I don’t know anybody who hates McDonald’s coffee the way some hate Starbucks coffee (mostly they say it is too strong or bitter). Nevertheless, McDonald’s is testing the McCafe concept in Japan. The company opened 15 “McCafe” cafe-style outlets in and around Tokyo, aiming at catering to a wider range of customers and serving soft drinks, soups, sandwiches, pastries and ice creams. 10 McCafe’s were opened inside existing traditional McDonald’s restaurants, while the rest were launched by renovating smaller restaurants. It looks exactly like the Starbucks tucked in the corner of Target, or the cafes in Barnes & Noble.  From the photo, you can clearly see the snacks are well above the quality of the hot apple pocket pie served by McDonald’s – you can see large cakes (carrot cake), danishes, and other pastries you expect to find in a Panera Bread bakery, albeit none of the goodies are baked onsite at McCafe.  I am sure this has been in the works for many years, and was confirmed to launch as a competitive response to Dunkin’ Donuts successful coffee brand upgrade in recent years.

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 …

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, …

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, …

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 …

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.

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 …

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 …

Sign-A-Rama, the world’s largest retail sign franchise, has been awarded the United States Department of Commerce’s Presidential “E” Award. Sign-A-Rama is the first franchise company to ever win the award.Commerce Secretary Carlos M. Gutierrez joined President Bush at the White House to present Sign-A-Rama , along with ten other organizations, with the “E” Award for excellence in exporting. The company’s export sales increased 700% in three years, growing from $1.5 million in 2002 to $12 million in 2005. In attendance were president and founder Ray Titus and his wife Andrea. Also in attendance was Tony Foley. Foley is president of World Franchisors which has assisted Sign-A-Rama and countless other franchisors for many years with their global expansion goals. World Franchisors is comprised of an advanced team who helps other franchisors quickly and cost effectively sell master licenses and establish a strong presence outside the United States. Also assisting the franchise with their success in export sales is the U.S. Commercial Service. This government agency is the trade promotion unit of the International Trade Administration and works with companies to help get them started in exporting and increasing their sales to new global markets. The Fort Lauderdale, Florida office was instrumental in Sign-A-Rama ’s export success and subsequently their being honored with the “E” Award. The President’s “E” Award is the highest honor the federal government can give to an American exporting company. The award serves to recognize U.S. firms for their competitive achievements in world markets and their part in increasing U.S. exports abroad. This marks the 45th anniversary of the Presidential “E” Award created by President John F. Kennedy in 1961. “Winning this award was a great honor for our company coupled with the privilege of meeting President Bush in the Oval Office,” says Ray Titus, president of …

“Best Overall Company in North America” World’s Premier Business Award Competition Gives Global Business Coaching Franchise Its Top Honor; Contest Judged by International Business Leaders Action Coach announced today that it has won one of the world’s top business honors: the 2007 International Stevie Award for “Best Overall Company in North America.” The Stevie Business Awards is the only international, all-encompassing business awards program. Judged by a blue-ribbon panel of CEOs, business school academics and industry leaders from around the world, the Stevie Awards exists to raise the profile of exemplary companies among the press, the business community, and the public. The New York Post has called the Stevies “the business world’s own Oscar Awards.” As “Best Overall Company in North America” for 2007, ActionCOACH is recognized for its innovation, integrity, and growth. The company will receive its award at a gala dinner ceremony September 10, 2007 at the Munich Marriott Hotel in Munich, Germany. “Besides the long-term success of our franchisees and clients, being named ‘Best Overall Company in North America’ is one of the highest accomplishments ActionCOACH could hope to achieve,” said Brad Sugars, chief executive officer of ActionCOACH. “This is an award that recognizes not only the exceptional worth of our system’s coaching services, but also the way we at ActionCOACH conduct ourselves — our culture, our values and the way we’ve chosen to do business. On behalf of our employees, as well as our 1,000 franchisees in 23 countries around the world, I’d like to thank the International Stevie Awards for this tremendous honor.” Winners of the International Stevie Awards were chosen from over 1,000 nominations received from more than 30 countries. A two-step judging process determines winners, with the Stevie Awards’ distinguished panel of judges and advisors deciding the Stevie Award recipients from a …

Talking to existing franchisees is one of the most important things you can do to investigate a franchise opportunity. Franchisees know the business. They can help you decide if this opportunity is right for you. Being well informed at the start will improve your odds of success, of course, just as it does in any new job experience. The franchisees are the ones who can tell you the real deal; how well sales strategies hatched by the franchisor really work, what your day will be like, and when you might expect to break even, for example. You will want to speak with a number of franchisees, preferably some of whom are very successful and also some who are struggling. By reviewing the responses and comparing your own management style to those currently operating stores, you will have a better idea of where you might end up if you purchase this franchise. Before calling any franchisee you should have read the franchisor’s Uniform Franchise Offering Circular (UFOC), which will give you a wide range of information about the franchise. But getting in touch with franchisees and getting them to tell you what they really think isn’t easy. The UFOC contains a list of current and past franchisees. Here are some suggestions: Have a clear idea what you want to discuss. Create a list of questions. The most common questions to ask revolve around these subjects: Initial Investment, Training, Opening Support, Ongoing Support, Marketing Programs, Purchasing Requirements, Purchasing Power, Earnings, ROI. First ask yourself, “What do I want to know?” Here are some suggested questions to ask franchisees choose the questions that help you answer the question “What do I want to know?”  How has the franchisor responded to your calls for support about business operations or any other general questions …

Arby’s franchisee finds formula for success The keys to their success can be summed up as: Hiring reliable employees, and nurturing them so they stay consistency of product quality (linked to employees) flexibility of franchisor to permit altenative and innovative store layout Below are direct quotes for the article: Lowe attributes much of the company’s success to hiring standards almost unheard of in the restaurant industry. The company has a turnover rate of slightly above 50 percent, unusually low for the industry. Before an employee goes to work for The Restaurant Co., they undergo a psychological profile, a drug test and a criminal background check, and that’s after having gone through several interviews. … Once the company hires someone, Lowe said, the processes in the restaurant are designed to help them be successful. The company conducts employee satisfaction surveys twice a year to help spot problems. Restaurant employees also have the authority to solve a customer problem, up to $100. … “We are full-service guys running fast-food restaurants, so we look at things differently,” he said. “We focused on dinner, where a lot of quick-service restaurants focus on breakfast.” The company supported that effort with innovative restaurant designs including carpet on the floors, softer lighting, granite countertops and wooden chairs. The Short Pump restaurant even serves beer and wine, although it’s a small part of the business, Lowe said. “If you are really trying to analyze why our average unit volume is so high, dinner has a lot to do with it,” Lowe said. “Our lunch/dinner mix is about 50/50.”

When I was growing up: Wednesday’s was always Prince Spaghetti Day, but at least once a week we had pizza from Papa Gino’s.   It’s great to hear that Papa Gino’s is planning to more than double its restaurants to 335 pizzerias over the next five years and expand for the first time outside its hometown New England market. The Dedham company is looking to add 135 stores in New England, including about 90 of its first franchised restaurants, and open shops in new regions along the East Coast in Florida, Virginia, and North Carolina. “We’re taking a giant leap,” said Anthony Padulo, Papa Gino’s senior vice president of franchise development. “We’ve been a market leader in the pizza business here, and we want to grow at a faster rate than what we’ve been doing. The timing is right.” The push comes as other major pizza purveyors, including Little Caesars, have targeted the competitive Boston market for expansion. Papa Gino’s, which was started nearly 40 years ago as a single East Boston pizza shop, was ranked as the 21st-largest operator with about $145 million in sales in 2005, according to the most recent figures from trade publication Pizza Today. Last year, Papa Gino’s sales exceeded $160 million, and existing stores have seen a 5 percent sales growth annually over the past five years, Padulo said. Papa Gino’s says this makes it a prime time for the company to expand its brand through franchises and take advantage of the growing $35 billion US pizza market. Papa Gino’s, whose parent company Papa Gino’s Holdings Corp. also owns D’Angelo Grilled Sandwiches, has already secured the market’s first franchise location, in Portland, Maine. Papa Gino’s recently unveiled the prototype for company and franchise stores that aims to create more of an authentic, yet contemporary …

Another oldie but goodie article for franchisees from Inc in 2000, abbreviated below: 1. Not reading, understanding or asking questions about the disclosure document. As you read the document [UFOC], keep notes on those areas that are confusing and unclear. While you may want your attorney’s opinion, give the franchisor the benefit of the doubt and first ask its representatives to explain their understanding. Then check the remainder of your concerns with your attorney…. One of the most common problems between new franchisees and the franchisor is a misunderstanding as to responsibilities. Among other things, this can cause problems in meeting the schedule for Grand Opening dates. 2. Not understanding or having an inaccurate or incomplete interpretation of the franchise agreement and other legal documents to be signed. You and your attorney should carefully review the franchise agreement, the lease or real estate agreements, and any other contracts. First, make a list of questions to go over with your attorney, then present your concerns to the franchisor. Get the franchisor’s clarifications in writing. 3. Not seeking sound legal advice. Locate and retain an attorney, preferably one experienced in franchising. 4. Not verifying oral representations of the franchisor. You may want to tape-record all your meetings with the franchisor. If you ask permission to do so, it is generally admissible in court if the need arises later. It also lets the company representatives know that you are tracking their words…Send a registered letter to the franchisor and a copy to the representatives memorializing your notes with a request for their response to any items you want clarified. 5. Not contacting enough current franchisees. …find out whether the franchisor has introduced you to specific franchisees compensated for their help to solicit new franchisees. Ask them….has the franchisor held up its end …

Three years ago on Friday, February 13th, Ground Round’s parent company shuttered its nearly 60 corporate restaurants and the chain’s headquarters. The closing stunned customers, creditors, employees and franchisees. The mass layoffs and hasty restaurant lockups on that Friday afternoon, catching scores of diners in the middle of unfinished meals, were of a scale not seen in the restaurant industry. The announcement came right before the dinner rush on a Friday, when store managers were ordered to tell diners to finish eating and pay their tabs. (Some were sent home with half-eaten meals in takeout containers.) More than 3,000 employees—some of whom had been with the restaurants for over a decade—were let go without severance, and their final paychecks bounced. A few big competitors immediately considered buying Ground Round’s assets out of bankruptcy, but during the months-long sale process, the franchisees were left to fend for themselves. They considered it crucial that the franchisee-owned restaurants all stay open during that time. Within a few weeks the franchisees elected leaders, hired a law firm, created a buying co-op, renegotiated food contracts—and even introduced a new, low-carb menu. In fact, after the initial scare, being on their own had a certain revolutionary appeal. With no royalties to pay and no corporate office to answer to, life was pretty good. So a few months later, when bids started coming in, the franchisees got the idea of taking their experiment in self-government to the next logical step: Why not pool their assets and buy the company themselves? The franchisees formed the Independent Owners Cooperative, LLC (IOC) and acquired a majority of the assets of The Ground Round Inc. The assets acquired included 42 trademarks registered in the United States and Canada, all of the franchise agreements and leases related to franchised locations and …

Project FAL$E HOPE$ is a state and federal sweep by regulators and law enforcement agencies targeting bogus business opportunities and work-at-home scams. We’ve all see the bogus ads for quick money making opportunities (“Make $5,000 week from home working only 10 hours per week!”). This state enforcement list points out the franchisors who violated various state fraud and securities regulations. Some of these names are a surprise: Aussie Pet Mobile (consent order) Bio Performance, Inc (Petition for Temporary Restraining Order, Temporary Injunction and Permanent Injunction and Asset Freeze) Candy King (permanent C&D, administrative fine of $25,000 against Candy King and $7,500 against Gladstone, Candy King barred for five years from offering biz ops in Connecticut, Candy King must offer rescission for approximately $100,000 to affected Connecticut purchaser investors, Gladstone barred for five years from acting as an officer or director of any entity selling biz ops in Connecticut) Coffee Beanery Ltd (consent order) Coffee Heaven (final order to cease & desist) Daily Grind (agreement) Garagetek (summary order revoking registration – New York) GNC (consent order) KaBloom (consent order) Lady of America (order to show cause) Pet Products Delivery Regal Nails LLC (Stipulation and Agreement, payment of $3,000 fine for unregistered business opportunity sales in Connecticut) Tax Recovery Group (permanent C&D from sales of unregistered tax service biz ops and notice of intent to fine issued) Hat tip: “busmagroomer” in the discussion forum Update 2-14-2007: Read Michael Webster’s excellent Misleading Advertising Law blog for your daily dose of provocative Due Diligence for Income Earning Opportunities.