Franchising

Jim Coen August 11, 2016 Leave a Comment

The Importance of Franchisee Independent Trade Associations

Franchisees invest in franchise systems for many different reasons. One reason franchisees universally share is that they are joining something so they will not be alone to solve the myriad of business challenges they will face.

A business owner today needs to understand and deal with issues that just didn’t exist 25 years ago. From complicated tax issues, to complicated labor laws and insurance needs. In marketing alone: advertising, online, social media and public relations have all drastically changed the marketing dynamics.

Many feel franchise systems can provide assistance in these difficult areas. The reality is most franchisors are in a very different business than their franchisees. The business of running a franchised unit is extremely different that running a franchise system. Many of the franchisor’s employees including the C-Suite level have never operated a franchised unit. Most C-Suite’s change every 5-7 years. The institutional memory is lost to the franchisor but remains with the franchisees that tend to be in the system longer that many of the employees of the franchisor.

The reality is franchisors are in a different business and have an entirely different set of challenges that are not a part of running a franchised unit.

Independent Franchisee Associations (IndFA) typically form from the imbalance in the relationship. A single unit franchisee may have a difficult time changing the status quo on their own. Many of the multi-unit franchisees feel they have different needs, yet they also have the same serious concerns about their investment because of the way onerous franchise agreements are.

Most IndFA’s talk about creating one voice, creating more leverage in negotiations, developing resources to defend franchisee from predatory franchisor practices. Franchisees typically don’t have the knowledge on how to set-up an IndFA. Some franchisees were members of a union so they understand that 1+1=3, and the unions empower workers to act as one they could do the same for franchisees. But most franchisees come from the corporate world and have little experience running a small business.

Franchisees run a business and as stakeholders, they are directly affected by the customer’s perception of the brand. Although many of the reasons listed above are all good reasons to form an IndFA. The most important reason to create a franchisee association is the need and power of creating a shared knowledge base of the branded business from the franchisee perspective. That is something very hard to obtain other than forming an IndFA. Most Franchisee Advisory Councils don’t even let franchisees take notes, never mind discussing the matter in full.

Forming an IndFA is easier said than done, but the benefits of Independent Branded Trade Association can help the stakeholders in the brand improve the product, profitability, market share and brand recognition.

Branded Trade Associations can help foster collaboration seek transparency and empower franchisees to have a positive impact on the brand they have chosen and have dedicated their money, heart, and soul.

When I run into a franchisee, and they ask me why they should form a franchisee association my typical answer today is “if you want to succeed, decades to come, you don’t have a choice. You must unite franchisees as an essential part of the successful franchise systems to ensure that the franchisees have as much knowledge of the business and the future risks of running the franchised units.” Otherwise, you are putting your business lifeline in the hands of someone that is in a different business and possess an onerous franchise agreement that offers you nothing more than my way or the highway.

Forming an Independent Franchisee Trade Association will not solve all issues, there are multiple sides in the franchise relationship, vendors, franchisees, franchisor, customers, employees, and suppliers. What matters is the Association will be able to share similar experiences from other franchisees. Independent Franchisee Trade Associations will provide you access to information to help you have a say in the direction the brand and company may take.

At Franchise Perfection we help interested parties to form independent franchisee associations. We provide startup and ongoing management services necessary to establish and operate independent franchisee associations.

For more information contact Jim Coen at jim@franchiseperfection.com or call 617-469-3002.

Jim Coen April 23, 2015 Leave a Comment

It is All About the Franchise Business Model

A strong business model is the most important component of an investment worthy franchise system. The business model is the method or means by which a company captures value from the business and shares that value with its stakeholders.

The business model in Franchising is crucial to establish how the franchise owner, franchisor, vendors, employees, investors and customers gain value from the company. The franchise business model may include many different aspects of the business, such as how it makes, brands, distributes, prices, markets, or advertises its products.

Each and every franchise system has a different business model. The Franchise Disclosure Document (FDD) discloses many business mi. The FDD was not designed to identify the value proposition. It was designed to communicate critical information and legal obligations in the franchise agreement.

The franchise business model is about value creation. It is also about the core strategy to generate economic value for all stakeholders. Understanding the franchise business model is critical in determining whether that franchise system is investment worthy and how capable the franchise can compete in the marketplace and make money.

The franchise business model exposes how the company converts franchisee capital, brand value, and vendors participation into a return that is greater than the opportunity cost of the capital. This means that a franchise business model’s success will create returns that are greater than the (opportunity) cost of capital, invested by its franchise owners, shareholders, and bondholders.

Business models are an essential part of strategy – they provide the fundamental link between markets and the consumers. Any resilient business model must be able to create and sustain returns for its franchise owners and stakeholders over time. Otherwise, it is likely to go out of business or fashion.

Jim Coen January 9, 2015 Leave a Comment

Franchising Could Change Forever…

Image credit: Keoni Cabral | Flickr

Jason Daley writes in Entrepreneur Magazine that legal issues could change franchising forever.

He writes:

Franchising usually makes it into the mainstream press when Taco Bell jams a new snack chip into its burritos. But in the past year, franchising has been making front-page news for other reasons: Several issues that have been simmering for years came to a head, pitting franchisors against franchisees and labor advocates against both.

The results of those conflicts—and their ultimate consequences for franchising as a whole—aren’t at all clear, obscured by hyperbole, legalese and a lack of guidance from regulators. Whether these issues will reshape franchising for the better, as some argue, destroy franchising as we know it—or change nothing at all—remains to be seen. Whatever the case, the legal and political fights are worth watching.

I was interviewed for this article well over 8 months ago and forgot about the interview until it popped up in my google alerts.

At the time I was the Executive Director of the Maine Franchise Owners Association (MFOA) currently I serve as a member of the MFOA Board of Directors.

“What’s happened is that over the years, attorneys for franchisors have tightened franchise agreements to the point where franchisees don’t really own any equity in their business,” explains Jim Coen, executive director of the Maine Franchise Owners Association, which supported the bill in Maine. “When push comes to shove, in most franchise agreements franchisees don’t have anything but the equipment they buy. They have no right to the name, to their customer base, and because of noncompete clauses they can’t use the skills they’ve learned. Yet franchising sells units by telling people they can be in business for themselves.”

Later on in the article I was also quoted as saying:

Coen of the Maine franchise owners’ group agrees that the minimum-wage movement is about union power, but he believes it also ties into fair franchising legislation and helps explain why the SEIU supported SB 610 and other franchising acts that improve franchisee equity. “The unions realize that if they can help franchisees increase their margins, then the franchisees can pay their employees a higher wage,” he says. “And I really think franchisees will pay higher wages instead of pocketing that income. The customer service experience at the counter is so important, franchisees want the best people they can get. The ones making minimum wage are cleaning tables or in the back. Franchisees shouldn’t be afraid of unions. They should be worried about protecting their equity.”

In the last sentence of my quote what I meant to say or thought I said was “Franchisees shouldn’t be afraid of the minimum wage. They should be worried about protecting their equity”.

Not a big difference but an important one.

Many Franchisees Get Nothing for Their Investment

Photograph by Frank Tozier/Alamy

Patrick Clark of Bloomberg Business Week reports that the breathless marketing around franchise businesses often makes them out to be surefire moneymakers. Case in point: The website franchisehelp.com, a resource for prospective franchisees, sent an e-mail yesterday advising recipients to “Just Say No to Savings Accounts”—and to consider parking their savings in a “turn-key” franchise business instead.

They make it sound as if a Quiznos is as solid an investment as a New York City taxi medallion. A new analysis published by industry website BlueMauMau shows just how wrong that is. Of 165,000 franchise operations that changed hands or closed from 2010 to 2013, more than one-third, or about 58,000, went out of business. Another 40,000 were terminated—i.e., the franchiser yanked the license back from the buyer because of some breach of contract. And another 12,000 contracts weren’t renewed when they expired. The data were compiled by FranchiseGrade, a company that analyses franchise systems for prospective investors.

In all those situations, franchise buyers are unlikely to have recovered the money they spent to get into the business. Many may have lost more than their initial investments, says Don Sniegowski, editor of BlueMauMau: “Unlike stocks, where you’re out the amount of money you put in, you can invest $5,000 for a startup fee and walk out with a collapsed business and hundreds of thousands in debt.” He adds that some franchisers sue failed storeowners for royalties they would have paid if they have stayed in business for the length of their contract.

States Offer Equity Protection regardless of “No-Equity Contracts” That Bryant Uses.

From Left to right, Tim Bryant, Greg Rudenstein, Jim Coen, and Rory Valas

At the last the New England Franchise Association meeting, Tim Bryant of Preti Flaherty stated that franchisee equity was not part of the franchise deal. Tim claims a franchisee leases a franchise and the franchisor controls the equity. That statement is very true for most franchisors and franchise agreements except in states that offer some protections for franchisees.

The basic premise is that today’s franchise agreement do not allow franchisees to build, harvest or perpetuate their equity. Tim Bryant correctly points out that under today’s franchise agreement equity belongs to the franchisor. Listen to what Tim Bryant says, he is speaking the truth of franchising’s dirty little secret, the IFA and dubious franchisors have been avoiding this secret for decades. I and other pro franchisee advocates have been telling you this for years.

There are a number of ways that franchisors can extract equity from franchisees, and franchisor attorneys have been adept at changing the language in franchise agreements to attempt to circumvent the state’s law.

There are some states that offer franchisees a degree of protection to franchisees that choose to invest in a franchise in that state. My advice to anyone looking to invest in a franchise is if the franchise agreement does not allow you to build, harvest and perpetuate your hard earned equity than you should not invest in that franchise. The only other option is to invest in a State that offers protection for franchisees.

I have listed the States with franchise protection laws and the protections that those states offer. These laws will not prevent franchisors from extracting your equity if that is their intent, but these laws curtail some of the approaches dubious franchisors often take to extract equity.

Washington: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, freedom of sourcing, no undisclosed kickbacks, exclusive territory protection, no Litigation out of the State of Washington, fair and reasonable price for goods sold to the franchisee, transfer fee limited to expenses incurred by the franchisor, 30 days notice of termination, 30 day cure period, good cause required, 360 days for franchisor to issue notice of intent not to renew.

Indiana: Discriminatory treatment prohibited, freedom of sourcing, no undisclosed kickbacks, exclusive territory protection, no unreasonable non-compete, no unilateral substantial modification of agreement, mo limits on Litigation, no unlimited advertising contributions, 90 days notice of termination, good cause required, 90 days Franchisor Notice of intent not to renew.

Hawaii: Freedom of association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, freedom of sourcing, no undisclosed kickbacks. exclusive territory protection, reasonable notice of termination, cure period 60 Days, good cause required, franchisor notice of intent not to renew within a reasonable time.

Minnesota: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, no unreasonable standards of performance, exclusive territory protection, no unreasonable non-compete, 90 day notice of termination, good cause required, 60 days cure period, 180 days franchisor notice of intent not to renew.

Illinois: Freedom of Association with no retaliation or retribution, discriminatory treatment prohibited, 30 day notice of termination, good cause required, 30 days cure period, 180 days Franchisor Notice of intent not to renew.

Nebraska: Freedom of association with no retaliation or retribution, no unreasonable standards of performance, 60 day notice of termination, good cause required, 60 days franchisor notice of intent not to renew.

New Jersey: Freedom of Association with no retaliation or retribution, no unreasonable standards of performance, 60 day notice of termination, good cause required, 60 days franchisor notice of intent not to renew.

Rhode Island: Freedom of association with no retaliation or retribution, 60 day notice of termination, 30 day cure period, good cause required, 60 day franchisor notice of intent not to renew. 30 day renewal cure period.

Wisconsin: Good cause required for change in competitive circumstances, 90 day notice of termination, 60 day cure period, good cause required, 90 day franchisor notice of intent not to renew. 60 day renewal cure period.

California: Freedom of association with no retaliation or retribution, 30 day notice of termination, 30 day cure period, good cause required, 180 day franchisor notice of intent not to renew.

Iowa: Freedom of association with no retaliation or retribution, freedom of sourcing, 30 day notice of termination, good cause required, 30 day franchisor notice of intent not to renew.

Michigan: Freedom of association with no retaliation or retribution, no litigation outside the State, 30 day notice of termination, good cause required, 30 days franchisor notice of intent not to renew.

Connecticut: Minimum 3 Year term, and 3 Year renewal, 30 day notice of termination, 30 day renewal cure period, good cause required, 180 days franchisor notice of intent not to renew.

Most franchisees feel they do deserve to own the equity they have accumulated in their franchise. Many sell those franchises and reap most of the rewards, unless dubious franchisors put their fingers in the franchisees cookie jar. The IFA and most franchisors believe it’s their equity and not the franchisees. It just very seldom that one admits it especially an Attorney member of the IFA.

Jim Coen September 30, 2014 Leave a Comment

Gov. Brown vetoes bill to protect franchisees

Gov. Jerry Brown discusses a bill while meeting with advisers at his Capitol office on Monday, Sept. 29, 2014 in Sacramento, Calif. Brown has until midnight Sept. 30 to sign or veto hundreds of bills that were approved in the final weeks of the legislative session. At left is advisor Nancy McFadden. RICH PEDRONCELLI — AP

Patrick McGreevy of the Los Angeles Times reports that Gov. Jerry Brown vetoed legislation to protect small-franchise owners against fast-food giants and convenience store chains, saying he needs more proof there is a problem before considering changes that would “significantly impact California’s vast franchise industry.”

The measure by Sen. Hannah-Beth Jackson (D-Santa Barbara) would have prohibited corporations from putting a franchisee out of business unless they have committed a “substantial and material breach” of the franchise agreement. The bill also would have protected a franchisee’s ability to sell or transfer the business without unreasonable interference.

Brown wrote in his veto message that he is open to reforming the franchise laws “if there are indeed unacceptable or predatory practices by franchisors. I need, however, a better explanation of the scope of the problem so I am certain that the solution crafted will fix those problems and not create new ones.”

Jackson said problems do exist. “Current law allows these corporations to put these small franchisees out of business for even the most minor and arbitrary violations,” Jackson said recently in support of SB 610.

Franchise owners have complained that parent firms have forced them to give up their stores or blocked transfers of ownership.

“We are disappointed that Gov. Brown ignored the small-business owners who have invested our life savings and life’s work into creating California jobs, and instead sided with the giant corporate franchisors with his veto of SB 610,” said Keith Miller, chairman of the national Coalition of Franchisee Associations.

Help SB610 become law in California!

On August 21st, the California state senate voted 23 – 9 in favor of SB 610, a bill that strengthens franchisor good faith relations with franchisees. In order the turn this important piece of legislation into law, it is crucial that all franchisees express their support of the bill and ask the Governor to allow SB610 to become law. He can sign it into law, veto it, or let it to become law automatically on September 30^th. Franchisor advocates are bringing substantial pressure on the governor in a last ditch effort to defeat SB610.

This is an important time for all franchisees in every state. SB 610 offers significant protection for franchisees and will set a precedent for Governors throughout the US that California has become the best state to invest in a franchise. It’s about time that “good faith and fair dealing” becomes law protecting franchisees and their investment. SB 610 overcomes greed and ruthlessness that many franchisors utilize against their franchisees.

Here is a link to a word file that you can use to post a message to California Governor Brown.

This will take you only a few very important moments, but could be of significant step to protect your franchise equity in whatever state you operate.

Jim Coen May 24, 2014 Leave a Comment

Equity Extraction Schemes Live On in Franchising

The equity extraction scheme that was exposed by 7-11 Employee Kurt McCord brings back painful memories for me.

The scheme is eerily similar to what was perpetrated against Dunkin’ Donuts franchisees from 1998 thru 2008. In that period it is estimated that Dunkin’ Brands extracted over $100 million dollars of franchisee equity using similar tactics described by Kurt McCord.

The biggest difference in the two brands, is that in Dunkin’s the franchisees made money and were afraid to speak out against what most franchisees knew what was going on. Some franchisees benefited at Dunkin’ because they were able to purchase the shops, but they paid top dollar for that privilege. I’ve been told by franchisees that purchased some of those shops that they were very surprised when at closing that Dunkin’s would walk away with the biggest check and even sometimes the franchise got nothing.

Unfortunately 7-11 franchisees do not make as much money as Dunkin’s franchisees do. 7-11 takes over 50% of any profit the store generates, it truly is a gloried manager’s job that may pay better than minimum wage, but not much more.

Onerous franchise agreements create the tool, greedy investors set the stage, failure to meet development goals cause the C-Suite level management to look for other means to generate cash flow and bingo the franchisee equity extraction scheme is launched.

Michael Seid and the IFA lobbyists scoffed at the suggestion that franchisee equity extraction is a problem in franchising. In Maine the IFA and franchisor lobbyists said that “there isn’t a problem in franchising, just with Dunkin’ Donuts franchisees, it’s an isolated incident”, well it looks like the quarantine is over and the equity extraction scheme is no longer isolated.

I will admit that blatant franchisee equity extraction schemes perpetrated by one brand against its franchisee are not common at let’s say bullying franchisees is. Bullying franchisees is not new to franchising, it happens in many systems, every single day. In Maine the IFA refused to accept any attempt to diminish franchisors ability to extract equity from franchisees, they even opposed “Freedom of Association” or termination with only with good cause, which is central to the effort of stopping equity extraction schemes in their tracks.

Thankfully, 7-11 has a national franchisee association. There is no doubt that they are discussing Kurt McCord’s revelations as I write this. 7-11 franchisees have been complaining about the bullying and equity extraction scheme for years now.

There is a need for pro-franchisee legislation to protect and defend the equity that franchisees invest in each state in the US. By the way 7-11 endorsed the IFA’s position against pro-franchisee legislation in Maine and New Hampshire. What a surprise?

Franchisees, wake-up! Most of the franchise agreements you signed can and will be used against you if and when the franchisor needs cash and is so incompetent they can’t figure out productive ways to generate that cash. Your franchise agreement is the tool that makes franchisee equity extraction possible. That tool may not be utilized as of yet in your system, but don’t kid yourself, it lies dormant in the franchise agreement you signed, and it can be utilized against you unless you live is a state with pro-franchisee legislation or unless you have a competent independent franchisee association working to protect your ability to protect, defend and enhance your equity as a franchisee.