What happens when your franchisor sells in alternative sales channels that chip away at a franchisee’s sales? You’re screwed.

For example:

A Blockbuster franchisee filed suit in federal court claiming that because Blockbuster now allows customers to buy and rent videos online, the group’s local franchise agreement has been undercut. This was on top of the “no late fee” promo Blockbuster was running. What’s a franchisee to do? Well, there is not much you can do. Most franchisors expressly provide in the Franchise Agreement that they are authorized to sell their products online and in other venues that encroach on your territory.

Another example – The Dippin’ Dots franchisors reserve an exclusive rights to sell their goods online, at special events and venues no matter where a franchisee is located.

…there were a few problems with our web host, but everything is now up and running.

About 60 percent of Pizza Patrón customers and 45 percent of the franchisees are Latino. As a convenience to its mostly Latino customer base who often have have leftover pesos from Mexico, Pizza Patron will accept foreign currency in exchange for pizza.

On an unrelated note, did you know that Patron tequila (which I love almost as much as Casa Noble) also co-founded Paul Mitchell, the haircare products company?

Pizza Inn is ~400-unit buffet, delivery, carryout, sometimes-drive thru pizza chain in the soutwestern United States with a drama filled past few years that would make some soap opera’s jealous.

In 2002, the then-CEO Rogers of Pizza Inn borrowed about $2 million from the company to buy company stock. The stock sank and Rogers couldn’t pay back the company’s cash loan. Rogers was fired as CEO and Pizza Inn wrote off the debt and moved Parker, then President, to CEO.

Shortly thereafter, ex-CEO Rogers sold his 27% stake in Pizza Inn to a private investment firm escaping with a tidy profit. With the private investment firm holding a controlling interest, the current executives sought to protect their jobs by writing employment agreements with Pizza Inn. The employment agreements provide that if the four executives left for “good reason” or were removed from their posts, they would receive payouts totaling $7.4 million (Parker would have pocketed $5.4 million, Olgreen $630,000, Clark $605,000 and Preator $597,000), more than twice Pizza Inn’s 2003 profit of $3.1 million, which would have surely bankrupted the company.

Eventually the private investment firm got their wish and the shareholders elected new candidates to the board of directors. Parker, the CEO with the parachute employment agreement, resigned and claimed this trigger the parachute and the company owed $5.4 million (he sold 98,000 shares a few days before). He eventually won a settlement of $2.8 million. Pizza Inn even sued its former legal counsel for its role in advising the company on the huge severance packages (the lawyers were supposed to work for the best interest of the company, not the executives). In the meantime, revenues of the franchisor fell due to lower franchisee sales which resulted in the franchisor suffering less royalties and less revenue from the franchisor-owned supplier. Pizza Inn also settles an unrelated law suit with PepsiCo for breach of contract and agreed to pay to PepsiCo $410,000. Drama!!

(links to many articles on the subject at Pizza Marketplace)

So, with all these distractions supposedly behind the mind the executive team, will Pizza Inn salvage the business and work on a profitable model? The pizza is above average, usually gathering positive reviews on Citysearch and other local city guides. The franchisee association (I would have loved to have been a fly on the wall at those meetings during over the past 5 years) claims it is pleased with the new direction of the company and looks forward to the more collaborative style of management. Pizza Inn recently sold it’s headquarters to pay off debts and is outsourcing distribution services previously operate by a company-owned division. Pizza Inn will probably turn the corner and further improve operations. The lower food costs will certainly help franchisees and hopefully dampen the store closings.

Would I buy it? While I like the quick buffet style restaurant rather than the small-box take-out/delivery, with even Papa John’s recently looking to convert to small eat-in areas, I’d be more inclined to buy the stock than buy a franchise during turnaround when cash is tight.

The employee of a franchsee wrestles with a customer over a hot coffee pot.  The coffee spills on the customer burning him.  Is the franchisor liable (the franchisee obviously is liable)?  No, not in New York.  The franchisee is obviously liable, but not the franchisor.
7-Eleven argued in court that there is no evidence of negligence on its part and that the existence of a franchisee/franchisor relationship is insufficient to impose vicarious liability on 7-Eleven for the acts of an individual employed by an independent franchisee.

In Nickola v. 7-Eleven, 03-13494, Doyle explained that in determining whether a franchisor may be held vicariously liable for the acts of its franchisee, the most important factor to consider is the degree of control the franchisor maintains over the daily operations of the franchisee.

Here, the judge found, 7-Eleven exercised no control over the activities that led to Nickola’s injury. “Thus, in the absence of a principal/agent relationship, or proof that the franchisor exercised a high degree of control over the franchisee, there is no basis for holding the franchisor responsible for the franchisee’s misconduct,” Doyle said.

Telling nugget of information in this article about Stone Cold Creamery:

So far per store sales at its 12 international stores in the Pacific Rim are running at about $1 million annually, about three times higher than at U.S. stores.

(In the U.S., stores have two to three workers on a weeknight shifts and five to seven on weekend nights).

Pulling in $300,000-$400,000 in gross sales per store is below what most franchisees would consider a fair return on investment.

If labor costs are 30% of your overall costs, this infers that your costs are about 3.33 x $152,500 = $507,825

That seems extraordinarily high but its hard to be more accurate without more data.

—- Discussions on Stone Cold Creamery in the discussion forum

How can you electronically pay employees who do not have bank accounts? Payroll companies are offering debit cards filled with the employees cash that can be used to make purchases or withdraw cash from an ATM. It’s a kin to a virtual temporary bank account. Good idea!

It’s payday at a Wendy’s in Wichita, but the teens who flip the burgers aren’t lining up to get their checks from the manager’s office. In fact, they aren’t getting checks at all. Instead, sometime in the next few days they’ll simply visit a bank machine and withdraw part or all of their pay using a debit card.

It looks and works just like a standard debit card, but there’s a twist. Most of the employees using it don’t have bank accounts. The card draws on the payroll account of their employer, Wichita-based LDF Cos.

By offering this option to employees at its 44 franchise restaurants and five beer distributorships in three states, LDF has become one of the first small businesses to adopt the payroll system.

“We have a lot of employees who are young and ‘unbanked,’ and thus can’t get direct deposit,” explains Bill Goodlatte, LDF’s senior vice president of human resources. “This is a way for them to get their pay without paying exorbitant check-cashing fees, while allowing us to move toward a paperless office.”

A decent article on 10 Signs of Great Franchise.

1. Responsiveness during the investigation process
2. Direct operational training
3. Other training
4. Marketing programs
5. Real estate and construction assistance
6. Financing assistance
7. Litigation history
8. Financial strength of the franchise company
9. Financial strength of the unit operations
10. The attitude of the existing franchisees

Note: The author is paid a finder’s fee by franchisors when someone signs a Franchise Agreement.

Dollar Financial is getting about $3.25 million back from the founders of We The People (Ira and Linda Distenfield). Dollar Financial alleges that the sellers of We The People deliberately concealed certain franchise sales breached representations and warranties with respect to a number of undisclosed liabilities and other matters arising from the acquisition.

Readers may remember this not-so-flattering review, “We The People, or We The Screwed?” on FranchisePundit.com last year.

As an aside, the founders of We The People are now a soon-to-be 20 unit franchisee and (equity owner?) broker of the PR Store, which is a fine concept.

Line-of-sight visibility of your store from the road and commuted routes can make the difference.

“You have to be open to doing anything,” says Dan Hamari, co-owner with his wife, Janis, of an EmbroidMe shop in Appleton, Wisc. Hamari just relocated from the back corner to the front end of a local shopping mall. “We moved to get better visibility, and it’s working,” he says. “I’ve already had two new customers come in who saw us while they were tied up in traffic.”

The mall location is ideal in several ways, Hamari says. It draws walk-in customers who don’t expect to find an embroidery shop there. “But everybody knows somebody who is in business, and they spread the word,” he says. The venue also appeals aesthetically to shoppers. “You have to treat your store as a retail establishment in terms of appearance, hours and customer service,” he says. “Shoppers who are exposed to Macy’s and Nordstrom have expectations.”

The larger, 2,000-square-foot space, with 900 square feet dedicated to retail, includes a large window allowing people to look into the workrooms. “We want to show people that we are local, that we do the work here,” Hamari says.

This article briefly discusses government regulations surrounding the renewal of franchise relationships:

The CFA, C.G.S. §§42-133f-g, relates solely to the termination, cancellation or failure to renew a “franchise” relationship, and requires that such action by the “franchisor” be taken only with good cause, normally upon 60 days’ written notice.

Lesser notice may be provided in certain unusual circumstances. Good cause includes, but is not limited to, “the franchisee’s refusal or failure to comply substantially with any material and reasonable obligation of the franchise agreement. … ” C.G.S. §42-133f(a).

A franchisee which is improperly terminated, cancelled or non-renewed may sue for injunctive relief, damages and attorney fees, C.G.S. §42-133g(a). All franchises entered into or renewed after Oct. 1, 1973 must be for a minimum of three years. The parties cannot contract away rights under the CFA by a choice of law provision. R & B Assoc. of Conn. V. Deltona, Business Franchise Guide (CCH) ¶7,525 (D. Conn. 1980).

Nearly all state franchise laws (whether “registration and disclosure” or “relationship” statutes) provide that a franchise exists when:

(a) a franchisee is granted the right to engage in the business of selling or distributing (sometimes also “offering”) goods or services under a marketing plan or system prescribed in substantial part by a franchisor; (b) the operation of the franchisee’s business pursuant to that plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logo, advertising or other commercial symbol; and (c) the franchisee is required to pay, directly or indirectly, an amount of money to become associated with the franchisor, commonly referred to as a franchise fee.

The Crain’s Chicago publication profiled several pet “waste management” businesses, where the business owner will visit yards and scoop up the pet waste. It’s generally a profitable, flexible services business, and can grow rapidly by word of mouth. The $25,000 franchisee fee and 6-8% in total royalty and fees each year most often do not seem worth the payoff. Spending the $25,000 on smart, targeted advertising is more than enough to build a client base, and spending 10% of sales on advertising ongoing should be more than enough to grow the business each year by twice the investment. If there was a franchise brand that most dog owners recognized, than the franchise fees would be a fair exchange. But that is just not the case.

Here is a glimpse from the article:

To start, the couple spent $20 on two scoopers and $1,500 on an ad in Save on Everything — a coupon book mailed to 150,000 people in Chicago. Within two weeks, they had their first 25 customers. Now they have 120 weekly clients and are expecting to bring in around $80,000 this year.

Another article in the same issues touches on the broader pet services industry.

1) Are You Franchisee Material?
We asked franchisors what they want in franchisees, and 4 qualities rose to the top.

2) 2007 Franchise of the Year? (Entrepreneur Mag)
#1: Subway
#2: Dunkin’ Donuts
#3: Jackson Hewitt Tax Service
#4: 7-Eleven
#5: The UPS Store/Mail Boxes Etc.
#6: Domino’s Pizza
#7: Jiffy Lube
#8: Sonic Drive In Restaurants
#9: McDonald’s
#10: Papa John’s

I’d personally choose in the following order: McDonald’s, 7-Eleven, Papa John’s, Dunkin’ Donuts, Domino’s Pizza.

3) Great comments from a few franchisees and people in the industry. You can listen to the segment with Real Player too.

4) Franchisee rebuffs new product offerings and promotions from Taco Bell.

Some notable actions taken by Dalham since the opening of his franchise in 1990:

• Refused to expand his menu beyond the basic, non-premium offerings such as the “Taco.”
• Used plain white Styrofoam soda cups until the corporation forced him to use branded paper cups during an audit in 1999.
• Furnished dining room with squeeze bottles of hot sauce to avoid purchasing branded sauce packets.
• Failed to update logo – currently displays the red, green, yellow, and purple logo phased out in the 1990s.
• Did not hang promotional posters featuring the talking Chihuahua when the campaign was introduced in 1997.
• During the “Head for the Border” campaign, posted a banner that read “Americans Even Do Tacos Better.”

Due to franchise regulations, Dalham was forced to adopt certain conformities, such as the display of the words “Taco Bell” on his backlit menu and identifying his restaurant as a Taco Bell in the local yellow pages.

Personally, I prefer the Pepperblue Steak Sandwich from Panera Bread. Several chains introduced new beef sandwiches:

But it was the beef sandwiches that debuted in 2006 that seemed the most inventive. In February, Quiznos introduced its Prime Rib and Peppercorn Sub, followed by its Prime Rib Cheesesteak in September. Subway rolled out two premium steak sandwiches of its own, the Blackened Cajun Steak and the Steak and Cheese, in September.

On a related note, here is an article discussing the strategy behind Quiznos’ new salad offerings.

A new Curves franchisee association organized at the most recent Curves annual meeting. The group will represent all 10,000 Curves franchisees.

The association held its first annual meeting in late October during the Curves International annual convention in Las Vegas. At the convention the association’s executive board members elected officers for the organization, and the executive board and officers were presented to the franchisees.