Should you take the buyout? This NY Times article profiles several middle-aged (50ish) people who left the employ of large public companies. What do you do next?

I always enjoyed reading articles about how people evolved into becoming franchisees.  The article starts –

THEY were all on different career paths, but they had one thing in common. In midlife, well before they were ready to retire, they decided to take buyout packages.

The first person profiled is a former attorney and senior executive from JP Morgan Chase who earned a “six figure” income. She is now happier in her role as a not-for-profit director helping women over 50 network. Her friend’s advice was, “All the truly interesting jobs pay under $75,000/year.” I’m sure that is true for many high paying occupations that are not entrepeneurial in nature.

The second profile is that of a former Delta pilot and current owner of an office supply franchise in Las Vegas.

“My wife has a good job as an administrator for the school district.” He hopes to pay himself a salary at the franchise soon.

“There’s a phenomenon called the ‘wealth illusion’ when people get a lump sum in a buyout,” he added. “Have they really assessed, ‘Can I do my own business?’ If they’re going to open a franchise, is there really a need? You end up in a posture where the actual economic status of most people is way, way off what you would assume from all that retirement advertising.”

For Mr. Vance, the risks of starting a business seemed lower than the near-certain disaster of staying at Delta. For now, as he tries to expand his franchise, he is also flying for a company that provides jets to executive travelers. It is not the life he envisioned when he joined Delta, nor is it the one he feared when the company started to shake.

He is not able to save much for retirement, he said. But after living for so many years in the air, “I’m finally able to get involved in things like the chamber of commerce, and I got to know my neighbors, so in that sense it’s been pretty nice. I grew up on a farm in Kentucky, so I’m no stranger to hard work.”

…the final paragraph about the renewed connection to your local community is an often overlooked intangible benefit of owning a franchise.

Interesting article in the Dallas Morning News highlighting common “disagreement” points between franchisees/franchisors.

This week, Pizza Inn Inc. said it is being sued by former franchisees who say the company, based in The Colony, “intentionally and negligently misrepresented development and operation costs.”

Subway parent Doctor’s Associates Inc. faces two lawsuits filed this summer stemming in part from a fight for control of the brand’s advertising dollars….

Chris Bray, a franchisee of the Denver-based Quiznos brand, complained of what he views as a lack of communication between franchisees and headquarters….

Most [of Quiznos’ disclosed litigation in the UFOC] involve claims the franchisees say were made about exclusive territories or the inability to get their outlets open within the required time.

Hat Tip: Paul Steinberg in the forum

I’ve spent most of past year working full time for a private equity and asset management firm. I thought I knew a lot about the private investment world before I started (I’ve been part of several business that received venture capital funding), but what I learned has been a tremendous eye-opener, particularly in seeing the naivity of investors.

My job involves handling and fixing issues (legal, financial, complaints, compliance, etc) that involve hundreds of investors. I often speak to investors when they have concerns or complaints.

I have a lot to say on this topic because I slap my head almost daily at the mistakes, misconceptions, and wholly amateur approach investors make when deciding whether to invest in my company’s real estate related investments and funds. This will be a multi-part series of postings that will be equally relevant to those looking at investing in private placement offerings and those looking to be a franchisee. The no-bologne, no excuse due diligence an investor in a private partnership should go through before locking themselves into an investment is nearly the same a potential franchisee should go through before locking themselves into a franchise.

Venture capitalist often repeat that they do not invest in “ideas”, but rather they invest in the “people”. I always hear that them say they’d much rather have a “C” idea ran by an “A” team, than an “A” idea ran by a “C” team. Focusing on the “people”, the franchisors or general partners, is indeed key from what I’ve seen. How well do you really know the people and managers you’ll be investing with? Have you done a background check on the managers? Have you asked for audited financials this deal and other deals? If they aren’t audited by a reputable firm, walk away…don’t believe the “we didn’t feel it was worth the money” crap excuse. Have you asked for the underwriting documents? If the deal is a preferred return structure and the general partner has built in equity to pay you the full preferred return for a certain period of time, do you know what that time frame is? Are they going to borrow money to pay your distributions? If you don’t know what I’m talking about, you are a fool to invest in a private offering deal no matter what they promise or claim is their past success.

Many complaints stem from misaligned expectations. In my view, the overly positive expectations of investors are their own fault for not doing enough investigation and due diligence. I once watched Jim Cramer from CNBC’s Mad Money show say, “I’d never invest in non-regulated securities (private offerings) because I want the protection.” Cramer formerly offered private offerings through his hedge fund too, so it’s a lot for him to admit that.

What people (potential investors or franchisees) seem to loose is their skeptical prudent eye when they feel comfortable with the salemen. You do know that your salesman is being paid a commission based on he get you to invest, right? You know some firms pay 10% or more to their brokers, don’t you? Do you know where that 10% commission is paid from exactly…it will comes out of your investment even if it is not represented in your capital account as such, so the partnership has to recover your commission to get you back to whole. The salesmen usually only knows enough details about the project to talk about it superficially, so his virtual “guarantees” are baseless beyond his own impressions.  Get to know these facts and be comfortable with their implications, please.  And for crying out loud read the darn PPM (private placement memorandum) and operating agreement (LP or LLC agreement), and have your lawyer review it with you in detail. 

Often in the world of private offerings, you meet the salesmen (broker or finder) from your religious organization, through mutual friends, clubs or other referal. Does that mean you should take their word without your own “real” research? Of course not.

Private placement offerings are (supposed to be only) offered through registered NASD broker/dealers, and these registered representatives are a very regulated group with stiff penalties for saying or promising too much.  If the person hasn’t taken the NASD tests to be certified (usually a Series 7, Series 63, or Series 82) and a member of an NASD firm.  However, firms often bypass the registered rep requirement by paying a “finder’s fee” to the person who made the introduction of the investor.

I will write later about what “real” due diligence and research consists of for the investor/franchisee. Out of the hundreds of investors I’ve seen at my company, in my opinion not one individual person has done enough due diligence before writing that big (sometimes multi-million dollar) check.

Here is a laser skin care franchise that is pitching itself as a viable part-time business. Sounds good, eh? The franchisor is implying that you can work part-time hours and earn full-time profits. How then does the franchisor make money? By upcharging you on the equipment you must buy and subsequently rent, earning a % on each rental deal you source, charging a $30,000 franchise fee, and charging a flat-monthly royalty that is highest when you first start. The franchisor seems to be in a great position to profit in the first two-years regardless of whether you ultimately succeed.

After becoming a LaserShare franchisee, you will purchase the equipment from a specific vendor that we refer you to. The next step is to identify medical practices or other potential business to enter into, what we consider, is a unique long term “revenue sharing lease” and marketing arrangement with. Once, the “revenue sharing lease agreement” is entered into with the medical practice or other business, the practice or business will provide the space for the laser equipment as well as providing the operators of the equipment, most of whom will usually be members of their staffs already. As the LaserShare franchisee, you will provide the laser equipment, marketing/advertising assistance, and initial guidance in launching or expanding the laser skin care component of their practice or business. And, you may set up as many relationships as you like, thereby increasing the utilization and the number of revenue sharing relationships.

Does this sound like a casual, part-time opportunity?

We have tried to keep it simple. You pay a one time fee upfront of $30,000 and a FLAT monthly royalty, not tied into sales or other revenue volume that declines substantially over the first 24 months to a small one time annual fee starting in Year Three.

Return on your investment and time, in addition to individual lifestyle choices, are the primary reasons most people buy into a franchise system. Before you buy into a franchise, always look at the tradeoofs…evaluate your dollar investment, time investment, likelihood of success based primarily on discussions from those already selling similar product to your customers, and how much money you would need to net for this business to be worthwhile.  Compare that risk with a safe choice, such as taking a lower paying job that you enjoy and investing the franchise fee and other upfront costs in safe passive investments earning 6-8% per year.  Is the franchise worth the risk?  Is it only worth the risk if you buy multiple units?  You must know the answers to these questions.

I’m embarassed to admit that I’m a fan of drive-thrus, and I’ve perfected eating while driving with my knees since I drove to high school. When you think of drive-thru, however, you normally don’t think of healthy meals, unless you want to go low-carb and just slop down the burger meat.

QSR mag released a survery of consumer preferences related to drive through. Here are some highlights:

56% eat quick-serve food at least once each week, while 39% use the drive-thru at least once a week. Another 25% said they use the drive-thru once or twice per month.

63% of consumers we surveyed agreed or strongly agreed with the statement, “I want food that is easy to consume in a car.” And 15% said, “I only shop at restaurants with a drive-thru.”

57% said an acceptable wait time was no more than five minutes….23% indicated they would wait up to ten minutes, while 11% said they would wait for one or two minutes.

46% indicated that their food choices differ when they are ordering at a drive-thru, compared to when eating inside the restaurant

The survery makes a good case to favor restaurant franchises with drive-thrus, especially when 39% of the people surveyed eat at the drive-thru weekly.

This always puzzled me – why isn’t their more drive-thru pizza by the slice restaurants? Sbarro’s drive thru, perhaps?

Excellent article reviewing the major print franchises.

* source: Cary Surburne @ WhatTheyThink.com

Our company recently purchase several boxes of envelopes with our logo and it cost us more than $1,400.00. While the quality is good, that’s quite a markup for short-notice printing.

How will these companies compete with Internet monsters iPrint and VistaPrint, who can provide equal quality at fractions of the price? I’ve used the online printers with outstanding results. But, I think the local printing industry will do just fine and will eventually innovate as necessary to stay competitive.

“Companies in the printing space that seem to be doing the best are those that have embraced technology and leveraged the convergence factor to expand the range of services they are offering, like the FedEx Kinko’s printing/shipping concept. If the franchisee has been making money and the company they are with has been successful in supporting them, making that leap to renewing is an easy one.”

Hat tip: Paul Steinberg in the forum

The past decade has seen substantial innovation and entrepreneurship in the moving industry.

As a general observation, there seems to be ample opportunity for franchise success in the trades and laborer market. The public typically responds to recognizable franchise names in an otherwise disorganized industry (see Roto-Rooter, MerryMaids, Handyman Network, Two Men and a Truck, Prospection, CertaPro Painters, Geeks on Call, Mac Tools, 1-800 Waterdamage). Low-margin, labor-intensive businesses in industries such as landscaping, painting, plumbing, moving, repair and installation, can earn premiums if professionally branded with the attempt (or illusion) of standardized, ethical business practices.

Here are a few examples:

1. Two Men and a Truck (and copy cat strategy Little Guys Movers): A simple yet successful branding strategy that made local moves less intimidating with the image of a trustworthy, hard-working team of guys.
2. PODS franchise (plus copy cats UNITS and SmartBox) and ABF’s U-Pack: Most moves are local, yet people fear the scams, delayed deliveries, your stuff unloaded in a warehouse to make room for another move, etc. The selling point of large metal-box storage is that your stuff is always locked up, eschewing the chance of damage or loss from frequent unloading. I don’t like the fact that PODS charges a non-refundable $50 to even learn more about their franchise offering, but for a $2+ million startup cost, $50 is nothing to and it filters the inquiries to serious ones only?
3. eMove.com, part of Amerco’s U-Haul, has cornered the market for laborers to help you move with an ebay-like service for hiring those needed strong bodies to load the truck. I have personally used this services and its become one of those “How did I ever do without it?” reliances.

Crain’s in Chicago published a great set of articles focusing on franchising. Here are the article titles:

IT’S ONE WAY TO BE YOUR OWN BOSS . . .
Want to be king?

MAKING IT WORK: DUNKIN’ DONUTS
The doughboy

THINK NUMBERS DON’T LIE? THINK AGAIN.
Is this franchise the real deal?

MAKING IT WORK: SUBWAY
Turning sandwiches into a bread maker

MAKING IT WORK: HELP-U-SELL
Keeping it real in real estate

BEWARE THE FRANCHISE GHOULS AND GOBLINS
Tales from the dark side

WANTED: SALES SKILL AND RESPECT FOR ELDERS
It’s good to be (franchise) queen

RESOURCES FOR YOUR LONG JOURNEY TO THE THRONE
Words to the wise

Check it out!

This British franchisor developed a vending style golf club cleaning machine. My initial reaction was that it was terrible concept for myriad of reasons, but I can see it possibly working as long as competitive pricing pressure is nearly nonexistent. It could provide low-end golf courses with a small but riskless alternative revenue stream.

The Sonic Golf Club Cleaning Machine cleans a full set of golf clubs in just two minutes. The Sonic can clean both the heads and grips of the club to an original condition. The grips are restored to a tacky finish and the grooves on the clubs face are clean thus improving the amount of ball control.

A franchisee explaining why his wing joint is doing well:

“Everybody loves wings,” he said. “I think of the attributes that contributed to our success is the clean environment, good food, 14 different sauces, sports environment and casual atmosphere. I think a while back that what had a lot to do with it was the Atkins Diet. Chicken is very healthy.”

And another explanation:

He said wing-based eateries have thrived in the U.S. restaurant market because they provide an affordable product and operate at low cost.

“Obviously, it has a lot to do with the bottom line,” Wilkerson said. “They’re able to serve at a place with a small dining room and serve carry-out. They keep the menus limited, keep costs way down with little overhead and don’t have lots of waste like some restaurants do.”

Said Nicoloff: “It’s easy to inventory. You don’t have to have the equipment or time to train someone. It’s pretty simple to run.”

….”We have a full range of menu items other than chicken,” Tieber said, “but it’s 30 percent of our business.”

“I really don’t know how the wings took off,” Weisbrodt said. “It just seemed like one day we were doing some here and there, and now we’re doing them like you wouldn’t believe. Today, we can’t keep enough.”
…

“I think it’s reasonably priced meal,” he said. “Wings are good. They’re meaty. They can get just about any flavor. They come up with some original flavors. Our customers mix our flavors, and we have almost 60 different flavors right now. You can get in about any flavor. If you don’t like wings, we have many other things like hamburgers, hotdogs, pizza, sirloin steak sandwiches and fish, like walleye and cod.”

Smith has also noticed increased competition, especially from the larger franchises. Although franchises can get a better price for the product and buy in larger qualities, he believe small owners like him give consumers quality.

This is one of the better articles I’ve read recently giving readers an “inside look” at the franchising experience – what can go wrong, the competing dynamics and interests in the franchising business model, and financial and legal realities.

And that was just the beginning of Ross’s troubles. It seemed like her email account logged a new message almost every day, welcoming another Super Suppers franchisee to her region of the state while she was still struggling to attract new business. With neither the money nor the energy to advertise locally, she again turned to Super Suppers corporate headquarters for help.

While I’m sure the new franchises weren’t technically encroaching on her protected territory, it still has significant impact on sales.

Even if no more new Texas franchises were sold, she would still see many new locations pop up in the near future. Not to mention the “other guys” — Dream Dinners and Dinners Ready!, among others, were beginning to make multiple appearances around town. Unlike franchises that can thrive in heavily saturated markets (Starbucks, McDonald’s), a meal-assembly center needs a large number of households in any given territory to be successful. According to Bill Byrd, it takes 500-700 households to support a Super Suppers, but he concedes the divvying up of territories is “not an exact science.”

Whenever there is a “hot” segment, copycats franchisors are only months behind. Success breeds competition, and the competition can ride your wave and simultaneously learn from your mistakes without experiencing the costs. Potential franchisess must evaluate whether their soon-to-be franchisor will constantly innovate and improve to stay ahead of the competition.

For example, a less-experienced franchise owner wouldn’t know that regional and national advertising in a franchise-based business plan is usually rolled out well after a significant number of stores have been opened. “They usually try to pack a lot of franchise locations into an area before advertising so that they get some value,” says Letier. Bill Byrd says Super Suppers will begin advertising nationally at “around 1,000 franchises.” By this projection, franchisees have a long wait ahead of them. For the time being, Byrd says, “A lot of our [marketing] is to go in and talk to moms’ groups, PTAs, and church groups and tell them the story about Super Suppers.”

The franchise sales team or “independant consultant” didn’t highlight this for you? Oh yeah, they want to close the sale so they earn their commission.

Hat tip: Anonymous in the forum

for those interested in Quiznos….

It’s worth reading the comments from the Quiznos blog posting last year. The comments keep coming.

It’s also worth reading the forum posts regarding Quiznos.

Finding complimentary businesses and locating next door is an obviously smart move for a budding franchisee. For example, if you are starting a coffee franchise, locating next to an Ace Hardware (caffeine hungry contractors) or CVS (heavy foot traffic) can double your sales over a generic strip mall.

In this instance, an Advance Realty locates next to a Daily Grind coffee house in an old firehouse.

In case you are curious….Daily Grind: $300K estimated initial investment, 5% royalty fee, 1% advertising fee, $30K franchise fee…about average

Radio Shack and Duckwall-ALCO in a co-branding deal.

The company said that the agreement will enable those ALCO stores to sell RadioShack’s product line and enable RadioShack to further grow its franchise retail presence in the area.

Paul Rickels, RadioShack’s vice president-dealer franchise said, “This enables us to offer our broad line of consumer electronics to customers who otherwise might not have access to the latest products and technologies. Convenient store locations in neighborhoods across the country are a part of our heritage, and Duckwall-ALCO enables us to cost-effectively build on that tradition.”

Many franchises that require frequent travel or rely on a gas-intensive system (delivery drivers, UPS Store, etc.) may want to consider the impact higher commodity prices will have on their business, and whether they could survive a double-digit percent swings.