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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 October 11, 2014 Leave a Comment

Why are Franchise Relationship Bills Showing Up in So Many States?

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

On Wednesday evening 10-1-2014, at a meeting of the New England Franchise Association, I served on a panel of four that discussed “Why is Franchise Relationship legislation popping up across the country?” There were three attorneys on the panel: Tim Bryant, Preti Flaherty, Portland, ME, Gregg Rubenstein, Nixon Peabody, Boston, MA; and Rory Valas, Valas Law, Boston, MA. The moderator was Suzanne Cummings, Cummings Law, Stoneham, MA.

The discussion was civil to a point and in particular Gregg Rubenstein did a good job questioning the validity of these laws and the problems they are supposedly trying to solve, he denied that a problem exists. Rory Valas also did a good job of articulating how “bad acting franchisors” take advantage of franchisees. He shared a number of common legal clauses that are unconscionable in that the outcome to franchisees is devastating. Rory informed the audience that the unconscionable franchise agreement clauses are not typically found in other business contracts. Often those business contracts are protected by common law, where franchise agreements are not.

Tim Bryant of Preti-Flaherty sounded more like an IFA lobbyist than an attorney. He stated false statistics as well as the unfounded claim that these laws are being introduced by “wealthy franchisees” that are funding these initiatives for their personal gain.

Not only was I astounded at his accusations. I also found his arguments to be ill-informed, false, hostile and provocative.

On the contrary, I tried to represent that collaboration and transparency to the transaction is the real need and that Independent Franchisee Associations can create leverage and obtain more balance than most laws can. With that said, basic laws can raise the bar for franchisors to treat franchisees with “good faith and fair dealing” and help attract more buyers that have turned away from franchising over the last 8-10 years.

The clip above is of Tim Bryant of Preti-Flaherty from Portland, Maine accusing rich franchisees of supporting a law in Maine only for their self-interests, which is far from the truth. The reality is a Franchise Relationship Law is not retroactive. It will not have an effect on existing franchise agreements. The law if enacted will only effect franchise agreements signed after the enactment of the law. So wealthy franchisee self-interest is a moot point. Besides dubious franchisors prey on the small franchisees who can’t afford to fight back.

The basic premise of these laws is that today’s franchise agreement do not allow franchisees to build, harvest or perpetuate their equity. In the clip below Tim Bryant correctly points out that under today’s franchise agreements the equity belongs to the franchisor. Franchisees, listen to what Tim Bryant says. He is speaking the truth, and I and other pro franchisee advocates have been telling you this for years.

That is exactly why state laws have been introduced nationwide to protect, enhance and defend franchisee equity. Fair franchise bills will continue to be introduced in state capitals nationwide.

Most franchisees feel that they do in fact deserve and do own the equity they have accumulated in their franchise. Many sell those franchises and reap most of the rewards, unless unscrupulous franchisors put their fingers in the franchisee’s cookie jar. But the International Franchise Association and most franchisors believe it is their equity and not the franchisees. It just is very seldom that one publicly admits

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.