placement investments.

• Finding Franchise Disclosure Documents
• Revenue to the Franchisor
• Financial Performance Representations
• Recent Same Store Sales, May 24, 2008
• UFOC Explained

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.

• What Constitutes a “wrongful” Termination Of A Franchise Agreement?
• Connecticut Law: Renewal of Franchise Relationships
• Entire Agreement
• Franchisee Now Prefers non-Franchised Businesss Route
• Hotel Franchise Agreements: Opportunities And Pitfalls

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.

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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.

Change has to come from the top and it will be slow, getting a better handle on the franchise sales group will be difficult, but relief for most owners will likely never come. The realistic best case scenario is lower costs, same or better quality, and more efficient and effective promotions. Cutting food costs by 3% and coupon discounts by 4% seems hardly enough to squeeze $25k - $30k in profits. The franchisor prefers heavy coupons because it is paid on gross sales, and the franchisor dislikes coupon generally beacuse they still have to find a net profit margin on sales.

• Quiznos Claims More Profits for Franchisees
• Quiznos lawsuits (Part 21,412,219)
• Quiznos Sales & Profitablity - Summary Report
• Recent Same-Store Sales Rundown
• More on the Quiznos Class Action in Wisconsin