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john a. gordon's picture

Accounting 101 for Franchisees

Agree of course that this is a classic, useful balance sheet ratio to watch, not only for the franchisor (who should generate plenty of cash) but more importantly for the franchisee. When franchisees have their financials done by outside firms, insist on not only a balance sheet and income statement (with prior year data) but also a sources and uses of cash exhibit. That is key in showing where the cash went. 

Also, of course profits are essential but all franchisors, franchisees and other organizations live on the free cash flow. That is what really goes in the bank. Free cash flow is store level EBITDA less taxes, franchisee overhead, debt serice (both principal and interest) and future years capital spending (big ticket items not expensed to the P&L.)

And yes...if you are searching for a franchise brand, you've got to try to rough out these values.

Ed Teixeira's picture

Stirring Memories

Stanley, thanks, for stirring some fond memories of the neighborhood that included the Charles Street jail. The jail had a long history and numerous controversies that would pop up every once in a while. Boston is an ideal walking city and anyone who chooses to stay at the Liberty has the opportunity to visit historic Charles street, the Boston Common and the State House.

Holiday in is IHG - I messed

Holiday in is IHG - I messed that up ...LOL

I do not think your comments

I do not think your comments resonate with seasoned travelers. We know the game. In my wallet are my Marriott Platinum, Hilton Diamond, IHG Platinum Elite and SPG Platinum Preferred as well as Choice, Holiday Inn and 5-6 other loyalty programs. Obviously I use the first 4 most. Grated PSG has fewer budget choices, but the other major chains all have a brand that competes at a level of service ad a price point. For example a Homewood Suites does not compete against a Hilton Garden, it competes against a Marriott Residence Inn and the budget chain Extended Stay America which does not have a loyalty program. I am on the road 40 + weeks a year and have been for 25 years now.

Holiday Inn Express does not compete against Homewood Suites in any way shape or form.

And by the way we all know why Holiday In Express is a poor performer, it has the same issue Hampton INN USE TO have on it.

Re: Exclusive territory

Visitor: "The best-known hotel franchise companies rarely grant exclusive territories to their franchisees"

That's an interesting idea. I'm sure you understand if we just don't take your word for that. So, can you list the "best-known hotel franchise companies" and why they are the best-known? And then can you put into another column on whether each of these offer exclusive territory, according to their FDD/franchise agreement.

Now THAT would be very useful.

Not all competition is the same. Why encroachment matters

Despite competition that is outside the hotel family, all competition is not the same. Territory and encroachment matter. First, an identical Courtyard property across the street is different than a Day's Inn across the street. That's why encroachment matters in the hospitality industry. It matters so much it is one of the first things property owners want assurance of, be they huge corporations or mom & pop owned units.

An informed franchise seller would advise his clients to stay away from high franchise turnover brands like Holiday Inn Express and look at a Homewood by Hilton instead. The same franchisee in Virginia may want to look at his mix and re-construct it. Hotel franchises, unlike franchised retail stores and QSRs, have "windows" in their franchise contract of say 3 years and 7 years in which hotel property owners can leave one brand and join another. Even if it has a high occupancy rate, informed consultants know also know that Holiday Inn is lower in economic performance than other concepts. So all hotels that have the same occupancy rate are not the same.

Why does it matter? Say

Why does it matter? Say you have a Hilton Garden, what is going to stop me from opening a Holiday Inn Express, a Courtyard by Marriott, a Comfort Inn & Suites etc all. Great example Springfield Va, there is a Hampton that shares the parking lot with the Comfort Inn. They are owed by the SAME franchisee and the staff runs both establishments. They are across the street from a Hilton, and there is another Hilton 4.7 miles away - all are usually booked solid. There are also several Marriott and other chains etc.

So since you are a consultant

So since you are a consultant specializing in the hotel industry which hotel franchises do you recommend?

Re: Exclusive territory

Stanley -

And yest the great hotel brands are in demand from franchise investors.

You think it's a "ripoff" so what? Who cares what you think anyway?

I suggest you call up Marriott's and Hilton's general counsel and make your complaint known. Let us know how that works out.

Exclusive territory

The best-known hotel franchise companies rarely grant exclusive territories to their franchisees. Since they receive franchise fees on all room revenues, they collect more fees from two hotels operating at 50% each than one operating at 75%. What a ripoff! Stanley Turkel

Don't Be Surprised if These Cases Open the Floodgates....

There must be more to this dispute than meets the eye. These claims involve consumer fraud at virtually every store location in Manhattan and claims of a broken franchise model. UPS doesn't seem to deny it, they just claim they had no obligation to do anything to fix it. The stakes seem much higher here than in other cases MBE/UPS has dealt with before. It's been almost a year since the eleven stores closed and these lawsuits were filed. UPS can't seem to shake free. Why? Are these same things happening to customers and franchisees outside of New York?

The UPS Store, Inc's April 2014 Franchise Disclosure Document describes these lawsuits as follows:

3A, Inc., Tanmor, Inc., Ridgepac, Inc., Ridge Assets, Inc., Ridgedown, Inc., Tommys Doc Squad,
LLC, Ridge Logistics, LLC, Ridge Pen, LLC, Tompack, LLC, Bigpack, LLC, Robpack, LLC, NYPS, LLC,
Robert Hagan and Thomas Hagan v. Atlantic Mailboxes, Inc., Tripp Singer, and Bradley Kaplan
(Supreme Court of the State of New York, County of New York, Index. No. 650013/14, filed January 3,
2014). Former franchisees and their affiliates sued an Area Franchisee and another franchisee for
tortious interference with business relations, defamation, violation of New York General Business
Law §687, negligent misrepresentation, and fraud. The plaintiffs allege, among other things, that the
defendants inaccurately reported to us that the plaintiffs’ centers were charging in excess of UPS
retail rates in breach of their franchise agreements and contract carrier agreements. The
plaintiffs also claim that the Area Franchisee allegedly did not disclose to them that other franchisees had purportedly artificially inflated sales data as a result of alleged billing discrepancies. The complaint seeks $20,000,000 in compensatory damages, $50,000,000 in punitive damages, and attorneys’ fees. We are not a party to the action. We are responding to a non-party subpoena duces tecum in the matter. On March 19, 2014, the defendants moved to dismiss all of the plaintiffs’ claims.

The UPS Store, Inc., United Parcel Service, Inc., and United Parcel Service of America v. Robert
Hagan, Thomas Hagan, Ridge Assets, Inc., 3A, Inc., Ridgepac, Inc., Tanmor, Inc., Ridge Logistics, LLC,
Tommys Doc Squad, LLC, Ridgedown, Inc., Robpack, LLC, Ridge Pen, LLC, Tompack, LLC, Bigpack,
LLC, and NYPS, LLC, v. Bradley Kaplan, ABC CORPS 1-8 d/b/a “The UPS Store Centers 1786, 4386,
4419, 4769, 5158, 5472, 5979, and 6341,” John Wong, ABC CORPS 9-13 d/b/a “The UPS Store Centers 4190, 4248, 5388, 6404, and 6415,” Kevin Panchmia, ABC CORPS 14-17 d/b/a/ “The UPS Store Centers 5958, 5961, 6374, and 6387,” Ketan Seth, ABC CORPS 18-21 d/b/a “The UPS Store Centers 0304, 4611, 4754, and 5138,” Jerome Taylor, ABC CORPS 22-25 d/b/a “The UPS Store Centers 0526, 1052, 2992, and 4831,” Mark Taylor, ABC CORPS 26-28 d/b/a “The UPS Store Centers 0745, 1083, and 0647,” Shyam Buxani, Mohan Buxani, Danny Dansignani, ABC CORPS 29-30 d/b/a “The UPS Store Centers 0444 and 1492,” Abu Rahman, ABC CORPS 31-32 d/b/a “The UPS Store Centers 4163 and 5777,” Shueb Choudhury, ABC CORP 33 d/b/a “The UPS Store Center 5865,” Tani Sussman, ABC CORP 34 d/b/a “The UPS Store Center 4766,” Sylvester Onurah, ABC CORP 35 d/b/a “The UPS Store Center 5017,” Otis Davis, ABC CORP 36 d/b/a “The UPS Store Center 6367,” Marcos A. Lopez, ABC CORP 37 d/b/a “The UPS Store Center 4768,” Charmaine Raphael, ABC CORP 38 d/b/a “The UPS Store Center 6166,” Mohammed Riaz, ABC CORP 39 d/b/a “The UPS Store Center 5899, Chad Jaafar, ABC CORP 40 d/b/a “The UPS Store Center 5953,” Danny Spies, ABC CORP 41 d/b/a “The UPS Store Center 4472,” Ed Xu, ABC CORP 42 d/b/a “The UPS Store Center 5296,” Sandra Machado, and J&S Quest Services, LLC d/b/a “The UPS Store Center 5565” (United States District Court for the Southern District of New York, Case No. 14 cv 1210, filed February 25, 2014). We, UPS of America, and United Parcel Service, Inc. filed suit against former franchisees and their guarantors to enforce the post-termination covenants and for trademark infringement, breach of contract, unfair competition, misappropriation, and conversion arising out of, among other things, the defendants’ failures to comply with the post-termination provisions of their franchise agreements. The former franchisees were terminated after receiving multiple Notices of Material Default for multiple material breaches of the franchise agreements, including, in many instances, overcharging customers. Despite the termination of the franchise agreements, the franchisees, among other things, failed to de-identify the former centers and to comply with the post-termination covenants in the non-competition and non-solicitation agreement. In the complaint, we seek, among other things, injunctive relief, damages relating to unpaid royalties and other amounts due, and attorneys’ fees. United Parcel Service, Inc. seeks damages relating to unpaid UPS shipping fees and attorneys’ fees. On April 16, 2014, the defendants filed an answer denying our claims as well as a counterclaim against us, UPS of America, and United Parcel Service, Inc. and a third-party complaint against certain other franchisees. The defendants allege, among other things, that the franchise agreements and Contract Carrier Agreements were selectively enforced against them; they were required to comply with a “zero tolerance” policy regarding overcharging customers; there were sales and billing
discrepancies at other franchise locations with respect to, among other things, calculation of billable
weight, communication regarding the guaranty for ground shipments, “up-selling” to air shipments, and
application of fuel surcharges and they were retaliated against for raising these alleged sales and billing discrepancies; we provided inaccurate information to them about other franchisees’ compliance, about the defendants’ own non-compliance, and future expansion plans; they were not provided with a
commercially reasonable franchise system and not told the business model would be altered; their
franchises were terminated without good cause, and their businesses were attempted to be transferred to other franchisees as part of a scheme to obtain the defendants’ business without compensation and without providing them an opportunity to sell their franchises; they were required to execute unlawful releases in connection with the purchase or renewal of their franchises; the plaintiffs and other franchisees have profited by the closure of the defendants’ former centers; and their contractual relationships with lenders, landlords, and vendors were disrupted. The defendants seek a declaratory judgment that they have not infringed the Marks. They assert claims against us, UPS of America, and United Parcel Service, Inc. for breach of contract, fraud, breach of the duty of good faith and fair dealing, violation of the First Amendment, breach of the New York Franchise Sales Act, N.Y. Gen. Bus. Law §687, violation of the California Franchise Relations Act, Cal. Bus. & Prof. Code § 20020, and violation of Cal. Bus. & Prof. Code § 17200. They also assert claims against us, UPS of America, United Parcel Service, Inc., and certain franchisees for unfair trade practices under California law, Cal. Bus. & Prof. Code §17000 et seq., fraudulent and deceptive trade practices under New York law, N.Y. Gen. Bus. Law §§349-350, unjust enrichment, and tortious interference with contract. The defendants seek declaratory and injunctive relief, damages of $50,000,000, treble damages, restitution, treble and punitive damages, attorneys’ fees, and costs of suit, including post-judgment interest. We intend to pursue this matter vigorously.

Well Said and Enough Said

about the "evils" of franchising for those on the bottom of the pyramid who are looking for a safe job and are willing to borrow money to become "their own boss" ---only to become the victim! As you have indicated, there is no shortage of victims!

Merry Christmas-Happy Holidays!

FuwaFuwaUsagi's picture

The above post at 2014-12-12

The above post at 2014-12-12 20:33 was by me. I usually sign my posts, not sure what happened this time.

I agree with your first

I agree with your first comment, but I suspect I taught that to you some years ago now - LOL!

Carol, it just seems to me you could actually have a greater impact working with someone who shares your views and is, apparently, a crusader for the little guy etc like Elizabeth Warren.

My view, franchising is a lost cause in its present state. It can be wildly successful for the correct candidate, but, those tend to be win-win situations, where the zor needs the zee and the zee does not need the zor, but rather may have greater earning potential as a zee, Such folks don't tend to look at franchises and are more or less actively recruited by the zor.

I don't know about now, but for example Chil-Fil-A operated this way in the recent past. Where they actively recruited folks from their own ranks and offered the prospective zee a potential for higher earnings while the major capital risk was one the zor.

A couple of insurance adjuster franchises for public adjusters are another winning example. In this, the zee has their own separate book of business as a public adjuster and also serves as a zee where business is dropped in their lap by the zor. The zor gets a taste and the zee does the work, hence - win-win.

Some of the automotive franchises are variations on the theme where the zor recruits and finances the would be zee who already is skilled in the industry. There is not much downside for the zee, as most have nothing in the first place except industry skills and 10-20k of their own i it. Sort of a marriage of convenience.

If you are sales oriented and and a sales professional there are a lot of good possibilities in franchising, Executive recruiting among many other options might appeal to you. I am familiar with Sanford Rose and i the past knew several extremely satisfied zees of theirs. But time moves on and I no longer am in touch with them. But they were sales types who wanted more earning potential while leveraging an existing system-framework.

For true professionals, like the Public Adjuster, Dentists, Optometrist etc there are opportunities that allow you to expand your earnings while concentrating on your profession.

But the above, are not representative of the majority of franchise operations out there. There is a big difference between the examples I cite and the guy who worked in accounting for XYZ corp for 20 years and takes his life savings and opens a sub shop or something. But my point is, it is not all bad, just very situational.

Season's greetings.

Yes I like and admire Elizabeth Warren but

as you know, FuwaFuwaUsagi, prospective franchisees do not get the protection of federal and state consumer laws as the FTC and the courts and the Congress consider the franchisees to be sophisticated business people, independent contractors, who can bargain contracts. Of course, this is not true and the unsophisticated prospective franchisee who is looking for a job and a future can be sold a pig in a poke. They are premeditated sacrifices to the system and the efficient but ugly business model of francising. I don't think anyone really cares about failed franchisees. They have no PAC and fade away into obscurity. Platforms are formed on issues that impact the voters in large numbers.

Nice to talk to you again!

FuwaFuwaUsagi's picture

I have reviewed the postings

I have reviewed the postings and it seems clear this anonymous poster is indeed Carol Eblen aka Cross.  In a spirit of benevolence (given politically I am opposed) I would suggest to Carol in addition to her labors at BMM she take the time to explore the background of Elizabeth Warren and support her candidacy.  In a nutshell she is a strong consumer advocate.  Through her you might get your reforms to the Franchise rule etc, as she appears eager to listen and actually act and Franchising reform might actually make an interesting platform plank

You can continue to expend your energy here, but I suspect you might actually also have a shot at influencing things in the direction you seek to go if you also dedicate some time to reform at a higher level.

And Seasons Greetings to all…

Name some of these disputes that

franchisees can sue for in the state and federal courts.

Re: Franchisees cannot SUE a franchisor in the court

Franchisees can and do sue franchisors for pre-sale and post-sale disputes.

You are just wrong. You don't know what you are talking about.

Franchisees cannot SUE a franchisor in the court

for a violation of the Franchise Agreement even when the franchisor violates the agreement. There is no private right of action for the franchisee if the franchisor violates the Franchise Agreement as long as the franchisor is in compliance with the disclosure terms of the FTC Rule. Franchisees can try to sue for matters outside of the franchise agreement, the binding contract, but this is almost never very successful because, of course, the contract of adhesion, the Franchise Agreement, generally doesn't do anything beyond giving the franchisee the right to use the Brand Name under the strict and binding rules rules for operating the franchised business. The matters outside of the franchise agreement for which the franchisor CAN be sued are what exactly?

Re: But, there is NO private right of action even

Franchisees can certainly make suit in state and federal court. They are not prevented from suing a franchisor. And they do.

But, there is NO private right of action even

if the franchisor violates the FTC Rule. For instance, if a false earning claim Is made and the franchisee can prove that it was false and that they did rely on the false earning claim to make the investment, only the FTC or the state can negotiate a rescission of the contract for the franchisee. In rescissions, the franchisees are not made WHOLE again and may only receive a refund of the franchise fee and the royalties. The percentage of franchisees who are doing well do not want to rescind their contracts even though a false earning claim was made.

In other words if you invested in a lousy franchise and they sold it to you compliantly or non-compliantly, there is no private right of actikon under the FTC Rule.

RE: No private right of action permitted under FTC Rule

The FTC got the private right of action wrong. They could fix it.

Most franchisors who follow the pre-sale requirements and they would love it if the bad franchisors could be stopped by lawsuits from franchisees who were not properly sold franchises.

The mistake people make when they talk about private right of action and the FTC Rule is it only applies to pre-sale activities and has nothing to do with the franchising relationship after the sale.

In other word if you invested in a lousy franchise and they sold it to you compliantly the private right of action under the FTC Rule doesn't help you.

No private right of action permitted under FTC Rule

for violations of the FTC Rule. Only class actions are heard in the courts, or what?

FPR

66% of FDDs contain an FPR today

Re: Personal attacks on individuals to avoid

Maybe you can explain two things:

1. What Carol Cross Eblen is saying?

2. Where anyone has made a personal attack? Seems to me we are scratching our heads about what she is writing.