Another Reason to Read the Franchise Agreement

Three Burger King franchisees in Florida found that every word counts in the franchise agreement.Burger King’s franchise agreements mandate operating hours “at a minimum of 7 a.m. to 11 p.m, seven days a week, 52 weeks a year, unless otherwise authorized or directed by BKC or unless prohibited by applicable law.”The franchisees argued that the language only gave Burger King the authority to exempt franchisees from those minimum hours, but not to mandate extended hours.  The franchisor argued the language clearly gives them the right to require additional hours.I agree with the franchisor that the language “unless otherwise…directred by BKC” clearly gives BKC the authority to change the hours of operations.

Renegotiating Leases

dimeIn the forum, a visitor proposed a question whether a buyer of an existing franchise can renegotiate the lease.  Paul Steinberg as always provides great guidance:

As previously noted, most landlords will not agree to a novation but most leases contain provisions relating to assumption.

Viz the personal guaranty, I have had leases which provide that upon assumption, the incoming tenant signs a personal guaranty whereupon the outgoing personal guarantor is released. Of course, this works only if the outgoing (selling) entity will be a shell after the sale, but if that is not the case then you can tweak the language to achieve the desired result.

If you are the seller and are unable to get a release from the guaranty, you should make sure to have appropriate language in your contract (or addenda thereto) to enable you to go after the purchaser and the natural person/guarantor which stands behind the purchaser. This will avoid the purchaser defaulting and leaving the original guarantor stuck. Of course, this will only work if the defaulter’s guarantor has assets…but judgments are good for many years (depends on state law). At very least, the new (purchaser) tenant will think twice about defaulting.

Inc. magazine tackled this question.

….If the landlord is reasonable,

Go to the landlord and say, ‘We really want to stay here, but we just can’t make it at the rent we’re paying. Here’s what we can afford as a base rent right now.’ And explain how you came up with the figure. Take him through the numbers, and show him why you’ll be able to survive with the lower base rent but you’ll go out of business if the rent remains at the current level. “At the same time, I would make it very clear that you have no problem paying more as your sales come back. One way to do that is by offering to give the landlord a percentage of your gross sales over a base amount that you agree upon.

….If the landlord is NOT reasonable,

Basically, you need to do a hardball negotiation. I’d go to him and say, ‘We can’t make it at the rent you’re charging us, and we’re going to be forced to close the store unless you give us some help.’ Then see what he says. It’s important to understand that you have a fair amount of leverage in this situation. Even if the landlord weren’t facing tenant problems already, it costs him money whenever somebody leaves, in terms of lost rent, broker’s fees to find another tenant, probably some demolition, and so on. My advice would be to hold out for a rent abatement of some sort. I think you have a good chance of getting one. For example, you can probably get the landlord to let you have a rent vacation, which would be preferable to rewriting — and extending — the lease. If you have problems with the landlord, you don’t want to lock yourself into a lease agreement for a period that’s any longer than necessary. You’re better off keeping your options open.

What metrics should you use to determine whether your rent is too high? Some experts recommend targeting any store with negative cash flow, or with occupancy costs higher than 10 percent of sales.

More Quiznos Franchisees Can’t Turn A Profit

quiznos.jpgQuiznos seems to be in perpetual defeat.  Here is another money-losing franchisee from Quiznos:  

“We can’t make money,” said Quiznos franchisee Marty Tate, who said his Erie, Pa., store leads the region in sales. Mr. Tate, who is not part of the lawsuit, said 40% of his sales go directly into advertising, royalties and food for the next week. He added that three of seven locations in his county have closed in the past year. Mr. Tate said that when his contract expires next spring, he will open his own independent store.

Advertising funds are always somewhat of a mystery. Typically, the franchisee will pay about 5-8% into an advertising pool that is supposed to be leveraged across all applicable markets. Unfortunately, there is often not as much bang for the buck as the franchisor would like you to believe, particularly in the creative production and media buys. Quiznos example:

Then there’s the issue of advertising. Quiznos’ agency is Cliff Freeman & Partners. According to TNS Media Intelligence, the chain spent $83 million in measured media in 2007 and $55 million in the first half of 2008. Despite the increase, many franchisees said that they rarely see their own ads, and most say the work isn’t memorable. (By comparison, Subway spent $361 million in during 2007, according to TNS.

“The last good Quiznos commercial was Baby Bob, and that was 2004,” said Mr. Tate, who said he’s complained to executives about the creative. “I would challenge anyone to remember the last Quiznos ad they saw.”

Starbucks Back is Back to Breakfast


Starbucks plans next week to launch warm sandwiches, called Piadini, on artisan breads filled with sausage, egg and cheese or Portobello mushroom, spinach and ricotta cheese.


He says about 30% of McDonald’s U.S. business comes from breakfast, and credits breakfast with “a majority of McDonald’s growth in the last two to three years.”

I thought I read they were ending the warm English-muffin based egg sandwiches. Appaprently it was all a ruse.

“We are not reversing our decision to replace the breakfast sandwiches. Rather we are continuing to evolve our food offerings,” says a spokeswoman. “We have found small ingredient changes that address the aroma issues of our current breakfast sandwiches, and have implemented these already.”

The company says it recently changed the kind of cheese it was using in its warm breakfast sandwiches to neutralize the cooking smell. Starbucks has ovens in about 3,000 locations and plans to add them in 800 more stores. Over time it wants ovens in 90% of its stores, according to Michelle Gass, the company’s senior vice-president of marketing.

Dream Dinners Hammered by Forbes

DreamDinners-OwnersDream Dinners is an example of good idea but profit challenged business model.   It’s just too expensive to attract and retain customers.

A Forbes article looked through the Dream Dinners FDD from the state of Washington, and focused on the required audited financial statements.

As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn’t get much.) That’s a snapshot, but here’s a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million.


Typically, new business concepts need up to five years to season before they can be franchised successfully. Dream Dinners–along with its next largest competitor Super Suppers, now with 165 stores–both began franchising in less than two years.

Franchisees accused the franchisor of false promises and unsubstantiated financial projections.

A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission’s franchise law, franchisers are not permitted to make “predictions” about franchisees’ financial success–unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers.

Dream Dinners “totally disregarded these regulations,” says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees.

Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to you, but if you write fast, you can get it all down,'” she says…

The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. On the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles. Allen and Kuna insist that “the figures were realistic and based on the actual performance of stores.”

The owners look innocent and reliable enough, eh?  On face value and blind trust, I would be tempted to believe Allen and Kuna.

Meal Assembly Watch has an insightful 5 Ways to Save Dream Dinners.

I have acted as general counsel to franchisors in my law practice.  From what I have observed, most smaller franchisors do not have experienced managers.  This inevitably turns growth sloppy by allocating too many resources and cash to new franchise sales.  Marketing programs for their franchisees and brand/product development suffer.  Inevitably, the franchise sales process is much longer and more expensive than projected, and ends up monopolizing the franchisor’s time and money.  Sometimes this get worked out (McDonald’s), and sometimes it doesn’t (Quiznos).

Trend: Franchisors Decrease Company Owned Units

dollarWhy do many franchisors tend to reduce their holdings of company owned stores?  To stabilize earnings from same store sales swings.

Safety In Franchisees

For franchised concepts, sales are diffused throughout the entire system, with the franchisor, or parent company, taking a little off the top for themselves in the form of royalty payments. Costs are also shouldered by the franchisees.

The difference between franchisee and company-owned models is evident in the effect fluctuations in same-store-sales, a closely watched industry metric, have on earnings.

At Darden, for example, each percentage point in same-store sales accounts for a roughly 14-cent swing in earnings per share, or roughly 5.1% of annual earnings, according to Larry Miller, restaurant analyst at RBC Capital Markets Inc. Compare that with McDonald’s Corp. (MCD), the fast-food giant that owns a little over 21% of its more than 31,000 stores, which sees EPS move about six cents, or 1.7% of annual earnings, for each percentage point change in comparable sales.

The relative isolation of franchise concepts from same-store-sales swings is one reason why investors have flocked to place their money in companies like McDonald’s, whose stock is up about 29% over the last 12 months, and Burger King Holdings Inc. (BKC), which owns about 12% of its roughly 11,500 stores and whose shares are up almost 9%.

“Right now, people are crowded around the defensive investments,” Miller of RBC said. Comparatively, Darden has lost more than 27% over the previous 12 months, while its casual-dining competitor Brinker International Inc. (EAT), owner of Chili’s Grill & Bar and others, has lost nearly 31%.

To be sure, the mix between franchisee- and company-owned stores is far from the lone factor affecting stock performance. Also contributing to that is a penchant for consumers to “trade down” and eat at fast-food joints rather than sit-down chains.But several chains in recent years have taken measures to transfer some of their company-owned stores off their books. DineEquity Inc. (DIN), formed after the merger of Applebee’s International Inc. and IHOP Corp., is re-franchising its Applebee’s locations, selling them off to investors.

Brinker has also said that its near-term focus will be less on company-owned restaurants, which make up a little more than 55% of its 1,600-plus eateries.

Customer Experience, Franchising, and Resources

I’ve become much more interested lately in the study of Customer Experience, a rapidly growing field especially in retail and restaurants.  Every touch point with the customer, both before, during, and after the visit,  impacts the customer’s decision to buy.   In franchising, the customer experience is mostly defined by the franchisor, with only minor execution responsibility for the franchisee.  The store layout, marketing, the parking lot, the type of flooring, the web site, the lighting, the registers, employee training, customer service processes…all contribute to the customer experience, which in turn, contributes to repeat and referral sales.

Understanding the elements that make a customer experience successful is critical when evaluating a franchise opportunity.   Before you can evaluate it, you need to understand what makes a good and bad customer experience.  Learning and keeping tabs on the trends in customer experience is easy with blogs.  Here is a list of 36 blogs in the area of brand and customer experience.

5 Pizza Franchises for $1

dimeWell, you have to go to Australia to buy these Pizza Hell franchises.

Hell has been torture for Matt Blomfield – so he’s auctioning his $830,000 Auckland store for a $1 reserve.

Mr Blomfield, a Hell Pizza franchisee, is so fed up with the New Zealand owner TPF Group’s handling of the business that he’s willing to take a loss selling up his five stores.

“I just want to get the business sold, pay all the bills and move on with my life.”

Why is this business model not making money? Here are potential reasons from the article:

The Herald has also sighted emails from franchisees complaining of the lack of support from TPF, the high cost of ingredients – which they can only purchase from TPF’s own supply and distribution operation – and what they say is unsatisfactory marketing.

Going Green May Loose You Green


Chris Toman’s plan to go green could have put him in the red.

The owner of a local pizza franchise plans to apply for LEED certification for his 2,600-square-foot restaurant space on the back burner because it was going to cost too much.

Toman said he would have to pay between $30,000 and $40,000 to become certified by the U.S. Green Building Council under its Leadership in Energy and Environmental Design program, which awards points to structures that are energy efficient and otherwise good for the environment.

$40,000 for a small restaurant to get green certified is proportionally a huge expense., plus the cost of the alternative materials such as insulation made of old jeans and coke bottles for a countertop. Would that $40,000 be more profitably spent on advertising?

While going green can sometimes attract additional customers in certain markets, the increase in price compared to the market will divert others to your competitors.

Toman is opening a Pizza Fusion franchise, which requires all of its restaurants to be built to LEED standards, as part of its self-described mission to “Save the Earth one Pizza at a Time.”

Not only are the buildings green, the chain delivers pizzas in hybrid vehicles.

The cost of going green for Pizza Fusions in other markets is less than half of what Toman was told he’d have to pay here.

Much of the cost goes to consulting companies that develop energy-efficiency plans for buildings seeking certification. These firms also make sure the buildings ultimately perform the way they were designed and file reams of paperwork required on all projects regardless of their size.

“It seems like they’re overcharging,” he said. “I’m trying to do the right thing, but someone’s taking advantage of it and charging high rates.”

Brave Entrepreneurs

If you were looking for a location for your new coffee & bakery business, would you commit to a location that had a Homer’s restaurant and Erbert & Gerbert’ both fail there within the past year?   And, direct coffee competition from Starbucks, Kopeli and The Coffee House are all within two blocks?  I would be extremely hesitant.

Nevertheless, aspiring franchisor Natalie Bubak of Lincoln, Nebraska will open a nuVibe Juice & Java in the serial failed location.  Gutsy.

After Homer’s closed last May, Erbert & Gerbert’s lasted only a few months, apparently a victim of competition from downtown’s plethora of sandwich shops.

There’s also a great deal of coffee shop competition in the area — Starbucks, Kopeli and The Coffee House are all within two blocks — but Bubak said she thinks nuVibe is different enough that it will complement, rather than take from, the existing coffee businesses.

“I think we’re going to help each other, really,” she said.

Besides coffee, nuVibe also serves all-natural fruit smoothies and gelato.

And Bubak said she’s planning on adding some breakfast and lunch items to the menu, including hot cereal and soups.

She said the new breakfast items will help fill what people have told her is a void in downtown.

Bubak said she has the opportunity to have expanded offerings at the downtown nuVibe because the space is so much larger — 4,500 square feet compared with the 1,500 square feet she has at her Pioneer Woods location.

Domino’s Subs

As if the sub sandwich category wasn’t crowded enough, Domino’s Pizza is adding sub sandwiches to its menu and delivery service.  The $4.99 oven-baked sub sandwiches will include classic favorites like Philly Cheese Steak and Chicken Bacon Ranch.

The move comes five months after Pizza Hut began delivering baked pasta dishes as well as pizzas. And it will be a wake-up call for sub shops Subway and Quiznos, which find themselves competing with pizza chains.

For the pizza giants, the message is clear: If pizza sales aren’t growing in a sour economy, maybe something else will. Besides the hot subs and baked pasta, some pizza chains also deliver chicken wings.

It’s an attempt by the pizza players to try to get back into being a growth industry,” says Ron Paul, president of Technomic, a restaurant research firm. “They’ve all lost their mojo.”

They also are further conflating a fast-food world that’s grown jumbled. McDonald’s (MCD), Burger King (BKC) and Wendy’s sell salads and chicken. Subway and Dunkin’ Donuts have tried pizza. Arby’s, once roast-beef-only, now makes a killing on Market Fresh deli sandwiches and sells toasted subs.

Domino’s U.S. same-store sales fell 5.4% in the second quarter after a 5.2% decline in the first quarter.

Brandon says the move should boost Domino’s lunch business and expects lots of calls from groups of office workers. (The minimum delivery order is $8 to $10, depending on location, and delivery fees are $1 to $2.)

Rivals are unimpressed.

Pizza Hut delivers hot sandwiches regionally but is focused on growing its national pasta delivery sales, says Brian Niccol, marketing chief.

Tony Pace, marketing chief of the Subway Franchisee Advertising Fund Trust, says, “Domino’s is watching our success and wondering how to get a piece of the action.”

Half of Quiznos’ locations deliver, and two-thirds will by year’s end, says Rebecca Steinfort, senior vice president.

The trend is clearly delivery to prevent a loss of sales, and online ordering.

Cuppy’s Accreditation Revoked – No Surprise

The American Association of Franchise Dealers (AAFD), who previously awarded Cuppy’s Coffee a Fair Franchising Seal, has suspended Cuppy’s accreditation pending a determination of the Association’s Board of Directors at a scheduled meeting on September 24, 2008. This comes after many obvious shameful contracts breeches by Cuppy’s old and new management over the past year.   Below the fold you can read the entire statement released by the AAFD.   Here’s a link to the email sent by Robert Purvin, AAFD’s chair, to Cuppy’s owner Dale Nabors informing him of the suspension. 

Read More »

Million Air Franchisee Wants Out

I know a man who became quite wealthy owning one of these.

Franchisee’s Argument (Defendant):

Allison’s FBO network responded with its own lawsuit, filed June 19, “for declaratory judgment and breach of contract.” The lawsuit claims that franchise agreements for the FBOs in Cincinnati, Columbus, Chicago Midway and New Orleans have “expired, been terminated or that the franchisees are entitled to terminate their franchise agreements,” and that agreements for Asheville, Charleston and Lafayette were never executed and that material terms had not been agreed on. The Jason III lawsuit also accuses MAI of “diversion of promotional funds and the dilution of the franchise brand resulting from unstable and deteriorating financial condition of the franchisor.”     

Franchisor’s Argument (Plaintiff):

Million Air Interlink (MAI), the franchising company based in Houston, filed suit against Allison’s FBOs in April, claiming that they “have taken steps to stop making payments required under the franchise agreements. Defendants are also terminating, or attempting to terminate, the franchise agreements and their obligations as franchisees without the contractual right to do so. Under the agreements, defendants are obligated to participate in an insurance program designated for the benefit of the franchisor and all the franchisees. However, defendants have terminated their participation in the insurance program in breach of their contractual obligations. Furthermore… defendants are also executing a plan to compete with MAI in breach of the franchise agreements.” MAI is seeking payment for damages exceeding $5 million plus payment for other costs, such aslegal expenses.     


News: Buffalo Wild Wings, Denny’s, Baskin-Robbins, Bennigan’s, Donatos

Buffalo Wild Wing’s own restaurants in the second quarter rose 8.3%, and franchises rose 4.5%.  Again, the corporate owned restaurant see double the same-store gains as the franchise.Same-store sales alone can be deceiving because it doesn’t tell the whole picture. Were higher same-store sales a result of additional customers, expensive marketing blitz or promotions, new menu items or new pricing?

Denny’s performance has been mediocre for the 2nd Quarter of 2008. Same-store sales decreased 0.7% at company units and decreased 3.7% at franchised units. Company restaurant operating margin increased by 0.9 percentage points to 12.5% of sales 

Do you live in Cincinnati? If so, Baskin-Robbins wants to open 30 stores in the surrounding counties. 

The Bennigan’s bankruptcy came as no surprise. There are about 150 company-owned Bennigan’s restaurants, compared with 138 franchise locations.Bennigan’s franchisees are unaffected, only the corporate-owned locations are shutting down today. The bankrupcty filings also do not include the Metromedia-owned Ponderosa Steakhouse and Bonanza Steakhouse restaurants. 

One of the best deals in franchising was made when Jim Grote sold Donato’s to McDonald’s and then bought it back for a rumored $50 million, a 1/3 of what he sold it to McDonald’s for just four years prior. Now, Donato’s has remade itself with a new look and expanded menu. [I love their pizza, bias alert] However, I am skeptical of management now that his daughter has taken over running the company. Is the best person to manage this company just happen to the be the daughter of the owner?