Dallas-based Romano’s Macaroni Grill (a Brinker Intl restaurant) is buying four locations from a bankrupt franchisee. The locations are in San Francisco Bay (3) and Seattle (1). The parent company now owns all but five of its 200+ Romano’s Macaroni Grill restaurants.

There has been a movement of public companies selling corporate owned units to franchisees, but now I’m seeing more examples of franchisors acquire units from franchisees. The reason is probably driven mostly by low valuations of the acquired businesses.

Today I rented online and watched the movie Act of Valor ($4 on Amazon Instant Video or iTunes). I was humbled and proud to watch the preparation and risks these Navy SEAL heroes take to protect our country. The movie put me in the right frame of mind to reflect on my own priorities and work to eliminate the unnecessary complications in life. 

The movie ended with a powerful poem from Native American Shawnee Chief, Tecumseh:

So live your life that the fear of death can never enter your heart. Trouble no one about their religion;respect others in their view, and demand that they respect yours. Love your life, perfect your life, beautify all things in your life. Seek to make your life long and its purpose in the service of your people. Prepare a noble death song for the day when you go over the great divide.

Always give a word or a sign of salute when meeting or passing a friend, even a stranger, when in a lonely place. Show respect to all people and grovel to none.

When you arise in the morning give thanks for the food and for the joy of living. If you see no reason for giving thanks, the fault lies only in yourself. Abuse no one and no thing, for abuse turns the wise ones to fools and robs the spirit of its vision.

When it comes your time to die, be not like those whose hearts are filled with the fear of death, so that when their time comes they weep and pray for a little more time to live their lives over again in a different way. Sing your death song and die like a hero going home.

Wise words that I plan to keep close to my heart.

Papa Johns is again offering incentives to new franchisees this year. This looks to be the same as last year. There are tight timing issues with opening to hit the incentives qualificaitons.

• No franchise fee ($25,000 value);
• $50,000 in equipment, including two Middleby-Marshall ovens, which may be purchased by the franchisee for $50 after operating for three years;
• A royalty waiver for up to 18 months; and
• A $3,000 food credit with PJ Food Service, which operates Papa John’s fresh dough and food distribution quality control centers, for each restaurant that opens at least 30 days prior to the scheduled opening date.

I am sorry about the days of downtime. It is now fixed!

Imagine you have the perfect location for your franchise near a stadium with lots of pedestrian traffic. You spend $450,000 to get your first franchise built and ready. Opening week was wonderful with sales of $12,000 and subsequents weeks continue on with profits. Then, a major light rail construction project starts out front and blocks your sidewalk. After a few weeks of jack hammers and tarps blocking views, nobody is venturing down your way because they don’t want to deal with the noise and nuisance. The construction project lasts for 8 months.

A similar story has happened in Minneapolis, MN in an area called “Stadium Village” near Target Field. Quiznos couldn’t afford to stay open. Independent fast food places such as Hot Diggity Dog and Leo’s Burritos also shut down with no word whether they will reopen.

This is a really unfortunate and sad situation. These projects are often years in the making so perhaps the franchisee should have anticipated this development. Nevertheless, with strict operating rules in a franchise agreement there is not much the franchisee can do to adjust operations.

I like the way this article in the NY Times described a requirement to be successful as a franchisee:

For someone who really has a passion for managing a process, though, investing in franchises can be so lucrative that that extra spark [entrepreneurship] may not matter.

I’ve heard several franchisors speak at the National Restaurant Association conferences and have worked with others as their attorney, and some failure and poor sales is attributed to failure to “follow the system”. I’m sure the franchisees would disagree, but I believe there is on some level truth in this failure to “follow the system” particularly in regards to marketing/sampling, cleaning and training.

“Following the system” is a little misleading though, because most of the franchisees technically are following the book, but the passionate and efficient execution is not there by the franchisee and their staff. Are the work areas and customer areas always clean even if you are following the operation manual’s cleaning schedule of “every 20 minutes walk through” of the dining area? Is the customer service respectful and prompt? Is the quality of product or service at least meeting the expectations of the customer? Is security monitored and threatening enough to ensure customers and staff are not stealing?

I would also add that franchisees need to be leaders. They must be able to handle the moment in front of customers and employees, run effective meetings, and be articulate motivators that can instill at least mild passion in staff to do the right thing. If you are meek and weak, you will be taken advantage of. But, don’t worry, it’s not you, it’s like that throughout the animal kingdom. But you probably shouldn’t be a franchisee.

Entrepreneurship requires the above traits as well. But, innovation is the element a franchisee is not empowered to really drive (it’s controlled by the franchisor), BUT an entrepreneur is required to drive innovation to survive.

Are you a franchisee thinking about how to best fund college for your children? Your research will quickly lead you to 529 plans, and in my opinion and experience as a purchaser it is probably the best option for college savings. You will also hear about Coverdale Education Savings Accounts but for tax complications and low investment levels it is probably more trouble than it is worth.

529 Plans are sponsored by states and enable USA-citizens to save after-tax money in an investment account that will accumulate earnings tax free and withdrawals are tax free if used to pay defined educational expenses. Some states offer small income tax breaks for investing in a 529 plan. For example, in Illinois:

Individuals subject to Illinois state income tax can deduct from their taxable income up to a maximum of $10,000 per year for contributions made toward the purchase of any College Illinois! Prepaid Tuition Program contract.* Married couples filing jointly can deduct up to $20,000 per year.** This state tax deduction reduces the individuals’ adjusted gross income (AGI) by the amount contributed up to $10,000 (or $20,000 for those filing jointly).

Contribution Limits

Contributions are included in the annual $13,000 exclusion from federal gift taxes for gifts made to any one person. But, unique to 529 plans, a contributor can give up to five times that amount ($65,000) in one year and treat that contribution as if it were made over five years for gift-tax purposes.

Fees; NY direct sold @ .17% is lowest in USA

You’ll have to do the math to see if the tax savings in the long run outweighs the higher fees of your state’s 529 plan. A benchmark to use is New York’s direct sold 529 plan which imposes a combined annual fee of .17% starting in March 2012, the lowest of any state right now. Investment options include a diverse and respectable range of Vanguard funds.

Prepaid Tuition – now too risky

I have previously recommended and have purchased myself 529 prepaid tuition plans, whereby a parent prepays tuition at todays value to protect against tuition inflation that has historically been over 5%.  The state prepaid plans generally have provision to pay out-of-state and private schools the same future value of the tuition. The state-sponsored prepaid college tuition programs were supposed to shift the investment risk from families to the government. But, many states now are struggling to make investment returns that keep up with annual increases in tuition and shortfalls are causing plans to turn into a Ponzi scheme. Some state bolster the appearance of safety like Florida who backs their plan with the full faith and credit of the state. Nevertheless, the program managers can and are starting to change the payout rules. You’ll have to research it.  I would only use a prepaid plan in combination with a 529 savings plan which YOU entirely control.

My main goal of this article was to provide some advice based on my experiences purchasing these plans over the  years. The recent development of the New York state 529 plan offering a .17% total fee is so enticing I had to share it with readers.

[EDITED May 20th, 2012 by FranchisPundit]

I’d like to respond to a some emails by adding perspective to this blog college, tuition, savings and jobs.

Two very successful entrepreneurs and billionaires, Peter Thiel and Mark Cuban, have written eloquently  on the education bubble issue and they believe student loan defaults will be as bad as the housing bubble as graduates can’t find jobs. See the links below for their provocative articles:

• Peter Thiel, co-founder PayPal, hedge fund manager, early investor in many startups including Facebook.
• Mark Cuban, co-founder of Broadcast.com acquired by Yahoo! for $5.9 billion, owns NBA’s Dallas Mavericks, Landmark Theatres, and Magnolia Pictures, and HDNet.

Their premise is that college degrees at expensive universities are a pseudo-scam. Students assume they can “flip” their degrees into a higher paying, more likeable job. So students in college trade 4 to 5 years of income, business experience, and pay for housing and room and board for a 50+% unemployment and underemployment rate. At many private schools the total combined investment can be over $75,000 per year.

Weeding Women gardeners, Lollypotz chocolate bouquets and potted plants, peace lilly installers to clean air, lice removal salons – those are some of the odd but growing franchises in Australia. See this article for more examples.

Most franchisors with 20+ units assign dedicated business coaches to franchisees to ensure operating compliance, help solve problems and bolster sales.

For example, here is what Jimmy Johns claims to do:

1 coach per 26 stores and they visit for a full day at least once every 30 days. If there are any issues or suggestions they are discussed with corporate if necessary and a written response is provided thr following day.

The reasoning goes that nothing should linger and everything is fixed immediately.

As comparison, Culvers has one coach for about 20 stores, but obviously they are much bigger stores. I believe Culvers has had only one store closure. A ratio under 40 units per coach is better than average.

I was told at the National Restaurant Association show in Chiacgo a few weeks ago that GE was no longer underwriting franchisee loans. I guess the speaker in that breakout session was wrong as they just provided $4.1 million in debt and line of credit to a 14-unit Jimmy Johns franchisee in Kansas. http://www.marketwatch.com/story/ge-capital-franchise-finance-provides-41-million-to-jimmy-johns-franchisee-hinz-jj-llc-2012-05-16

http://finance.yahoo.com/blogs/secrets-toyour-success/9-common-interview-questions-actually-illegal-201733303.html

Interesting perspective on illegal interview questions. Franchisees and the hiring.managers should be aware of these as training guidelines.

I think The article can be more clear about what the actual action is that is illegal. Asking the questions or discovering the answer isn’t illegal, only using it as the reason for certain employment decisions is prohibited. But why tread on thin ice with these issues? Just avoid these topics as a general rule.

GAME, the European and Australian retail gaming giant with over 1,200 outlets similar to USA’s GameStop and Play n Trade, filed for Bankruptcy.

GAME has 600 hundred stores in the UK with a £15 million rent bill per quarter and a £10 million wage bill per month. Would their reach be more effective with only a few marquee retail stores and the rest online sales?  While gaming is experiencial and in store demos and marketing can help drive sales, similar to retail book stores the overhead laden higher prices will push customers to online. Competitors, especially in the gamer demographic, will buy from tye cheapest outlet. Further, many games are downloaded bypassing even online retailers like Amazon. I wouldn’t buy a Play n Trade for those reasons, even though the used game disc market is alive and well.

Unique Pizza and Subs, a 7-unit pizza-sports bar chain traded on OTC Pink Current tier, has agreed to acquire the well branded Pizza Fusion, an 11-unit organic pizza chain. I think there is more to this story, as Pizza Fusion seems to be a much strong player than Unique Pizza & Subs. It could be seen as more of reverse merger with Pizza Fusion as the driver, whereby Pizza Fusion can now be publicly traded and potentially raise more cash for expansion.

[updated March 15, 2012]
I found another interesting article about this merger. [more here] It seems there may be some Bacon Raton, FL penny stock promotion linked to this merger, and it’s not the first time Pizza Fusion has flirted with the Pink Sheets marketplace to attract needed capital, as you can read below:

Trafford, Pa.-based Unique Pizza, which recently issued news releases about two franchising agreements, also said in January it was in the “secondary stage” of selling its pizza in China. The China announcement, which indicated a financial partner was actually still seeking a distributor in China, was issued by Mirador Consulting via PR Newswire and gave a Boca Raton phone number.

Boca Raton is known nationwide as a center of penny stock promoters and penny stock companies, which would include Pink Sheets companies like Unique Pizza.

Unique’s Pizza 2007 filing said the company had raised $718,993 of a $1 million offering, so one question is how the current deal will be funded. The news release said the deal is subject to execution of a definitive agreement and other conditions including the availability of working capital.

A chart on MarketWatch shows no trading volume in Unique Pizza since January, when the announcement of the China deal and a sports pizza sports bar were made. However, trading volume started to appear on Thursday. At 5 p.m., Unique Pizza announced a master franchise deal in Michigan.

Woodbridge Holdings, which merged with BFC Financial Corp. in 2009, made a $3 million investment in Pizza Fusion in 2008 and an additional $1 million investment the following year.

In a U.S. Securities and Exchange Commission filing in December, BFC said Pizza Fusion was in need of further financial support to continue operating under its business plan, and that BFC had no plans to make further investments. In that filing, Woodbridge said it held a 45 percent equity interest in Pizza Fusion.

For its part, Pizza Fusion had not be successful in raising additional capital, the SEC filing said.

It’s unclear how much of a role BFC has continued to play in the pizza business. BFC also has a majority stake in Bluegreen Corp. (NYSE: BXG) and BankAtlantic Bancorp, which has missed its previously stated goal for releasing its annual report and whose stock hit a 52-week low.

http://www.cbc.ca/news/business/story/2012/02/28/tim-hortons-class-action.html

Justice George Strathy of the Ontario Superior Court recently issued a summary judgment in favour of Tim Hortons, dismissing an attempt by some franchisees to argue that the chain was wrongly profiting from a switch in how the company makes its baked goods.

Under what’s known as the “Always Fresh Conversion” several years ago, the company stopped making baked goods from scratch in each location every day, and instead started shipping partially baked items that had been flash frozen before final baking in ovens at all Tims locations every morning.

The new system has proven very profitable for the parent company, but some franchisees complained it simply downloaded new costs to them while the parent company pocketed the savings.

The case also alleged that Tims was requiring franchisees to sell new lunch menu items at break-even prices — or sometimes even at a loss.

The plaintiffs allege that’s a breach of their franchise agreements, which states ingredients would be sold to franchisees at commercially reasonable prices.

The judge dismissed all aspects of the suit, saying Tims is well within its rights as a franchisor to implement new procedures and technologies to its business model

“In order to keep the system healthy and competitive, the franchisor must be permitted to introduce new products, new methods of production or sale, and new techniques,” the ruling reads. “It would not be commercially reasonable to require that the franchisor can only implement system-wide changes … if the proposed change is [demonstrated] to be an improvement that benefits that particular franchisee.”

Nearly ever franchise agreement I’ve read allows the franchisor flexibility in specifying what products must be sold, even if this involves a fundamental change in the way the product is produced. I doubt the primary motivation of Tim Horton’s is financial, I’m sure there are consistency and labor cost savings involved, but stepping into the shoes of the franchisee I understand their frustration of this added “fee”. On a side note, Dunkin Donuts uses frozen dough.

I loved this list. One of the United Kingdom’s most successful entrepreneurs, Luke Johnson, shares 21 lessons he’s learned in business:

1. The world is in love with the romance of start-ups. But all other things being equal, I believe it can sometimes be better to buy a business than start one.

2. Never demand a certainty: if you wait for that, you will be on the sidelines for ever.

3. Leave behind the notion of the big idea and just do what most successful entrepreneurs do: copy and improve. Imitate first, and then devote yourself to constant incremental improvement.

4. Whenever you can, make sure a name has some underlying meaning. Don’t copy the example of Diageo; one of the world’s biggest drinks manufacturers. “Diageo” means nothing. It’s not even easy to spell, or to Google. For everything that’s bad about high-concept names, look no further than Diageo’s own toe-curling explanation: “The word Diageo comes from the Latin for day (dia) and the Greek for world (geo). We take this to mean every day, everywhere, people celebrate with our brands.” I wonder if Diageo’s management realize that having to listen to that sort of rot could well make its staff want to quit and start their own business.

5. Today is a better time to start a business than tomorrow, no matter how today looks.

6. Achievement changes people. Once someone attains status and wealth, their attitude towards sharing the spoils and the glory alters. It slowly dawns on them that actually all the clever moves and breakthroughs were their idea and, in fact, they are the only one who really does any work.

7. When I interview managers, I ask them about their customers and competitors. The high achievers will know them intimately, and can talk for hours about the strengths and weaknesses of their rivals.

8. I tend to respect actual experience in a line of work, or a specific trade qualification, over an MBA.

9. It can be better to take a bad decision and correct it later than procrastinate and sit on the fence.

10. Anyone who employs talented people knows that talent is a rare commodity. The entrepreneur should move heaven and earth to hire it. Yet at the same time, no company should ever be in thrall to its stars.

11. Football clubs are essentially charities run for the financial benefit of staff, as are most investment banks.

12. It’s a sad fact that if an entrepreneur employs enough people, sooner or later there will be a thief on the payroll.

13. The most common personal issue I’ve encountered among associates has been the male mid-life crisis, with the classic accoutrements: mistress, motorbike, drugs, long hair, and even cosmetic surgery.

14. The very utterance of the letters HR should strike fear into the heart of every self-respecting entrepreneur. Human resources are like many parts of modern firms: they are a pure expense and a burden on the backs of the productive workers.

15. The life of a self-made man is not always pleasant. Driving hard bargains, dealing with litigation, juggling creditors, making staff redundant, fighting for customers – these are all part of the craft of running your own show. Managing a business can have a brutalizing influence on your character.

16. Hugely successful entrepreneurs probably don’t make for tranquil life companions as a rule.

17. The greatest ritual of all is, of course, the “meeting”. This is a magnificent engine of bullshit of all kinds. It gives the participants the feeling they are making progress with their project, whatever it may be.

18. It soon becomes apparent that some angel networks are run by people with no obvious record of great success themselves. 19. Robert Frost put it best: “A bank is a place where they lend you an umbrella in fair weather and ask for it back again when it begins to rain.”

19. The most fertile period for innovation is when people are in their twenties: from Nobel Prize winners, to entrepreneurs, to composers, to writers, real breakthroughs and greatest works tend to be the province of the young.

20. A complaint that’s well handled often leads to repeat business. The fascinating thing is that good service does not necessarily cost a firm more to deliver than shoddy service.

21. Beyond a certain point, the trappings of wealth are merely a game to keep boredom at bay.

Jimmy Johns sales were almost twice Subway.