Thinking of Becoming a Franchisor?

If you are now thinking of franchising your business, or of taking a hard look at what you might wish to do with this business that you franchised some years ago that could now use a bit of freshening up, this article might tweak some ideas for you. About 15 years ago, I wrote about why new franchisors fail. This new article looks critically and very seriously at where franchising is today – as I see it after 50 years in this business/profession.

During that 15 year period we lawyers have “improved” upon the legal infrastructure of the franchisor quite substantially.

As you may know, the franchise legal infrastructure, a/k/a franchise agreements and FDDs, have moved significantly along the road to elimination of all legal risks for franchisors, except maybe for the more hard core thugs. If you are not and do not intend to become a hard core thug, you might just want to read all of this. There is still a lot of room for sound concepts to be developed into investment worthy business replication models. And the fact that in doing that your legal infrastructure has morphed into much better protection should be a positive influence for you. After all, isn’t risk reduction what this is all about after you demonstrate to yourself that you have a profitable model and that you can translate that into a profitable business for others even after loading onto it the costs of being in a franchise relationship?

The Current Franchise Landscape

Even in the old days there were dodgy franchisors. They sold tons of franchises and opened very few. They made profit representations that were total fiction and impossible. They said things about where the business was positioned and about the quality of the support they provided that were outright falsehoods. In the 1960s some states began enacting franchise disclosure and relationship laws modeled somewhat upon the laws regulating securities selling. But there were also a lot of really good, serious opportunity franchisors, and a reasonably careful person with some professional help could buy into such things as KFC, McDonalds, Little Caesars Pizza, Pizza Hut, Wendy’s and Burger King, among others.

Today there are many more dodgy deals being put out for investment to less able investors. The techniques for getting around the law one way or another have become more sophisticated. Analysis of potential franchise investments is more complicated. Most lawyers shrink from giving any business advice or analysis for fear of professional liability lawsuits. Asked about an opinion whether a particular franchise is a good investment, the lawyers say that it might be if they are telling you the truth, and stop there – utterly useless.

Franchise blog sites abound on the Internet, chock a block with broke and whining franchisees on their way to bankruptcy and unable to afford legal representation. Class action lawsuits against tough franchisors take years and are rarely certified by the courts. When they are, they drone on for a few years and settle out for paying the lawyers, with the franchisee class members getting little or nothing.

How Do Franchises Go Bad?

Franchises start out with an initial cash requirement – initial fee, business set up costs and working capital. It is not unusual for this to be $ 500,000 to $ 1,000,000. The money comes from liquidating a lot of family assets plus SBA guaranteed loans or start up loans that are not SBA guaranteed. Franchisees always have to personally guarantee the full performance of the agreement.

In addition to the regular operating costs, there is the ongoing cost of being a franchisee, nominally in the disclosure materials around 10 % of gross sales. Because the disclosure materials never tell the whole story, the cost of being a franchisee begins at around 15 % of gross sales. Hidden franchise fees include the additional cost of having to buy from designated vendors who have no competition when selling to the franchisees and can charge more than competitive prices. Some parts of some franchise systems are franchised separately under add on licenses with additional royalties. Software is often licensed separately for additional charges per month. The list is long. When I tell franchisee clients to go back and refigure their business plan pro formas using 15 % of gross sales as the true royalty and advertising cost and then come back and talk about whether the working capital number is adequate or whether they can come out at all, they are often in disbelief that people would do something like that to them.

As the franchise matures, imaginative franchisors find other things that can produce additional revenue streams from the systems at the cost of the franchisees. So called improvements, remodels, and miscellaneous fee add-ons drive the cost of being a franchisee to over 20 % of gross sales. Franchisees cannot survive. The businesses cannot be sold to others in most instances. Avarice has bled the system dry.

There are other nuances in the mix, but I think this shows the pattern of what is happening in scores of tough franchise systems today. Oddly enough, some of the profit that is removed by the franchisor resulted from franchisee cheating. There is no difference in the honesty rate between franchisors and franchisees. Business information tracking capability has so improved over the last 35 years that cheating is harder, but it still happens. If this was about telling war stories I could use up a lot more space on the subject of shenanigans.

Where Does That Leave You?

If you really have long term intentions regarding the health and survivability of your franchisees, it helps to build a dynamic financial model of what the business is that your franchisees have to live in. None of the bozos do this. They don’t really care anyway. All they want is as much fast revenue as they can squeeze out of the system.

For the serious long term franchisor, departure from the IFA norm can really help you measure the health of your system. But you have to make the franchisees send in the tax returns their agreements require anyway, and from those, you can build the dynamic financial model, making the adjustments to derive an approximate EBITDA. It is not the impossible project that the IFA says it is. The IAFD (www.IAFD.org ) is now working on a project to be able to provide that for franchisees.

The reason it isn’t thought to be a smart move is that then you would eventually find out which franchise system in any business segment is the most profitable, and once that got out no one would ever buy any of the others in that segment. Nobody wants to be known as tail end Charlie on producing positive cash flow. The IFA also fears that such activity will one day lead to compulsory financial performance disclosure, which is a distinct possibility only if the IFA lobbying arm, FranPac, runs out of money. So it is a bit of a dilemma. You really cannot count on the information not getting out. On the other hand, since the franchisees will soon be doing this for themselves, there is little justification for you to deprive yourself of the information. Dynamic financial modeling will enable you to see what the traffic can bear and continue to have positive, meaningful yield potential for your franchisees.

If your franchisees start a lawsuit or arbitration proceeding using dynamic financial modeling to show that you are tearing the financial heart out of the business they invested in, you would have to build your own model to dispute theirs, and yours might have to be rather contrived and convoluted in its attempt to show that theirs is not reliable. Econometric modeling of markets has been used for decades in antitrust litigation, to positive effect. The government lost its first merger case under Section 7 of the Clayton Act because the target defendant used competent econometric modeling. The same thing soon after that happened when the FTC lost the breakfast cereal oligopoly case. I know because I brought econometric modeling into both those cases. Financial modeling of franchise systems is not more complicated than that. The universal solvent would be a cooperative project that produces a really high value dynamic financial model. That, as we say in Texas, aint gonna happen.

Franchisors that operate numerous company stores, if they are going to consider this, should have a separate financial model for the company stores. While it may lack positive sales information potential, the ability to compare company owned versus franchisee owned financial results probably would yield marketing information. It would show what we have always believed to be true, that absent artificially imposed barriers to positive cash flow, franchisees really do better than the company does in producing cash flow.

But the really important value of dynamic financial modeling would be that it would tell you when you are approaching marginalization of the franchisees through add on extraneous periodic charges. If you went just one step further, you would also know your franchisees’ debt structure profile and would be able to determine what they can afford in terms of remodeling the stores and even to prearrange the financing of large projects before you impose them. Lenders pay commissions to those who bring them large deals like that.

In this interim before everyone is doing it, you can designate all information regarding financial modeling to be a highly secret body of information and treat it as such. If you designate it secret but everyone in the company has access to it, you are just kidding yourself. If more than five people have access to it you can forget confidentiality. The grunts who churn the basic data can be controlled if you don’t fire them every now and again.

Attitude Issues

No franchisor is ever going to be loved by her franchisees. That is axiomatic. Within a year or two of becoming anyone’s franchisee, the attitude becomes one of disbelief that there is anything special or unusual in being your franchisee. They believe your support sucks and that they are getting little or no value from being affiliated with you. How virulent this attitude is will be the only variable. If you don’t have a competent information management protocol in place your franchisees will rob you blind. There are just as many cheating franchisees as there ever were dodgy franchisors. Back in the days when franchisees filled out monthly paper sales reports, the audit of their actual performance was their biggest fear. Of the literally hundreds of depositions I took in cases having to do with under reporting terminations, not one franchisee was ever under reporting unintentionally. Some of the stories of whining franchisees and what they were charging to the business would make your eyes roll back. One franchisee in Florida was writing off a twin engine airplane against the revenue of a print shop with a three mile territory. His lawyer went ape when that part of the examination happened. Lawyers rarely make the effort to understand the finances of their clients before the horse leaves the barn, and clients never tell you where the bad stuff is hidden. If you don’t find it yourself, you can usually bet that your opponent will.

Since you will never be loved in franchising, your contentment will come in providing a working positive cash flow franchise model from which you will become wealthy. If you need more than that, well, be prepared for large legal bills.

The Ultimate Franchise Solution

The ultimate franchise solution for anyone wanting to begin or expand a franchise system is to provide a concept that you have field tested and proven to be revenue credible in a franchise mode, and then to continue to measure its financial performance through dynamic modeling. To be sure, you will also have to improve its appeal to its customer base, but that is what you tell your franchisee prospects that you do best. It helps is that is true.

I am simultaneously publishing another article about the risks of becoming a franchisee. If you read that you might be offended. Franchisees who see that I drive both sides of the franchise road often criticize me for that, and some franchisors wouldn’t touch me with a stick because I represent franchisees too from time to time. I never worry about that, but be aware that I see this business from both sides all the time, every year, year after year. My feelings about franchising are really love – hate, but that is because I wish I could make it better and that people could more safely invest in franchise opportunities.

Profile picture for user Richard Solomon

Comments

and the critics obviously hurt your feelings - not

Richard; you’ve explained financial model profiling and monitoring in enough dumbed down detail that existing and prospective franchisors should understand the value. I’d suggest that today’s software makes it extremely easy in comparison to 15 years ago and now the key is the interpretation of data and the fine tuning of financial models where a franchisor intends to survive long term. Let’s face it – there is hardly any need for the short-term franchisor to model anything except where an appearance of interest in franchisee financial performance fits with the sales pitch.

There are some other issues of profiling that relate to successful franchisees and locations that would benefit the long term franchisor and these topics have been covered to varying degrees at BMM. Again, these only apply to the long term franchisor but they all go to a point that I feel could be discussed and that is the influence of the internet on franchise sales into the future.

I suspect that today we are, more or less, in a transitional period where the extent of that influence has not been fully experienced even though there are some dangerous shocking brands out there that have seen the internet cut them off at the knees. As the need and take up of thorough franchise pre-investment due diligence grows and the internet bashes more and more poor and terrible franchise investments I question whether the cost of being a short term franchisor will change at least some practices of at least some of smarter franchisors.  

At the moment franchising brands being attacked on the internet tend to be those from larger networks. Given that most fleeced franchisees tend to wander off without a whimper the bigger networks produce a percentage of screwed franchisees that do get on the internet with the intent to deliver some payback and in so doing educate prospective franchisees to stay clear of that particular brand.  The smaller networks typically, but not always, involve less franchisee capital outlay and less hard numbers of outspoken fleeced franchisees.

But the problem for franchisors is that they all aim to become the franchisor of a large network.  Abusive practices, lousy models or dumb concepts today and in times past continue to allow reasonable and sometimes large network growth. Do we expect that growth to continue with increased franchise brand hammering on the internet and would it be farfetched to suggest that internet influence might one day encourage more complaints from smaller brands; of course we cannot forget that franchising has a dedicated propaganda machine that portrays any and all franchises as God’s gift to any moron – but that hasn’t changed and won’t. The question is whether escalating internet complaints will retard crap franchising at any level.

You might be surprised to know that when I return to active duty in 4 or 5 months I’ll be working with a franchisor to build his revenue from his franchisees and I expect his franchisees will applaud the effort.

He was once a screwed franchisee who made the mistake of creating a model totally devoid of everything he objected to and now the brand is hamstrung by his generosity.

The franchisor’s efforts to develop and promote the franchise and therefore the franchisee businesses are badly restricted.  The franchisees’ profits and resale values can be increased once the franchisor’s revenue, profit and ability to promote the brand is reasonably increased – balanced to benefit all parties. But how often does a franchisor short-change himself?  Rarely! Remember when they used to promote that franchising was a ‘win/win’? Oh; thats right – they still do.

BTW: Franchisors need to continually review the effectiveness of how they deliver support and training if they want optimal long term franchising. I’ve seen some good stuff poorly delivered for virtually the same outlay to produce minimal benefit and poor return.  What a waste …

Corporate Owned Model

Ray - Thanks for sharing your comment. I'm curious to know what you mean by:
"The franchisor’s efforts to develop and promote the franchise and therefore the franchisee businesses are badly restricted. The franchisees’ profits and resale values can be increased once the franchisor’s revenue, profit and ability to promote the brand is reasonably increased – balanced to benefit all parties."

Is the franchise successful? Is it possible to roll-up an existing franchise system into a corporately owned model to make the existing franchisees shareholders of the corporately owned entity. Existing franchisees would become corporate managers of their existing stores. The goal would be to take the entire system public. I'm not an attorney so I don't know the legal hurdles but the concept seems possible. Would love to hear some thoughts from the community.

Jerry your thought was one of

Jerry your thought was one of only a few choices forward but as that is new ground for ALL these investors it will have to wait until I get back and have more time.  BTW; It would work but would require the agreeable people getting an education on the restructure and for me its early days. I must add that I was originally approached by a franchisee and it all began from there with someone that doesn't fit the typical franchisor mould.

To answer your question; he left so much of the profits for the franchisees it became a disservice to them in that he cannot possibly justify what the brand needs to grow given his return is so bloody limited.  I cannot share more than that on the financial models at this time.

Yes - it is successful for franchisees but all parties agree it could perform a hell of a lot better with a bigger network - ad fund, more franchisor driven tech support etc. etc.

The real reason I introduced

The real reason I introduced that franchise situation into the thread was in response to a Guest who had been ridiculously suggesting that the Bill of Rights and any attempt at a review of relationship law was an attempt by franchisees to screw their franchisor. 

I’d suggest that the vast majority of franchisees truly understand that they need a financially strong franchisor and the goal is ‘win/win balance’.

We’ve all seen the worst of what happens when a franchisor screws franchisees and it seems to be hard to ignore the legal costs and negative influence on franchise sales that a rogue franchisor experiences sooner or later. But the other side of the coin when the balance goes too far toward franchisees also carries avoidable and high costs.

Franchisors must drive the culture of the win/win to save everyone avoidable costs and drive everyone’s ROI to optimal levels. Why the franchisor? – because it retains the ultimate contractual power to ensure a collaborative win/win.  And this fits with the original blog.

BTW: the contract involved does allow the franchisor to screw franchisees in a minute flat.  Again it comes down to interpretation and common sense.  The franchisor recognises the long term consequences of squeezing franchisees.

Re: The real reason I introduced

How did it work for you?

1st Whip The Franchisee Into Shape

Ray, are you suggesting that your franchisor 1st needs to whip the franchisee community into shape by demonstrating who their Daddy is? It seems from your comment that enforcing franchisor contractual rights is something the franchisor has avoided in the past, and now, the franchisees are starting to walk over him.

You also touched on the Bill of Rights, which by the way I believe is joke, in order to a make a point to some Guest. I'm missing your connection on what it is that you believe should be done in order to re-align this franchise system to ensure profitability for both franchisor and franchisee.

Whip 'em into shape! Compliance is an indispensible discipline.

As often as franchisees complain about the performance/lack of performance of their franchisor, there is enough dodginess to go around.

We have a laboratory on that subject in the DD system. The franchisees who have been terminated/threatened have in many instances been caught out in some nasty business. Back in the old days of the franchise there were a lot of shenanigans that went uncorrected. The old guys used to live with "slippage" unless something "loud" arose that made it necessary to use enforcement. The newer generations are hungrier and don't want to leave an extra nickel on the table because every nickel translates into potential capital value. The old guys thought they were to live on operations. Operations includes real work. The younger guys who inherited the business (by descent or acquisition) loathe real work. Think of Mitt Romney, for example. Remember who he "works" for? They want IPO sales price enhancement.

Cleaning up "slippage" is a good way to move in the right direction. While I like to see people have a good chance to prosper from their franchise investments, I have deposed too many dozens of franchisee miscreants to believe that abuse is only a top down phenomenon.

Discipline is the training that makes punishment unnecessary. (The Citadel Cadet Blue Book)

First Whip'em, Then Beat'em

Richard, you bring up a good point, "Cleaning up "slippage" is a good way to move in the right direction."

The franchisor must remain vigilant against miscreant franchisee operators. The franchisor must protect its value by protecting its royalty stream. In today's world, the royalty stream is the franchisor's capital value.

There's a huge difference between whipping the franchisee into shape and beating them senselessly. During Dunkin' Donuts mass termination binge, Dunkin' went after franchisees for their hiring practices and business expense deductions.

Immediately prior to the mass termination spree, Stephen Horn mandated franchisees to utilize the DHS' voluntary Basic Pilot Program. Once the program became mandatory for DD franchisees, he tripled the size of Dunkin's Loss Prevention group with mercenary enforcers - that included many former white collar crime agents from the FBI and IRS. Armed with these highly trained soldiers, Stephen Horn launched his termination plan of attack against the franchisee community.  Many of the targeted franchisees showed no merit of underreporting.  However, the team of mercenaries did uncover franchisees who were not properly utilizing the Basic Pilot Program and had taken expenses that were questionable to the business.  Regardless, of the franchisees not underreporting, many of the franchisees received Notice of Termination.

In my personal view, the franchisees could have been warned and coached into compliance on what Dunkin' considered to be proper procedures. Many of the concerns could have been whipped into shape and corrected with a proper warning from the franchisor. If the practices continued, then a termination would be warranted. However, Dunkin' chose to terminate the franchisees immediately.

The franchisee violations had no impact whatsoever on Dunkin's capital value and were certainly correctable by the franchisee by either 1) cleaning up their employees, and/or 2) amending incorrect tax returns.  For Dunkin', the opportunity created a new revenue source through re-franchising. By focusing on the re-franchising opportunities, Dunkin' managed to financially beat many of the franchisees senselessly.

I agree that "discipline is the training that makes punishment unnecessary." However, how does a franchisee avoid a senseless beating by their franchisor?

Dunkin's termination binge occurred under the ownership of Mitt Romney (Bain Capital). Even though there is a new Dunkin' Brands management team, today, Bain Capital, as the current private equity owner, was certainly aware of management's practices. Is it reasonable to assume that a mature franchise, such as Dunkin' Donuts, must undergo periodic attrition in order to acheive sustainability and remain relevant in the market?

Re: First Whip'em, Then Beat'em

Eddy,

Did Dunkin's clean up work for them? Do they have a stronger assurance of royalty revenue and growth? Whilst you may not like their methods, the real question was it successful in strengthening the system overall?

Re: Re: First Whip'em, Then Beat'em

Guesty,

Did Dunkin's clean up work for them?

Sure, many franchisees were forced to exit the system.

Do they have a stronger assurance of royalty revenue and growth?

If the terminated franchisees were not underreporting, then what changed? Dunkin' is still receiving the same royalties from the re-franchised stores.

Was it successful in strengthening the system overall?

Let's just say, there are less franchisees for Dunkin' to deal with today - it is easier for Dunkin' to deal with a handful of foot soldiers versus a roomful of contrary minds and opinions.

Existing franchisees only got larger. Now, how does getting larger help the franchisee's secondary market valuation? There is a limited number of buyers that will pay a premium for large multi-unit networks (10-15 stores) compared to the number of buyers capable of purchasing smaller multi-unit networks (3-5 stores).  The limited secondary market activity discounts the sale valuations for the existing franchisees.   

Eddy do you think everyone is stupid but you?

Eddy says -

"Existing franchisees only got larger. Now, how does getting larger help the franchisee's secondary market valuation? There is a limited number of buyers that will pay a premium for large multi-unit networks (10-15 stores) compared to the number of buyers capable of purchasing smaller multi-unit networks (3-5 stores). The limited secondary market activity discounts the sale valuations for the existing franchisees."

Gee Eddy could a multi-unit franchisee sell their 15 units in groups of 3-5 or even one at a time? The valuation would be a function of EBITDA not the number of stores.

Eddy you are getting to be a boor.

Dunkin' Franchisee

It's harder to break them down without a kitchen servicing the network. Plus, there are operating synergies as the network gets larger. The Dunkin' model is evolving to central kitchen manufacturing locations. So yes, you can break them down but EBITDA is negatively impacted. In other words, the whole is greater than the sum of its parts for the franchisee. Makes sense when the franchisee owns a kitchen.

Re: Dunkin' Franchisee

Maybe so, but you can still sell the units as a whole or in parts whether or not they are a satellites or not. It depends on the buyer, if they are already an operator or not. In either case it can as is done.

Ed, you are absolutely right. Horn had the mentality of a warped

prison guard and could have fit right in at Abu Graib, pictures and all. And worse still, he was allowed to go on like that for a long time.

DD should have installed proper pos resources and cleaned up the mess automatically and at the franchisees' expense.

At its core, I think that the Mitt Romney personality has no concept of operations research or problem solving. They have never had to actually run a business. Romney is a product of Cranbrook School and just another dumb yuppie with a rich daddy. Obama is hoping that the Republicans run him in 2012.

But aside from the sicko issues of the DD regime, DD is a laboratory on cleaning up after lengthy laziness. Back in the good old days, franchisor laziness would have resulted in a successful franchisee revolt, the kind of thing that put my daughter through college and med school and my ex wives into relative comfort. But franchisees lack the guts of the older generations too, so they take it and whine until their community looks a bit like Misrata. Life was better in the old days when John Wayne was still on the big screen and people had guts.

You got it Ed

… franchisees could have been warned and coached into compliance on what Dunkin' considered to be proper procedures.

Now this may or may not work in many franchise systems but I will add it as a general belief anyway. 

Compliance to workable and beneficial systems and standards is something that can be explained as giving value to franchisee bottom lines and resale values.

If it is not bullsiht franchisees will understand and be guided by what benefits them if it is explained and also explained as an obligation to the financial health of the entire franchisee network.  When its the truth you get the majority of the network onside asssisting to educate those who solely operate from self - short-term - interest. 

Most could sell that concept when, on occasion, systems and standards are not franchisor profit driven bullsiht.   

How many franchisors are prepared to stand up in front of franchisees and argue franchisee benefits from compliance knowing that said franchisees would lynch them if it were not so. Franchising needs more lynching with tar and feather as a warning but in those systems franchisors don’t have the guts to front up in person.

Breaking from complaince should never be an individual franchisee's decision and it should be a last resort.  There are planty of 'Horns' out there and they do not need franchisee help.

You're Right Ed!

I appreciate someone is out there letting the world know how horrible and nasty Dunkin' Donuts managment is to their franchisees. I was a franchisee from 1985 thru 1998. Richard references the good'ole days under Bobby and Tom. I believe the General Counsel at the time was Larry Hartman before Steve Horn came along. They acted as a lynch mob against the franchisees. In order to stay on their good side, we were literally stuffing white wax bags with cash every month to pay off the field services reps who did absolutely nothing. The money they got was distributed straight to the top. They were the laziest bunch of boys. One of the guys I paying off was Bob Wiggins. I hear that slime ball is still there. One of the other franchisees from VA was paying off some guy named Bode and his brother. To get anything developed we had to use their friends construction companies. More money had to get paid to the development boys just to build new stores.

I wonder if the franchisees are still paying off the field reps like we did back then. We called them the good'ole boys. They use to love going after the Indians because they knew the most shaken ones would pay out the most. One guy even signed a note against his home just to pay the bastards off.

Thanks for sharing. I'm so glad to have moved on from the suited mobsters.

Too bad y'all didn't have the guts to stand up and do something

about that. It would have been relatively easy.

Instead you deciced it would be cheaper to pay protexia. Since you signaled that you were all a bunch of bloody sissies, is it any wonder things got worse.

But HEY! Think of the legall fee you saved back then!

What would you have done?

Richard:

In hindsight I'm sure everything looks hunky dory; however, imagine what the former franchisee was going through. Basically, it's a mob shake down. They were using the unilateral terms of the contract to say, "Pay me or else we'll terminate your a$$!"

If he even attempted to feel out his other franchisees, the rats within the group would have taken the information to the street bosses like Wiggins & Bodie just to get a better deal on the monthly payments they were making. Before any legal action would have happened, the franchisee would have been lynched.

Why do you think DDIFO was so quiet for nearly 20 years? Everyone was making money, and everyone was getting paid.

It was definitely cheaper for the franchisee to pay off the Business Consultants, then it was to rally the herd. From his story, I gather he was also able to exit on his terms. I suppose you can say, the payoffs protected the franchisee's "equity".

He saved legal fees, protected his a$$, and managed to save himself from financial destruction. Plus, he's out here telling his story - so, god bless him.

But it's not the mob...

Jerry sez: "Basically, it's a mob shake down..."

But it's NOT the mob, it's freakin' DUNKIN DONUTS.  That a Field Consultant could shake you down? What a laugh.  Any field consultant stoopit enuf to try that on us might end up underneath that new dumpster pad we're going to pour.  Or more easily for the faint of heart, facing trial for extortion.  Once you pay the Danegold you are never rid of the Dane.

Bean

I am with you on this one. I can honestly say that I would have had someone's butt pretty quick. If this person is interested in taking this story to the next level, please get my contact info from Don or Janet.

Things have changed.

It's not as though the franchisees in Dunkin' were not making money. It was a payoff type of business because everyone was getting "cash" distributions. However, things have changed since the good'ole days. Although some may not agree with the way business is done today, the model has gotten cleaner and more "professional". Franchisees are not making the money they use to make, so there isn't as much "cash" to go around.

I was wondering what "more professional" means. Thanks.

Professional means that the frachisees don't make money. Hmmmm!

As I think about it this morning, doesn't Al Quaeda seem like a franchise? And, if you agree with that, doesn't the demise of its  leader mean that it might be available for acquisition at a bargain price? Connecting the "professional" dots, do you think Bain Capital will make a bid to acquire Al Quaeda? If so, what do you think the acknowledgement clause will say?

Now that bin Ladin is gone, will they stop listening to ZZ Top music every day?

If al Qaeda is a franchise

If al Qaeda is a franchise then Bin was a lousy franchisor made worse by his timely exit. The compliance at brand al Queda is said to be very poorly managed and now with an unknown level of intel on systems and strategies in the hands of competitors those who invested in the AQ brand will be left with shaky confidence.

And if Bin’s press releases have been accurate, along with the intel the franchisees have lost at least the hub of all financial support and most in not all of the advertising fund.

What happens with local marketing remains to be seen but I suspect that the cost of relocations will be difficult for the lower echelon franchisees to meet.  If you are interested in cheap rents there could be a glut of available caves coming onto the market.  

But ultimately it appears that Bin’s final undoing came about because he just had to live in a mansion while his franchisees ate dirt and froze their asses off. 

Richard, if private equity execs get in quick they might get AQ real cheap and their losses aren’t their losses when compliance continues to turn to siht.

I replied to "what would you have done", but it must have been

politically incorrect. Many do not appreciate my blunt and sarcastic approach, and I sometimes have difficulty with the tender sensibilities of people who can't handle the rough discussions about confrontation and how to do it.

Sadly, my reply was taken down. My way of talking about what you do when you are being abused probably won't change.

It's a dirty business...

We threw down a bag or two to get things done. Most of the good'ole boys are no longer there. Many of the shady dealings has been cleaned up. Is it coincidence that you reference 2 people who still remain? I suppose today's management team still needs to be reminded once in a while how business should be done.

How do franchisees avoid abuse? I have preached the gospel of

early on establishment of a fully supported independent franchisee association for more years than most people in here have been alive. It is the only effective way to prevent abuse.

Take the DD situation for example. If the field reps were shaking down franchisees - and if they were shaking ndown franchisees who were not themselves stealing from the system - the answer would have been to take DD on right then and there.

When an association membership needs to be militant and rises to do their duty, having picked the right fight, that first franchisee victory sets the tone for the future.

Frachisors treat the brave differently than they treat the timid. We eat cattle, sheep and chickens. Few of us eat bears!

A relationship

 

I’m not sure how you come to your conclusions – while I’m a believer that the better the level of compliance with good systems the higher the return to franchisees and franchisor – I made no reference to compliance.

What I was suggesting and I’m sure most would have picked up on it – was that the franchisor could easily install a massive – industry common – rebate system to push the franchisees COG etc etc through the roof to profit the franchisor – add a remodel, a new software program etc etc - but he won’t because he isn’t an idiot.

You miss the point – not unusual – but in this case one was not made – change will be made because it must be made but it will be a collaborative decision and my part will be to merely table alternatives. May I ask if you are a woman - just wondering.

BTW: complaince and standards in this system are impressive and surprisingly, with minimal management focus [and cost] necessary.  I don't know - let me guess - there could be a relationship between franchisee profitablity and compliance and standards and management style - perhaps worth investigating. It might be useful information for most of the industry.

Thanks for asking

Ray, to answer your question, I'm a trans-gendered franchisor executive with a Midas touch. I have feminine skin with manly pubic hair.

Your points on the relationship between compliance and system profitabily are valid. I was questioning the issues you are dealing with in the franchise you are working on.

Maybe one day you can visit me in Chicago for a lesson in compliance. You sure seem like my type of guy...

Re: Corporate Owned Model

Jerry, franchisees and the corporate could sell their respective units to a a special purpose entity and do an IPO, however valuations would be challenging, executed all the underlying unit purchases would be exhausting, determining the value of the franchisor's intellectual property and royalty stream would be problematic and making all these disparate parts come together near impossible. And you'd have to all of the above before you could do the IPO with no guarantee of a favorable valuation.

Successfully making the former franchisees single and multi-unit managers would never work.

Unit Valuation Should Be The Basis

The valuation of the unit level royalties would be the basis to assess the franchisee store level contribution into the SPV. By selling the security off to investors the franchisor is able to cash out. A servicing agreement would be executed between members of the former franchisor and a representative body of franchisees. The value created from that point on is the basis to valuing a future equity offering. The new debt is paid off by existing franchisee royalties and channel distribution deals.

The above is just a conceptual thought, since there many other moving parts to consider. Supply chain control is another issue to deal with since it is the back bone of any successful system.

Re: Re: Corporate Owned Model

Ray has an interesting situation going on with the current state of affairs between the franchisees and the franchisor. He says, "He [The Franchisor] was once a screwed franchisee who made the mistake of creating a model totally devoid of everything he objected to and now the brand is hamstrung by his generosity."

The franchisor in his particular situation sold himself short to make sure the franchisees would financially perform.

You say, "franchisees and the corporate could sell their respective units to a a special purpose entity and do an IPO, however valuations would be challenging, executed all the underlying unit purchases would be exhausting, determining the value of the franchisor's intellectual property and royalty stream would be problematic and making all these disparate parts come together near impossible."

I agree that the franchisor would need to be compensated for the intangible assets. Another Guest raises a good point - "By selling the security off to investors the franchisor is able to cash out."

The system would need to be sold and restructured with a new ownership and organizational structure that includes both the franchisor and existing franchisees. Would not include new franchisees entering the system after a roll-up of the existing ownership structure. It would become corporately owned.

From Ray's description, it seems possible that the franchisees might actually buy into a shareholder conversion opportunity with a future plan to go public.

Dunkin' Brands Inc: Bribery and Cheating

Richard writes under How Do Franchises Go Bad?

There are other nuances in the mix, but I think this shows the pattern of what is happening in scores of tough franchise systems today. Oddly enough, some of the profit that is removed by the franchisor resulted from franchisee cheating. There is no difference in the honesty rate between franchisors and franchisees. Business information tracking capability has so improved over the last 35 years that cheating is harder, but it still happens. If this was about telling war stories I could use up a lot more space on the subject of shenanigans.

In Dunkin' Caught in Scheme to Entrap Franchisee, Masahige Kusunoki make the following observation in his comment to Michael Webster titled, "Dunkin Case: Seeing The Forest From The Trees"

That degree of routine and nonchalance in entrapping franchise owners should worry prospective franchisees about Dunkin'.

Mr. Kusunoki references DUNKIN DONUTS FRANCHISED RESTAURANTS LLC et al v. EZ DONUTS, INC. et al Filing: 65:

In the opinion highlighted above, Judge Katharine S. Hayden writes:

It is undisputed is that on May 9, 2007, Dunkin' employees William Gallo and Mike Ryan personally told Moussa that Dunkin' was planning to terminate his franchise unless he voluntarily left the Dunkin' system. (Gallo Dep. 22:10-25:8.)  Moussa refused, resulting in letters dated May 11, 2007, May 15, 2007, and July 19, 2007 terminating the franchise agreements and MSDA [Multiple Store Development Agreement].

Dunkin' can do whatever they want to do to their franchisees. They can bully them, extort from them, and cheat them. Dunkin' franchisees are at the mercy of their franchisor. So, when Thinking of Becoming a Franchisor you may want to follow the Dunkin' model because Dunkin' is still able to sell franchises and overcome the challenges of mistreating their franchisees. No class action lawsuit needed as long as the franchisees are still able to make a little bit of money - simply whip'em, beat'em, and mold'em into shape.

Eddy, It's Old News

Eddy says:
"Dunkin' can do whatever they want to do to their franchisees. They can bully them, extort from them, and cheat them. Dunkin' franchisees are at the mercy of their franchisor."

Maybe you were at Dunkin's mercy; however, it's a different world for the franchisees that made the cut and are still in the system. We have a new FA that doesn't allow Dunkin' to repeat their past practices. Dunkin' is now focused on working with their franchisees.

If you don't like being in the business, you can sell and move on.