Many different types of businesses operate utilizing the franchise business model. Growing a business using the franchise business model has proven to be a very effective way of brand building. Mostly because it creates opportunities for many people … Learn More...
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 email@example.com or call 617-469-3002.
Whether you are a newbie seeking to start a franchise, a multiunit franchise owner, an investment group seeking to diversify, an investor considering buying stock in a publically traded franchise company, the key to analyzing whether a franchise system is investment worthy is to dissect the franchise business model.
As with starting any business, a franchise brings both risks and potential rewards. Franchisees are responsible for the initial investment and the effort to establish the unit and also run the day to day operations. The franchisor gains benefit from an expansion of the brand and recurring revenues from the franchised unit. Each and every franchise system is unique and has different ways the parties involved benefit from the enterprise.
The Federal Trade Commission (FTC) requires franchise companies to disclose information in the Franchise Disclosure Document (FDD) on 23 Items the FTC has deemed critical for any franchise investor to understand about the opportunity before the investment. The FDD is a schematic to the inner workings of the franchise relationship. The FDD provides insight into franchise value, trends, and the probability of success.
The FDD includes information regarding the history, costs, restrictions, franchisee obligations, financing, territory, intellectual property, renewal, termination, transfers, dispute resolution, financial performance, outlets and franchise ownership trends of the enterprise.
At Franchise Perfection we help interested parties evaluate franchise opportunities.
We provide due diligence service to evaluate the franchise opportunity you are considering by taking an in-depth Franchise Business Model Review of the Franchise Disclosure Document. The cost of this service is $500.00. You will receive a detailed executive summary detailing the good, bad and the underbelly associated with the franchise opportunity. We are not attorneys and don’t profess to offer legal advice; our experience is in franchising and business. The Franchise Perfection Franchise FDD Review digs into the franchise business model and helps you determine the value of the opportunity. We do not review the franchise agreement directly other than the terms and conditions disclosed in the Franchise Disclosure Document.
For more information contact Jim Coen at firstname.lastname@example.org or call 617-469-3002.
The last thing you want to do as a prospective franchisee is to waste your time evaluating limited franchise opportunities. Even worse would be to invest in a franchise system that isn’t investment worthy.
Here is a quick sniff test to evaluate whether a franchise system is worthy of your investigation and potential investment.
The Story. How and why did the company get where it is, today. What is the value proposition for customers, vendors, franchisees, employees, and investors? Check out customer evaluations of the product and service. A complete understanding of who you will serve will help you to evaluate the opportunity’s value. The more experience the franchisor has in the business, the more likely that franchisor understands how to succeed in the business. Look at the franchisees, are they happy and expanding?
The Franchise Business Model is crucial for the prospective franchisee to understand fully. What value do the franchisees, franchisor, vendors, employees, investors and customers gain from the enterprise? How does everyone benefit financially from the operations? 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 and services. The details of the franchise business model must provide a clear picture of the financial metrics of unit operations and profits. Look at the Financial disclosure in Item #19 of the Franchise Disclosure Document for details on financial performance. If there is no detailed financial disclosure, move on. Don’t spend any more time investigating that franchise opportunity.
The People. People make and move the organization. Research the officers and management of the franchise system along with those who will provide support for your business. You are looking for people that have a lot of experience in the franchise business model you are considering. The franchisees play an important role in the success of a franchise system and will help you evaluate the culture of the franchise system. Look for stability and experience, as business is competitive and you want the best team on your side.
The Competition. As simple as it sounds, competition is the key to short-term success, while innovation is the key to long-term success of the enterprise. Does the franchise you are considering differentiate from the status quo? Or do the competitors do a better job by offering products or services that are more innovative or competitive regarding quality, image or price? If you understand the competitors, you will be able to predict how the franchise will perform head to head. This insight is precious in the evaluation of the franchise opportunity.
After the Quick Sniff Test, if you are satisfied that the franchise opportunity you are looking at provides you with a strong value proposition. It’s now time to dig and do some serious due diligence to substantiate your potential investment.
At Franchise Perfection we help prospective franchisees evaluate franchise opportunities.
We provide due diligence service to assess the franchise opportunity you are considering by taking an in-depth review of the Franchise Disclosure Document. The cost of this service is $500.00. You will receive a detailed report detailing the good, bad and the underbelly associated with the franchise opportunity. We are not attorneys and don’t profess to offer legal advice, our experience is in franchising and business. The Franchise Perfection Franchise Business Model Review digs into the business model and helps you determine the value of the opportunity. We do not review the franchise agreement directly other than the terms and conditions disclosed in the Franchise Disclosure Document.
For more information contact Jim Coen at email@example.com or call 617-469-3002.
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.
Jason Daley writes in Entrepreneur Magazine that legal issues could change franchising forever.
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.
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.
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.
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
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.
Read More at the Los Angeles Times
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 30th. 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.
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.