The tech-savvy community at Slashdot.org in 2006 had an interesting post and comments on the viability of a Gaming Cafe and what branding, culture and services have shown to work.

Re:Yes we have one. (Score:5, Insightful)
by Orangejesus (898961) on Friday August 11, @11:56PM (#15893072)

you have to understand that most people don’t go to gaming cafes for the games perse, they go for the social interaction, they go to play with their friends and be able to yell at them, they go to hang out with people with similar intrests. I have a better PC than the local place I go to game at and so do most of my friends, but it’s easier to spend a few bucks and just go to the gaming place down the street than drag a bunch of computers around and fool with networking them and making sure everyone has the same version of what we want to play and working cd keys and ect. the gaming place I go to is open 24/7 and after 5 hours is free, (5 an hour) So it’s pretty common for us to just go and set up shop and do an overnight there playing till the wee hours of the morning. When I was on break from college one summer about 6 of us litterally lived up there for almost a week straight sleeping on the couches and ordering pizza. I mean we probably didn’t smell very good by the end of the week but it still ranks as one of the most fun times i’ve ever had. The key to a good gaming place is to make it somewhere that people just want to go to hang out and escape and not be bugged. I don’t know how long this place will last but it’s been open for over 5 years now and it’s just a small 10 computer place in a small town. the key is that the owner is a cool guy, he lets people play sometimes if they are a little short or he’ll let them owe him and ect. people like him people like the others who play there, people keep coming back and the place stays full all the time.

Re:Yes we have one. (Score:5, Informative)
by DarkMantle (784415) on Friday August 11, @11:57PM (#15893075)

There’s a place in town here (Cambridge Ontario Canada) That does fairly well (open for a year now) They use memberships for people that want to play regularly to make most of their rent. They also have food/drink there (pop and chips kind of stuff) and gamer and geek T-Shirts as well (similar to Think Geek [thinkgeek.com]). The WiFi is cool, secure it though so you can control who’s on it better. There’s another one in London Ontario that has a “Internet Cafe” in the front, so people can check email and surf the web. Then the back room is the gamer room. Combine the front Internet cafe style with a bit of a real cafe (watch out for the licensing if you’re selling food/drink you make there) with a few tables at it so people can grab a coffee and do a quick email check on their own laptop/PDA while there would be a neat idea as well. Best advice is to look at the area and ask what is needed. Maybe hang out near the local EB Games for a day or two and ask people as they’re leaving/entering if they’d fill out a 5 question survey about it. You may be able to avoid the mistakes the other places made.

wwtdd (Score:5, Informative)
by antiphoton (821735) on Friday August 11, @11:23PM (#15892941)

I live in Brisbane, Australia, and gaming cafe’s are quite popular in the major cities. I know of at least four around inner city brisbane that have been open for years and are quite successful. From my observations their main revenue intake is based around these key concepts: 1. Location 2. Word of mouth Location is imperical, and you need to strike deals/lan nights to get word of mouth generation. Setting up shop near a school (preferably private school) can sometimes make this type of business a success, as i’ve seen in Brisbane. If you start all nighters and events it will generate a decent amount of friends telling other friends and so on to bring in business and customers. Anyway, these are just a few suggestions i’m guessing you already know about, hope it helps. PS: If you have the room, get a pool table!

depends on how you do it (Score:4, Insightful)
by grapeape (137008) on Friday August 11, @11:33PM (#15892978)

I had entertained that idea myself for a while but after going to ones outside my immediate area but within driving distance one thing I observed was that while they all mostly started out great with good staff, top of the line machines, local advertising, a pleasant atmosphere and a good selection of games, within a year or so most are pits with low staffing, unkept facilities, outdated machines and poor selection of games. I dont know if their budgets run out, or if they just found that the majority didnt care about the latest and greatest so it wasnt worth the investment. One theory is that those that are hardcore games already have systems as good or better at home

I did find a few things I would do differently, for one I would like to see a bank of printers, scanners, etc so that during certain hours (maybe school hours and few after that, the machines could actually be used for study, business etc. I also thought of adding a gamestop type game exchange with maybe a points program for time rented and maybe tournaments and contests (monthly high score, etc). Another idea would be to have certain nights that are 18+ and special events on a monthly basis. For rental time I wanted to use a keycard system like gemstar to keep track of time and charges. I had also thought about working out an advertising/sales deal with a local vendor to help with equipment costs.

I wrote an entire business plan but then got a job offer I couldnt pass up and just kind of threw it aside for now. I belive “cyber cafe’s” are viable here but they need more of a hook than just “PC’s for rent”.

Acquisition monster GameStop (they have merged with Software Etc., Babbages, Gamesworld, Funcoland, EB Games) looks like it is planning to begin franchising next year. Our forum mavens have heard the confirmed rumors and preparations at GameStop’s annual gobal manager’s conference in Vegas this weekend. From the forum:

Quote from: brem on August 27, 2007, 05:07:11 PM
GameStop Offering Franchises? I’ve been in the video game industry a while and thinking about a franchise and just heard from a well connected distributor contact of mine in the business that GameStop’s looking at starting to sell franchises for their stores in the near future. As the dominant game retailer, I wonder what that will do to other video game franchisors that have to deal with all GameStop’s aggressive competitive marketing and their volume cost advantages with game manufacturers. Need more info on pricing, etc, but this might be my way in — seems smart to join forces with the giant instead of trying to compete against it.

Well, here we go. I’m out at GameStop’s annual gobal manager’s conference in Vegas this weekend with several of the other distributors / industry players and heard other sources rumbling about GameStop’s plans to start franchising (prepresents new income opportunities for many in the business to set up franchise service networks to work with them). After the second source discussed it, I’m trying to find out where the sign-up list is.

The industry players are apparently a little dissapointed because it requires dealing with “onesie / twosies” versus one stop shopping for consolidated groups, but apparently GameStop’s not doing what a lot of the more sophisticated franchisors like Pizza Hut do and only sell franshises to massive, deep pocket franchise groups that can afford to buy up a whole cities worth of stores (although this would be good I suppose for the average franchisee wanting to get in).

Gamestop has the strongest reputation in the gaming business. If they can keep the customer experience and value add above the usually cheaper online retailers, they can avoid the same demise as Blockbuster.

On Donnie Deutch I just saw an interview with the new CEO of Just Fresh Kitchen Café, Dana Sinkler, who previously was a chef at a four-star NY restaurant and coincidentally founded and sold for $25 million the Terra Vegetable Chip.  Dana was previously a franchisee and has spent the past year revamping the menu launching the Kitchen Cafe concept, characterizing it as an innovator in Fine Casual Dining.

The new Kitchen Cafe menu looks ideal for my increasingly healthy-focused palate (South Beach Diet / Body for Life style diet foods – salmon, shrimp filled omelettes, marinated chicken, veggies…you get the point).  And, it takes the focus off the cookie-bread centered menus.  Last I read there were 73 franchises under contract, mostly the Carolinas and Georgia.

The restaurant claims to provide a fresh, great-tasting food and the atmosphere of a table service restaurant with the speed and pricing of a quick service restaurant – all in a setting that’s friendly to the senses and the environment.

Why would I spend time writing about this place? Because it shows what can be done when the franchisor-owners are willing to take a risk and let a successful entrepreneur and chef take the lead.  This brand was suffering the past 10 years but now the new Kitchen Cafe concept extention seems to have the right menu, management and financial backing to expand at will, raising the bar above Panera Bread on gourmet fresh food and fine dining food in a fast casual atmosphere.  See below for examples of what the brand and food looks like.

Valerie Killifer reports in Fast Casual The culturization of yogurt  when a little-known frozen yogurt shop opened in West Hollywood in 2005, Californians from the Valley to the Hills (Beverly Hills) couldn’t get enough.Pinkberry unsettled an otherwise quiet neighborhood and gave health-minded patrons the ability to indulge. It also reinvigorated consumers’ taste for frozen yogurt.

Since the launch of the TCBY franchise more than 25 years ago, frozen yogurt has experienced a pop-culture roller-coaster ride of popularity. But with the launch of several new frozen-yogurt concepts, and the success of existing custard franchises such as Culver’s, the segment has completed its latest uphill climb and is once again ready for accelerated growth.

Pinkberry’s owner told the Los Angeles Times on Aug. 4, 2007, that she understands the consumer desire for low-calorie, healthy food. And she’s not alone.

Concepts such as TCBY and Beautiful Brands International are banking on that same mentality for the success of and launch of their premium and frozen yogurt franchise concepts, Yovana and FreshBerry, respectively.

Yovana brand manager Rob Hanson said the concept was created in response to consumer health trends and features proprietary premium and frozen yogurt offerings in addition to yogurt-based smoothies.

“Yovana took TCBY’s expertise in yogurt beyond frozen yogurt and presented a healthier alternative to consumers,” Hanson said. “I think it fits very well with where consumers are going.”

Yovana has four open locations, two in airport locales and two standalones, but Hanson said the concept is still in the test phase.

“Really, we’re refining the concept,” he said. “We’re making sure the menu is right and everything operationally flows the way it should.”

FreshBerry as well is in its infancy.

The first location is slated to open in October after sitting in concept development for about a year.

“The public is ready for a reinvention of frozen yogurt,” said Carolyn Archer, senior vice president of operations for Beautiful Brands. “FreshBerry is the antithesis of the yogurt shops of the 1980s and 1990s. The whole idea is light, refreshing and really healthy. It’s the new wave of yogurt shops that’s going to hit the country.”

The berry of it all
If the success of Pinkberry is any indication, consumers are more than ready for a frozen-yogurt resurgence — and healthful toppings are leading the way.

While ice cream and gelato shops offer toppings such as gummy worms and candy bar crumbles, yogurt concepts such as Yovana, FreshBerry and Washington, D.C.-based Sweetgreen are capitalizing on fruit, nut and granola toppings trends.

Hanson said Yovana’s most popular topping is fresh fruit, which fits with the trend Beautiful Brands is seeing, too.

Darren Tristano, executive vice president for Chicago’s Technomic Information Services, said yogurt concepts are successfully capitalizing on healthful toppings instead of ones bogged down with preservatives and sugary syrups.

Unique flavors also are driving the segment.

Pinkberry only offers two flavors — plain and green tea — but there is plenty of room for innovation, Archer said.

“The Italians have been doing gelato in herbal flavors for decades,” she said. “And that’s coming over into the U.S. People are more adventurous in trying new flavors.”

Tristano also believes Korean-style yogurt concepts, such as Sweetgreen and Pinkberry, will continue to spread across the United States.

“We’ll see more of them and they’ll branch out more from the West Coast and areas popular with smoothies and ice cream and traditional frozen custard,” he said.

Pinkberry alone has 21 locations in California and New York, with plans for 50 more by the end of 2007. And another concept, Red Mango (with more than 130 locations in South Korea), made its U.S. debut this fall in Los Angeles.

Cross Posted at: Let’s Talk Franchising

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.

A Krispy Kreme franchisee is closing several stores citing lease problems.

…said it plans to close about half of its 15 Chicago area stores as it reorganizes under court protection.

Sweet Traditions LLC, of St. Louis, blamed a lease dispute involving highway oasis for its financial problems, as well as a dearth of new products from troubled Krispy Kreme Doughnuts Inc., which has suffered accounting lapses and a change in managers. The company said it will cut about 110 to 140 jobs from its current payroll of more than 600.

Sweet Traditions abruptly closed its three highway oasis locations in May, citing high rent and low foot traffic. Schlegel said the company had been obligated to pay leases at a total of seven oasis location, even though it had shuttered three and had not built stores at the other four.

“We were needing to get out of those leases,” Schlegel said. Bankruptcy allows companies to void unwanted leases.

So the franchisee filed bankruptcy to get out of those leases – drastic measure for choosing bad locations.

I see this problem all the time in my law practice. Leases can bring down franchisees very quickly, and writing that monthly lease check is as painful as writing that royalty check. All successful restaurateurs I have spoken to say a great lease (low price, great visibility and attractive traffic flow, etc.) are one of the important pillars in deciding on whether to open a location.

Schlegel said some corporate practices at Winston-Salem based Krispy Kreme had also hurt her company. At one time the company required its franchisees to build large factory stores, where all doughnuts are made on site. The stores cost about $3 million each, Schlegel said, a large capital investment that was difficult to recover.

I’ll say. Making up the $3 million investment by selling $.79 donuts is long road.

Schlegel said much smaller stores can do well at far less cost.

“Union Station is 800 square feet,” she said. “Its a great location and does great business.”

Krispy Kreme suffered accounting problems for several years and replaced some in top management. Schlegel said that distracted the company from bringing out new products.

Now the company is experimenting with ice cream, she said, which is being tested at her stores in Peoria and Bloomington. “Its doing very well,” she said.

So, is their really going to be a shakeout in the Franchise industry, as it relates to the overcrowded franchise consultant/brokerage field?
There has to be…….

The numbers will bear this out, I believe. The math:

Number of US Citizens interested in exploring business ownership is S {Smallish}
Number of Franchise/Business opportunities is I {Increasing}
Number of franchise consultants/brokers is RS { Really Scary}

So if S + I is divided by TMC {Too Many Choices}and divided again by FDW {Future Downsized Workers}, then the equation must be recalculated to reflect the Ginormus {Huge} amount of new Franchise consultants/brokers entering the field.
However……..The FR {Failure Rate} must be put into this newer equation as an IN{Infinite Number}.

So, according to my calculations:
1. More people will be downsized, and may start exploring opportunities in the world of franchise ownership.
2. More and more new franchise concepts will be introduced, with franchise companies using different ways to reach out to prospective franchise owners.{Consumers are already being bombarded by thousands of marketing messages every day, so this will only add to the confusion}.
3. With more and more choices in franchising being offered, and the possible number of new franchise consultant/brokers that could be in the market in the next year or two {who will also be adding marketing messages to the already bombarded consumer}, a consolidation in our industry will be inevitable.
{I feel this is starting already}

So what type of consultant/brokers will be the survivors?
{End of Part 3. Part 4 Soon}

Posted by Joel Libava, from his  The Franchise King Blog 

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

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

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

…

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

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

…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cross Posted at: Let’s Talk Franchising 

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

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

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

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

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

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

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

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

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

{End of Part 2}  Part 3 Coming Soon Enough

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

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

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

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

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

{End of Part 1} Part 2 coming soon……

What is one way to gather sample financial results for franchises when the franchisor refuses to make optional financial disclosures in their UFOC? Check out the classified ads of businesses for sale. While the classified ads will generally disclose very basic and very vague financial information, such as annual sales and net income or cash flow, you will start to get a picture of the going valuations and metrics used (such as a multiple of earnings before income, taxes, depreciation and amortization; or a multiple of free cash flow), all of which will help you understand the financial models and drivers for the business.

The financial disclosures in classified ads should be taken with a grain of salt. Why? You need to understand accounting and finance, or hire someone to help you with the valuation and explain the tax and valuation factors used in determining what type of free cash flow and return on your invested capital and time you can expect to reap. You also need to understand finance to know if you are comparing apples to apples. For example, all of these will make a huge difference in what the valuation means to you:

• Seller’s Loan payments and interest rates
• Lease payments
• Upcoming or postponed capital improvements
• Wages per employee, total wages per day
• Wages and distributions paid to the owner, if any
• Competition near location (knowing that there are several competitors in the mall is better, because if there are no competitors you know that sales will mostly drop when a competitors moves in)
• Your(buyer’s) financing options and interest rates
• Expenditures for accounting/legal (did they owner do their own accounting, or pay an accountant, what will you do?)
• Cash/theft rates
• Franchise renewals – how soon before the franchise agreement expires, and will there be required remodeling or purchases as a condition of the franchisor to renew the franchise?

Below are two Auntie Anne’s for sale:

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

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

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

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

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

Year Business was Established: 2003

Number of Employees: 1FT/9PT

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

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

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

Paying the IRS—On Your Personal Income and Dividends

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

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

Does a Change Make Sense for a Going Concern?

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

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

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

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

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

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

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

Paying the IRS—On Your Personal Income and Dividends

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

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

Does a Change Make Sense for a Going Concern?

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

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

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

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

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

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

Read MoreCross posted at: Let’s Talk Franchising