You have probably seen their big orange ads screaming “We buy UGLY homes!”. HomeVestors purchases homes at below market value, targeting homeowners that need to sell quickly, rehabilitates the properties and sells at a higher price. . This interview with the CEO walks through a few aspects of the franchise.

This was an interesting Q&A:

What do you think of TV shows like “Flip This House”?
In one episode of one of those shows, an investor goes up to a house, and the house is locked, but he wants to look at it. He says, “We’ll have to take matters into our own hands,” and kicks in the door and smiles at the camera. He just violated the law—that’s trespassing, and our franchisees aren’t able to do that. That’s the wrong image to give lawmakers, consumers and consumer lobbying groups about this business. I get agitated about what I see on these shows. People get the wrong idea—that you can buy a house, flip it and make $50,000 on it. So I don’t watch those programs too often.

A disciplined, systematized, ethical approach to flipping homes is the way to go in this business, whether that be on your own or with a franchise.  Homevestors’ system does things in a legitimate manner, unlike some home flippers. The erratic real estate market of late makes profits unpredictable, and sometimes finding homes 30% below market value difficult.  New government regulations could blind-sided franchisees as politicians try to buffer the profits from aggressive flippers.

When a franchisee closes it’s doors and walks away from the six-figure investment, it’s almost always about the unsustainably low sales.

Does anyone believe the dodgey “We just chose to no longer be a franchisee of Qdoba’s” excuse by Qdoba Mexican Grill franchisee?

At say, “It is for personal reasons, unrelated to the performance of the business”, or “The location did not provide us with enough traffic in the non-lunch hours to cover the high lease payments”, or whatever the real reason may be.

100-unit Potbelly’s, who recruited DeLuca from Starbucks as an investor and board member, is planning to raise money in the public capital markets with an IPO in the 3rd quarter of 2007.

Chicagoans have been enjoying Potbelly’s toasty-warm sandwiches, fresh homemade desserts, and old-fashioned milkshakes at the original Lincoln Avenue store since 1977. The original stand was in an antique shop, formed to feed and attract hungry locals to browse the atiques.

Current owner Bryant Keil purchased the business in 1996, and has since expanded its presence to Washington DC, Virginia, Maryland, Wisconsin, Michigan, Minneapolis, Ohio, and Texas. Potbelly has over 100 company owned-locations and the growth continues, albeit at an intentionally steady, controlled pace.

Background article.

Jimmy John’s (“JJ”) franchisees are happy because they make money and get decent support from the franchisor. The failure rate is very low, particulary in the past 5 years, if you follow the sytem. It is rumored that a single unit, on average, achieves $850,000 in annual sales, with breakeven reached usually with annual sales of $400,000-$420,000 (depending mainly on the lease). The latest numbers are over 500 restaurants in operation (20 company owned) with 1016 franchise agreements signed. A new JJ is opened every 36 hours as of January.

Most of the franchisees now are area developers, but sometimes single-units are sold. JJ has a well tuned but quirky fun system to make it ‘happen’. The operation manual is specific to every last detail, to how you put on your apron. The headquarters has rock music playing, Plasma TVs with Fox News on full time, and very casual but go-getter attitude. The founder recently sold a third of his business to a Weston Presidio, a famous private equity fund who funded Starbucks, Jet Blue, Wild Oats and Guitar Center, but founder Jimmy John Liautaud still has a 4-to-2 vote lead on the board.  Liautaud’s 29-year-old President is the 3rd largest shareholder.

On of JJ quirky but effective marketing approaches is an in-your-face attitude in the store and in their infrequent advertising.

A second unique aspect is JJ’s Franchise Consultants, who visit stores with supplies (tile glue, cleaners, mits, pans, etc.) to clean up and fix up shops, all while encouraging the owner. A third unique aspect is its use of more than a dozen guerilla marketkers who will visit one location and spend 4 days there. The first day is planning for the massive 3,000 sample distribution strategy over the next few days, the second day is giving out samples, the next two days is giving out more samples if possible and then helping the franchisee make sandwhiches. Orders usually increase by 60+% and strongly stay above pervious levels therafter.

Because JJ has strong roots in the college markets, delivery is a distinguishing factor of the franchise. Hey, if delivery works for pizza…

This isn’t a commercial, no one is paying or asking me to write this – it’s my unbiased opinion. I’d buy it!

I lived in South Florida for about a year and regularly ate at the Chicken Kitchen (background article). The restaurant flame roasts chicken on a very large open grille for all guests to see, and then chops up the whole chickens for plates, bowls or burritos. The bowls were quite healthy, filling and reasonably priced.

Chicken Kitchen was recently involved in a nail-biter law suit. One of its franchisees caused a serious auto accident. Who was liable? Only the driver and franchisee, or also the franchisor?

Let’s do this law school style (all you lawyers know what I mean):

Plaintiff (P): Joshua S, motorcycle rider hit; represented by lead attorney Ervin A. Gonzalez with assistance from Deborah Gander.

Defendant (D): Chicken Kitchen USA LLC; represented by Frank Alloca and Bill Davis of the law firm Buchanan Ingersoll & Rooney in Miami.

Facts: An employee of D’s franchisee was driving to make food deliveries for its restaurant. P was driving down the street in his motorcycle with friends. The franchisee’s driver hit P, causing severe neurological damage and the loss of his right arm.

P’s Claim: The Miami franchisee was an independent contractor, and it was therefore not responsible for any of the franchisee’s actions and omissions.

D’s Claim: Its franchisee was an independent contractor and therefore was not responsible for their acts and omissions

Issue: Is a franchisor legally responsible for the actions of its franchisee’s employee when the employee crashes a stop sign and causes bodily injury?

Holding: Yes.

Reasoning: Chicken Kitchen USA is legally responsible for the acts and omissions of its franchisee because it controlled or had the right to control the day to day business activities of its franchisee pursuant to its franchise agreement and operating manual.

The jury subsequently award Joshua S $2 million. I’m not sure whether insurance covered Chicken Kitchen USA LLC for its liability.

Move over Dunn Bros, Beaners, It’s A Grind, and Saxby’s Coffee, there’s a new theme in town. If it works to sell chicken wings, will it work for coffee? Sexpresso coffee shops are, for obvious reasons, gaining much free PR and repeat business due to the employee fashion, or lack there of. The coffee menu is reworded with suggestive coffee drinks served by girls in bikinis and provocative outfits, with one coffee house theming days – Tube Top Tuesdays, Wet T-Shirt Wednesdays and Fantasy Fridays…you get the point. For those who would prefer to supplement their green & tan decor with bikinis, Cowgirls Espresso (pictured at the right) has decided to begin offering franchises.Is it good for business?

Ms Araujo and others say it has given an unmistakable boost to their businesses. Their staff may only receive minimum wage, but the tips can be terrific.”Our customers may be half-asleep when they get here, but we do what it takes to wake them up,” said Ms Araujo. “They always say: ‘Thanks for the great cup of coffee and the smile; it made my day’.”

I’m not writing about this to imply or promote these gutter strategies, but to highlight that you never know what you’ll have to compete against in the future. While these wild ideas won’t put an ordinary coffee franchise out of business, it will chip away at sales, and sometimes a 10% drop in sales can be catastrophic. Constant improvements and innovation in the menu, systems, preparation, marketing, and operations will keep the impact from trendy and oddball competitors to a minimum by keeping your brand fresh.

A Quiznos franchisee discusses why he is dumping his 3-year old franchise in favor of opening his own restaurant at the same location:

“Over the years, the cost of operating has gone up to the point where it’s not profitable, and it actually has never been profitable,” he said. “The business model is just too expensive and advertising fees have gone up recently.”

The risk that the franchisor will increases the mandated advertising fee or cost of inventory is risk born solely by the franchisee.

Tully said advertising rates and product costs hindered the Quiznos operation. He said he was only allowed to buy products pre-approved by Quiznos, which led to higher prices.

“I understand Quiznos has a system and brand, and they want to promote the brand in every way, but the model is such that a lot of us are having trouble,” he said.

What’s the attraction to running his own restaurant?

“The nice part about running it myself is I’ll have control of it, and if something doesn’t work, I can throw it out right away. It also gives a closer relationship to the customer,” Tully said. ”

“The nice part about running it myself is I’ll have control of it, and if something doesn’t work, I can throw it out right away. It also gives a closer relationship to the customer,” Tully said. “We hope to create the atmosphere of a neighborhood place.”

Needless to say, I would’t buy it!

Entrepreneur magazine seems to always figure out new ways to publish the same “tips” on starting a business or buying a franchise. Nevertheless, the most recent “How to make a lot of money as a franchisee” is worth a quick scan.

This item is most important in my opinion if you are looking at franchising primarily to increase your net worth (as compared to a ‘lifestyle’ business):

4. Reinvesting to achieve your absolute goal. If you find an opportunity that fits well for you and has a great return on investment, and you’ve got your first unit up and making a lot of money, you can reach your absolute number goal by acquiring additional units. This can either be done through further out-of-pocket investment or through the reinvestment of the profits you’re making into growing the business. I have a good friend who owns more than 40 haircutting franchises. The return on investment in each unit is great, but the absolute dollars in any one unit don’t meet his overall total income goal. He found that by adding additional units over time through the reinvestment of profits, he could realize a total income far in excess of what his absolute goals were when he started the business. In the example mentioned in the first point, if you want to make $100,000 per year, make four of the $5,000 investments and you’re there.

You are not going to believe this…

Consumer Reports conducted a coffee taste test, and the winner was [drum roll please]….Cuppy’s Coffee!!!…..OK, I kid. The winner was McDonald’s, who beat Dunkin’ Donuts, Burger King and Starbucks (I’m sure Starbucks loves being lumped into that group).

McDonald’s coffee “beat the rest,” according to Consumer Reports. It was “decent and moderately strong. Although it lacked the subtle top notes needed to make it rise and shine, it had no flaws.”

I agree.  I like the new protruding sipper lids.

As for Starbucks, its coffee “was strong, but burnt and bitter enough to make your eyes water instead of open.”

I somewhat agree.

I’m a big fan of coffee (with cream please). But, a friend of mine ruined my coffee drinking experience with one statement. He said “coffee looks and tastes like muddy water”. Now, when I drink my daily coffee with cream, I look into the cup and damn it, it looks (and sorta tastes) like muddy water!

– – – –
On a different note, do you want to know what investment bankers and M&A/LBO guys think about when they look at franchisors? They often look at breakup value and leveraging assets (primarily real estate of their company-owned stores) on the balance sheet.

“Flatbread Sandwiches” and “Grab-N-Go Pizza” is on the new prototype menu being tested in Sarasota, FL.

Meanwhile, every detail of this breezy-feeling building is designed to reinforce the brand.

Customers waiting for their food at the drive-up window gaze through glass walls at the interior, and they also have a good view of the coffee-by-the-pound, shelved up high and directly opposite the glass wall.

the Flatbread Sandwich is a key item at the new Dunkin’ at Stickney and Gateway Avenue. Priced at $2.99, the sandwichof the future comes in three versions: turkey, bacon and cheddar; ham and swiss; and three-cheese…Delivered frozen and crisped up in expensive new ovens that combine convection with microwave, the Flatbread is a cross between a Cuban and a pita sandwich…These convection-plus microwave ovens, which are all the rage in the fast food industry, give the bread a toasty, fresh-baked finish while getting the innards nice and hot, and they do it all in a minute.

Same for the next item down under the heading “Anytime Snacks” — the “Grab-N-Go Pizza” — and for another new hand-held meal, the “Chicken Biscuit.”

I like what I’m hearing…

Right now, Kaplan is doing at least 60 percent of his business between opening and noon.

I’m a bit surprised. I thought they’d do 75%+ before noon.

The average Dunkin’ Donuts store churned out $915,000 worth of coffee, donuts, cappuccino and Coolattas during 2005, a figure that was 8.3 percent ahead of 2004.

The $915k sales number is strong, and the margins have progressively increased, helped by nearly matching Starbucks’ coffee prices.

BusinessWeek documented Bhupinder “Bob” Baber founding of the Quiznos Subs Franchise Assn and its litigation soap opera.  The independent franchisee associations of Diary Queen, Subway, and few others are also mentioned along with their individual legal battles with the franchisors.  For example, Dairy Queen franchisees litigated over the new DQ Grill ‘n’ Chill concept, and Subway franchisees litigated over a potential loss of influence over an advertising fund.   Toasted Subs Franchisee Assn members pay $50 per store per year for membership – well worth it in my opinion.

About 25 Original SoupMan Cafés have opened (plus a wholesale business) since Yeganeh began to franchise his restaurants last year based on his original Soup Kitchen International in New York. One blogger feels that $7.95 for a bowl of soup from the Soupman (Soup Nazi from Seinfeld) is too pricey. He posted some pictures too.

Considering I paid about $5 for a grande, sugar-free Cinnamon Dolcé Latte at Starbucks today, 3 more dollars for hearty veggies and/or meat seems with the reasonable range.

Previous mentions of Soup Nazi

Imagine this –

You are a Subway franchisee and you are believe that you are being cheated by the franchisor over payments relating to the transfer of leases and equipment costs. So you set up a web site, SubwayUncovered.com to vent your frustration and tell the world of your experience. Subway, of course, will will try to protect its brand through the legal system. In this case, Subway is claiming trademark infringement from using the Subway name in a domain name. Trademark infringement complaints in these cases usually involve the claim that there is a strong likelihood of confusion in the reader’s mind that this may indeed be an official Subway property, and that confusion will dilute the brand’s goodwill. The final arbiter of domain names is usually the World Intellectual Property Organisation (WIPO), and the organization hasbeen permitting the use of trademarks in domain names when the site comments on the company. This Subway dispute happens to be taking place in the UK but the concepts are relevant in the US.

The operator of PayPalSucks.com has some great advice for those of you interested in this topic. It gives good advice on how to setup a protectable “complaint” site with the company’s name in the domain, and it illustrates the point with the actual letters from the attorneys on both sides of the PayPalSucks.com dispute (which he won).

KFC is shifting its design strategy to more upscale. Here is the experience from one franchisee:

The restaurateur has spent more than $3 million renovating all the restaurants, but only a location in Claremore and now the southeast Tulsa store boast the new image.

“The idea was to bring KFC up to casual dining,” Schoenhofer said. “We’ve gotten away from the fast-food look.”

KFC and its parent company, Louisville, Ky.-based Yum! Brands Inc., are in step with an evolution inside the quick-casual food industry — new images for many longtime chains, including fast-food giant McDonald’s.

“It’s a trend and, obviously, it’s working,” Schoenhofer said.

At KFC, hard plastic seating, bright primary colors,and old menu boards and lighting have been replaced with high, open ceilings, glazed tile floors, padded booth seating, upscale tables and chairs, and improved restrooms and lighting — all in a Tuscan color scheme of gold, rust, blue and brick red.

The restaurant also features a colorful, revamped menu board above the service counter.

With inflation, “We’re asking people to spend more money on food, and we want to give them the environment they want,” Schoenhofer said. “We want it to be a nice experience for them.” KFC is also making its menu healthier.

…And after the renovations, business soared, he added. “Since we took the stores over, our sales went up 150 percent.”

Most of the fast-food chicken brands such as Popeye’s, Church’s, Boston Market, El Pollo Loco, Pollo Tropical, Bojangle’s Chicken, Chick-Fil-A, and Chicken Kitchen, have relatively common cheap chair/booth style look. Improving the quality of the food and restaurant design is a smart, and very likely to be successful strategy. One strategy to capitalize on this new initiative is to buy an existing KFC franchise from an owner who does not have the cash to upgrade to the new design. I’d buy it!

While some claim any free PR is good PR, that doesn’t hold true in the franchise world. I would wager that the vast majority of people before they become franchisees do some searches on the Internet (or their loved ones will do it for them) about the franchise. Blogs come up high in search engines because, in part, to frequent postings and incoming links. They serve as a powerful self-disinfecting spotlight. But, this spotlight can be abused by franchisees who failed because of their own fault. Nevertheless, franchisees will flood towards franchisors that are committed to ethically maximizing both for themselves and franchisees.

The Java Jo’z / Cuppy’s Coffee story

• There has been a lot of negative blogger buzz with shark ferocity surrounding Cuppy’s Coffee and Java Jo’z. Apparently, Cuppy’s Coffee (formed in May 2006) purchased the assets of Java Jo’z Coffee & More, LLC. Allegedly, Java Jo’z orally promised a return of the $20-30,000 franchisee fee if the franchisee did not build out. However, things turned bleak – the CEO was sent to the pokey for tax issue, the assets were sold to Cuppy’s Coffee, and now there is supposedly no money to return the franchise fees. The Franchise Agreement does not provide for a refund of franchise fee, but allegedly oral promises were made to franchisees by Java Jo’z and its CEO, Roy Snowden. The asset sale under impending bankruptcy is suspiciously ill-timed and no one has released dollar amounts to determine whether fair value was paid. And if it was, where is the money?
• Should people be concerned about the ethics of Cuppy’s? Probably not at this point. Many details are unknown and just because people lose money does not mean anything unscrupulous occured.

I have a few questions:

1) Why did Aaron Weinstock from a few miles outside Fort Walton Beach register in Florida the business: CUPPY’S JAVA JO’Z COFFEE & MORE, INC. ? Is Aaron Weinstock related to Kristin Weinstock who name appears on blog spamming, and it always reads:[update 1-25-2007: this text has been deleted] As both an Employee and an Owner, I get to experience Cuppy’s in a way that not everyone can. I love Cuppy’s because of the dedication of the employees, to each other and to the Franchisees and Licensees. I also love having the chance to work with our owners every day, and learn from their experiences to help me in the process of opening my own store.

2) If Doug Hibbing, President of Cuppy’s Coffee, never had a legal relationship with Java Jo’z, why did a Russell Hibbing register “Java Jo’z International, Inc.” in Nevada last year?

For fun – what are the possible claims/theories of liability based on the allegations that have swirled around?

1) fraudulent conveyance/transfer:
As attorney Paul Steinberg pointed out, and Cuppy’s objected via a tersely worded letter from their attorneys, the asset sale may be unwound if under the Uniform Fraudulent Transfer Act, if Cuppy’s received or bought assets from Java Jo’z and Java Jo’z

(1) intent was to hinder, delay, or defraud creditors (pay back the franchisee their deposits),
(2) Cuppy’s did not receive a reasonably equivalent value in exchange for the transfer or obligation, and the debtor

(a) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(b) intended to incur or believed or reasonably should have believed that the debtor would incur debts beyond the debtor’s ability to pay as the debts became due.

Under the Bankruptcy Act, an aggrieved party may bring suit against those persons who received transferred property and may recover from the transferees the value of that property if they have subsequently converted the property.

2) criminal conspiracy
US Code Title 18, Part I, Chapter 19, § 371. Conspiracy to commit offense or to defraud United States:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.

3) civil RICO statutes
Most civil RICO claims are filed under Section 1962(c), which makes it unlawful to “conduct or participate, directly or indirectly, in the conduct” of an enterprise through a pattern of racketeering activity. The four primary elements are “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”

4) civil conspiracy
The typical elements for civil conspiracy include: (1) an agreement (2) by two or more persons (3) to perform an overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another.

Hat tip: The Usual Suspects = Paul Steinberg, Blue MauMau, FranBest, Ben Scoble, Franchise Pick, and probably others that I forgot (sorry!)