Check out Blue Maumau's 2012's Best 10 Franchises to Buy...

2012's Best 10 Franchises to Buy, Least Loan Defaults

By BMM, www.bluemaumau.org
Sat 2012/06/16

Knowing a franchise's bottom line and the ability to get a return on investment is the holy grail for a franchise investor. That's no easy feat. What Blue MauMay has been able to do is to find chains that franchisees are healthy enough with their earnings to at least pay back their loans more than other brands. So here are the ten best franchise brands in which franchisees have enough staying-power to pay back their lender.

To read the full article and see the top 10 best, and a link to the default rates of various franchises, click here.

Want to Buy a Franchise? The Requirements Went Up

Some chains demand more experience - and more cash - from buyers

By Emily Maltby
The Wall Street Journal - Small Business Online
November 15, 2010

For entrepreneurs, it's getting tougher to get in on some franchises these days.

With the economy in the dumps, an array of franchisers are raising their standards for prospective buyers. They're demanding candidates to bring much more cash to the table, as well as a stronger track record of experience in the industry. In some cases, they're even inspecting the buyers' current operations to see just how well they're run.

Tactics for Tough Times

"The margin for error in a down economy is less," says Darrell Johnson, chief executive of franchise research-and-consulting firm FRANdata in Arlington, VA. "In a good economy, when you are struggling and learning on the job there is more margin for error because the economy is helping you along."

To read the full article... click here.

Article: The Accidental Hero

BusinessWeek

The Accidental Hero
Subway's $5 footlong, the brainchild of an obscure Miami franchisee, is the fast-food success story of the recession

By Matthew Boyle

Stuart Frankel isn't what you'd call a power player in the world of franchising. Five years ago he owned two small Subway sandwich shops at either end of Miami's Jackson Memorial Hospital. After noticing that sales sagged on weekends, he came up with an idea: He would offer every footlong sandwich (the chain also sells 6-inch versions) on Saturday and Sunday for $5, about a buck less than the usual price. "I like round numbers," says Frankel, a brusque New Yorker who moved to Miami in 1972 and owned a drugstore before opening his first Subway outlet in 1988.

Customers liked his round number, too. Instead of dealing with idle employees and weak sales, Frankel suddenly had lines out the door. Sales rose by double digits. Nobody, least of all Frankel, knew it at the time, but he had stumbled on a concept that has unexpectedly morphed from a short-term gimmick into a national phenomenon that has turbocharged Subway's performance. "There are only a few times when a chain has been able to scramble up the whole industry, and this is one of them," says Jeffrey T. Davis, president of restaurant consultancy Sandelman & Associates. "It's huge."

In fact, the $3.8 billion in sales generated nationwide by the $5 footlong alone placed it among the top 10 fast-food brands in the U.S. for the year ended in August, according to NPD Group. That puts the $5 menu's success just a notch behind KFC (YUM) and ahead of Arby's and Domino's Pizza (DPZ). It helped privately held Subway, of Milford, Conn., lift U.S. sales 17% last year at a time when most restaurant chains, save for industry leader McDonald's (MCD), struggled. Actually, make that soon-to-be-former industry leader McDonald's. Subway's low-cost franchising model and mainstream appeal have allowed it to add 9,500 locations in the past five years, for a total of about 32,000 outlets. At its current growth rate of 40 new stores a week, Subway is poised to surpass McDonald's in worldwide locations sometime early next year. (Measured by total sales, McDonald's $30 billion still dwarfs Subway's $9.6 billion, although Subway has now supplanted both Wendy's (WEN) and Burger King (BKC) in market share.)

...cont.

Click on title above, or HERE to view the entire article and video online.

Article "Food Fight: Franchisees Caught in the Middle"

Food Fight: Franchisees Caught in the Middle
October 1, 2009
By Diana Ransom

IF YOU’VE BEEN to a fast food restaurant lately, you’ve probably seen some of the fallout of the downturn. You may have eaten some of it, too.

In an effort to convince consumers to open their wallets wider, franchisors are not only requiring franchisees to officiate (and pay for) new promotions, they’re also requiring them to serve new products, extend operating hours and hand over more of their profits.

“The whole restaurant industry is struggling,” says Bonnie Riggs, an analyst for the market research firm NPD Group, which tracks industry revenues. Although total sales at quick-service restaurants were flat during April, May and June, overall restaurant sales fell 1% over the same period a year ago — the first decline of that magnitude in more than three decades, according to NPD research.

To boost sales, franchisors are taking a scattershot approach. “Franchisors are trying to be everything to everyone right now,” Riggs says. Given that penny-pinching consumers are eating more meals at home, franchisors are pulling out all the stops to reel them back in. They are asking franchisees to pitch cut-rate sandwiches and burgers and dreaming up premium, often exotic menu items to lure consumers back.

Just ask Mike Wright, a McDonald’s franchisee in Shalimar, Fla. To make way for McDonald’s new McCafé espresso-based coffee drinks, which launched nationally in May, he was looking at paying upwards of $125,000 to remodel the interiors of each of his seven stores. The company eventually changed its tune – after substantial pushback from franchisees – but Wright and his fellow franchisees were still strongly encouraged to purchase the necessary coffee and frappucino-style drink equipment. “At $14,000 a pop, you’ve got to sell a lot of coffee to make it up,” Wright says.

In Southern markets, selling hot coffee isn’t easy, Wright says. “When you start selling Bubba a cappuccino, it’s like trying to sell grits to a New Yorker,” he says. “They forced everyone to put this in their stores regardless of profitability.”

McDonald’s is telling its franchisees to have faith in the new menu. “Despite the economy, we are still seeing consistent growth in both our premium and value offerings,” says Julie Pottebaum, a McDonald’s spokeswoman.

Although offering premium products could be an indication that franchisors think the recession is over, many of the nation’s franchisees are still struggling. And even though offering tantalizing new items and discounts can help prop up sales, those tactics don’t always translate to higher profits for franchisees.

“There is a big difference between traffic and bottom-line profitability,” says Darren Tristano, the executive vice president of Technomic, a food industry research firm in Chicago. “From a franchisee perspective, they are looking hard at their cost structure,” he says. Imagine the profit margin on a $1 double cheeseburger, he says. “There isn’t much.”

Meanwhile, franchisees are also coping with added overhead. Adding new menu items often includes taking on more inventory, equipment and maintenance charges, as well as training expenses.

Franchisees have always been tasked with meeting franchisor demands; it’s the mechanism by which chains offer standardized products and ensure quality control. However, fielding a rush of new demands amid slumping sales and rising materials costs – while paying employees a new, higher minimum wage – is proving to be much more challenging than many franchisees expected.

“We are in a retail business; we don’t have software that takes care of itself,” says Daniel B. Fitzpatrick, the chief executive of Quality Dining, which owns 116 Burger King (BKC) franchises in the Midwest. “We still have to clean the signs and take care of the grass. When real estate taxes go up, we pay it. When the minimum wages rise, we pay it,” Fitzpatrick says.

For years, Fitzpatrick and fellow Burger King franchisees regularly paid for these added costs by dipping into their portion of Burger King’s restaurant operating fund, which is funded in part by rebates that Coca-Cola (KO) and Dr. Pepper Snapple (DPS) contribute in return for being Burger King’s exclusive soda vendors. However, Burger King now plans to reallocate 20% to 40% of those rebates each year to bolster its advertising budget.

Faced with increasingly stiff competition among other quick service restaurants – a risk factor the company noted in its most recent 10k filing – Burger King plans to reallocate restaurant operating funds “for marketing and other promotional purposes in line with industry practice,” says Susan Robison, a BK spokeswoman.

The company says it expects to allocate $25 million in 2010 and increase the sum to almost $40 million in 2012. That’s roughly $5,000 to $6,000 a store each year. For Fitzpatrick, that amounts to a roughly $600,000 loss in the first year alone. “Times are tough; I don’t have $6,000 — much less $600,000 — to give up.”

SBA Studies Say Franchises More Likely to Fail than Small Businesses

SBA Studies Say Franchises More Likely to Fail than Small Businesses

Posted Fri, 2009/08/28 - 00:06 by Mr. Blue MauMau

WASHINGTON - Separate studies by Professor Timothy Bates and now two studies by the Small Business Administration report that franchises fail more than independent small businesses.

Over the years, studies have emerged with opposing views when comparing “success rates” of franchising to independent business ownership. Franchise experts are familiar with the reports from the U.S. Commerce Department and those authored by Bates (1996). There are numerous private studies as well delving into franchise ‘success’ and franchise regulation, such as those cited and discussed in “Beguiling Heresy: Regulating the Franchise Relationship," co-written by Paul Steinberg and Gerald Lescatre.

However, two lesser known studies undertaken by the Small Business Administration have received little to no attention. In September of 2002, the U.S. Small Business Administration’s Office of Inspector General’s Inspection and Evaluation Division published a report comparing the failure rate of the SBA’s non-franchise loans to the SBA’s franchise loans. Titled “SBA’s Experience With Defaulted Franchise Loans," the SBA queried:

“If franchise-based businesses are indeed “safer”, then Section 7(a) and Section 504 loans to franchisees – hereafter called franchise loans – should perform better than non-franchise loans in terms of SBA having to purchase defaulted guaranteed loans. In other words, franchise loans should have significantly lower purchase rates than those of non-franchise loans.” (pg 1)

The SBA’s findings?

“Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.”(pg. iii)

The SBA also found:

“There is also potentially more exposure per loan on franchise loans. In FY 2000, the average (mean) franchise loan origination was 40% larger than that of the average non-franchise loan. In FY 1991, the comparable figure was only 1%.” (pg iii)

Equally interesting was the following point:

“Moreover, a previously mentioned SBA-funded study [Shane’s 1997 study] found that a franchisor must reach a minimum efficient scale to lower its (as opposed to a franchisee’s) costs. Given this necessity plus the need to collect franchisee-paid fees, franchisors have an incentive to encourage as many prospective entrepreneurs as possible to become franchisees and find financing. Moreover, there is always a risk of some franchisors’ overly optimistic financial projections enabling under qualified prospective franchisees to obtain – and default on – SBA guaranteed loans.” (pg. 1&2)

Prior to publishing, the OIG’s Office of Inspection and Evaluation forwarded this report to the SBA’s Office of Financial Assistance (OFA) for review. In James Rivera’s, the Associate Administrator for the OFA, response to this request for review he stated “A member of my staff conducted a similar study and analysis of the SBA loan data base for the same period under inspection and came to the same conclusion supported by your finding related to the relative success of franchise verses non-franchise loans.” While a copy of this specific OFA’s report is not currently available, the aforementioned letter appears as Appendix C to the attached report.

Although not looking into franchisee success rates as the other studies did, Prof. Scott Shane and Foo conducted research (1997) that shone a light on the high mortality of franchisors, revealing that 1,292 franchise brands studied between 1979 and 1996, only 15% of the franchisors lived to be 17 years old, a rate comparable to independent start-up failures.

Editor’s note: This article was written by Blue MauMau member Oldsword, a former franchise owner-operator. This article has been edited and the facts verified by this journal’s editor.

Coffee perks up McDonald’s global sales

Coffee perks up McDonald’s global sales
By Jenny Wiggins in London

Published: August 10 2009 17:51 Last updated: August 10 2009 23:43

McDonald’s move into mochas and iced lattes has helped the fast-food chain report its seventh consecutive month of increases in global sales this year, underscoring the resilience of its business model in the recession.

The company’s shares rose 1.9 per cent on Monday to $56.27 after it said comparable-stores sales had risen 4.3 per cent in July, compared with an increase of 8 per cent a year earlier but beating analysts’ consensus expectations of a 3.2 per cent climb and ahead of June’s 2.6 per cent rise.

Jason West, analyst at Deutsche Bank, said the global sales increase had alleviated concern about a possible “downward spiral” in comparable sales, as had been seen at competitors like Burger King. “Globally, they have not had a negative month [in sales] in several years,” he said.

Sales were up 2.6 per cent in the US – which contributes about half the company’s profits – because of strong sales of coffees and core menu items like hamburgers and fries.

McDonald’s expansion into fancy coffees under the McCafé brand is part of a strategy to capture more customers at breakfast time and win them over from coffee chains to its lower-priced drinks.

The move has forced Starbucks to defend its brand. It has been running marketing campaigns with the slogan: “It’s not just coffee. It’s Starbucks.”

In the US, McDonald’s is selling espressos and mochas in its existing stores.

In Europe, it is emulating its Australian business and opening separate McCafé counters, operating in or next to its restaurants. The group plans to have 1,200 McCafés in Europe by the end of the year.

McDonald’s strongest sales were in Europe, up 7.2 per cent because of the popularity of its “tiered menu” – which offers cheap, middling and expensive options – as well as summer specials such as chicken, bacon and onion sandwiches in France and burgers based on the “great tastes of America” in the UK.

These include a “New York special”, which has beef, streaky bacon, smoked cheese, lettuce, onions and onion mayo in a chilli, chive and sesame bun.

In Asia-Pacific, Middle East and Africa – which make up 13 per cent of total profit – sales rose 2.1 per cent. McDonald’s attributed the rise to the “creativity” of its Australian business, which runs marketing campaigns based on a single theme – currently, family – and has introduced apple and cinnamon mini-muffins and spinach feta strudels, as well as opening more 24-hour and drive-through stores.

But sales in China, where it has been slowing new store openings, were weaker as consumers favour cheaper local brands.

McDonald’s has some 1,000 stores in China and plans to open 150 this year, compared with earlier projections of 175.

Chains, franchisees square off over discounted menu items

Chains, franchisees square off over discounted menu items


By RON RUGGLESS

(July 27, 2009) The recession-driven rush to grease sales with promotions and value deals is leading to mounting frictions between franchisors and franchisees.

Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes and KFC all have recently found themselves working to restore the delicate balance between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.

Burger King recently battled franchisees over plans to offer a $1 double cheeseburger.
Most recently, Burger King franchisees in mid-July twice rejected plans by Burger King Corp. to offer a $1 double cheeseburger that could square off against value items from quick-service competitors. The Miami-based franchisor eventually capitulated, deciding to offer the value item with a coupon program planned for August.

“It’s a challenge for any franchisor to push through a promo that cuts at franchisee’s profit margins,” said Lorne Fisher, chief executive and owner of Fish Consulting Inc. in Hollywood, Fla., whose clients include a number of restaurant and retail franchisors.

Communication from both parties is key to dissipating such tensions, Fisher said.

“From our experience, it is important to quantify the benefits to the franchisee to ensure they understand the value despite the cut in margin,” Fisher said.

“Whether the increase comes in consumer traffic, average check size or brand awareness, the franchisor must be able to present the tangible benefit to sell the promotion successfully and maximize the system’s participation,” he said.

Quiznos is among the franchisors that have run into conflict with franchisees this year. The Denver-based franchisor encountered wide pushback from franchisees over the $5.29 sandwiches it had hoped to give away in its “Million Sub Giveaway.” McDonald’s franchisees reportedly expressed concerned over the national introduction of the premium Angus burger in early July, while some Subway franchisees were upset by the chain’s ongoing “$5 Footlong” promotion.

Tempers also flared at both Popeyes and KFC over one-day product giveaways that found many franchisees emptying their larders as cash-strapped consumers rushed in for free goods. KFC’s high-profile marketing boost from Oprah Winfrey exacerbated the situation.

Burger King on July 14 reached detente with its franchisees when it said it would beef up the promotion of its $1 Whopper Jr. and feature the double cheeseburger in an August coupon offer.

“Burger King Corp. remains fully focused on its value offerings and delivering value for the money to its guests,” the company said in a statement. “As such, many product and menu options are always in development and under consideration.”

The company added, “BKC will also be deploying traffic-driving national coupons to nearly 80 million households during this time period with almost $50 in savings per coupon booklet.”

A spokeswoman added: “The direct-mail coupon book includes a $1 double cheeseburger offer from Burger King restaurants, and with more beef than a similar sandwich from McDonald’s, the offer will represent motivating affordability to burger lovers nationwide.”

McDonald’s replaced its double cheeseburger that had been on its Dollar Menu with the McDouble, above, which has only one slice of cheese.
Rival McDonald’s raised the price of its double cheeseburger from $1 to $1.19 late last year amid rising costs and franchisee complaints that a profit could not be made on the item. The double cheeseburger was replaced on the Dollar Menu with the McDouble sandwich, which contains two patties but only one slice of cheese.

Joe Buckley, an analyst with Bank of America-Merrill Lynch, said in a report that franchisee tension stemming from an ongoing soft-drink contract dispute could be a roadblock for Burger King as it seeks to add value offerings to drive traffic.

“We are concerned that the lack of alignment between Burger King and its franchisees could complicate efforts to turn sales,” Buckley said in downgrading the stock to “neutral” from “buy.”

The economic downturn has only served to heighten franchisee-franchisor tensions. Analysts said low-margin promotions in flush times could be a “loss leader,” drawing in customers who may buy additional, more profitable items to raise the check average. However, as patrons cut back on those extras, the “loss” loses its “leader,” and the franchisee is left holding the bag.

McDonald’s recent introduction of both the new coffee line, of which both the iced and hot mocha are being offered for free on Mondays through Aug. 3, and the new premium Angus burger have raised the eyebrows of franchisees. They have expressed concern that McDonald’s is trending too far away from its value focus and placing too much strain on franchisee operations.

In an April survey of McDonald’s franchisees by former stock analyst and independent researcher Mark Kalinowski, one unidentified McDonald’s franchisee called the Angus burger “another poor-margin item.”

However, Danya Proud, McDonald’s senior manager of U.S. communications, said many franchisees’ concerns were allayed.

“The franchisees told us they couldn’t get it in their restaurants quickly enough,” she told Nation’s Restaurant News earlier this month. “I think people misconstrued things. During the early stages of the test we were using a slightly bigger burger that would have required new equipment. But we went to slightly smaller burgers that can be prepared on existing grills.” —rruggles@nrn.com

Restaurants, Franchising and Discounting

Restaurants, Franchising and Discounting
by john a. gordon

In a June 23 New York Times Business article, Discounts Have Restaurants Eating Own Lunch, the woes of chain restaurants offering discounts—and the possible long term effect of doing so, was well outlined. The following passage caught my eye:A T.G.I. Friday’s promotion in April and May offering $5 sandwiches and salads led to a small-scale revolt among franchisees. Ross Farro, who has seven T.G.I. Friday’s restaurants in Ohio and Pennsylvania, said the promotion included salads that normally sell for as much as $10 and a steak sandwich priced at $11.89 on the regular menu. The ingredients alone for each steak sandwich cost about $4, he said.

The promotion was supposed to run at lunch and dinner, but Mr. Farro said he and some other franchisees put away the $5 menu inserts at night to stop the bleeding.

This was not the first such example just this year of such issues plaguing chain restaurants and franchisees. Sonic (SONC), for example, has been struggling for almost the entire last year by promoting either drinks or its $1 value menu, and having declines in average customer ticket, not offset by increases in customer traffic. It reported earnings on June 23, which were still weak. And Burger King (BKC) and Subway franchisees have also noted the same problem. But Subway units, with their overwhelming US presence, seem to be visually busy, and seem to of the right scale.

Routinely, in my field visits of restaurants so far this year, I find situations where the company’s central marketing thrust is all but hidden or ignored by misplaced restaurant outdoor posters, in store merchandizing, OR where cashiers actually “trade down” customers to the more discounted offers, from a higher margined item. Either action results in a very sub-optimal outcome.

In the example above, the TG I Friday’s franchisee pointed to a gross margin of only about 20% on that particular steak sandwich item. That’s far below the typical 60-70% margin. I’d bet that not every item in the mix resulted in such a steep discount. But any discount means that incremental sales traffic must be generated to offset the lower margin resulting from the promoted item sales.

Franchisees are more margin centric in their needs and outlook, while the large publicly traded companies are more comp sales oriented, because that is a key metric The Street is looking for.

A lot of that tension is due to the franchise model, where franchisors get royalties based on sales but franchisees make profit the old fashioned way, taking what’s left after expenses are paid. Also, franchisees generally have higher cost of capital (if they can get credit at all right now) and have lower potential margin structures, as they must pay a royalty to the franchisor off the top, usually 3-8%.

Very clearly, deal and value is very important in retailing, but how do you drive it optimally?

One, is that you avoid the mistakes noted in the TGI Fridays example above: work to make the discounts meaningful but not such that individual item sales are slashed beyond feasible (rule of thumb: 50% gross margin is a starting point).

Another is that Fridays could have limited the discount to lunch only—most casual dining operators are slower daytimes and are much busier in the evening. Work to fill in your gaps but play to your strengths.

Another is offering attractive, limited time offers with the price point and margin you can tolerate. Both Brinker (EAT) and Darden (DRI) have kept their product development groups busy lately, creating and rolling out such items.

About the author: John A. Gordon is with Pacific Management Consulting Group, an analytically oriented chain restaurant management consultancy; focused on restaurant economics and earnings

SBA Numbers

SBA numbers

Declining loans? Whose de-fault is it?

By Jonathan Maze
As published in: Franchise Times - April 2009

Amid all the concerns about the decline in SBA lending is one relatively simple explanation that gets little attention: skyrocketing default rates.

The default rate on SBA-backed loans given to franchisees has more than quadrupled since 2004, according to information prepared by the Coleman Report, a newsletter out of California that tracks the SBA lending market. In 2004, the default rate for franchisees was 3.1 percent. By 2008 it was 13.4 percent.

Meanwhile, 2 percent of franchisees receiving SBA loans failed and liquidated last year, an increase of two-thirds over the year before and more than six times the rate of failures as in 2004.

Both figures reflect an overall increase in loan defaults in the SBA program, in which businesses had an 11.9-percent default rate last year, up from 2.4 percent in 2004.

The higher default rates may help explain a 57-percent decrease in SBA-backed loans in the last three quarters of 2008 and a general decline over the past couple of years. That decrease has generated deep concern among lenders and small business advocates as well as government officials who view small business creation as a key to any economic improvement.

In February, Congress passed an economic stimulus package with provisions designed to increase SBA lending. The stimulus package reduced fees and increased the government guarantee on 7(a) loans to 90 percent, and it enables the agency to lend to dealers who sell loans on the secondary market - which many believe would stimulate lending.

The higher default rates on SBA loans in recent years are a likely symptom of the decline in the nation's economy. But many of the defaults predate the serious economic downturn. That suggests the numbers may reflect one of the causes of the recession: banks' loosening lending standards in a period of historically low interest rates.

Darrell Johnson, CEO of the franchise information firm FRANdata, said that while the number of loans in default is near 12 percent, the dollar amount defaulted is much lower, less than 5 percent. In other words, the loans more likely to go into default were for lower dollar amounts.

Companies with higher default rates among their franchisees typically require smaller loan amounts. The 10 companies listed on the Coleman Report with the worst default rates - ranging from 55 percent to 86 percent - had an average SBA loan amount of $173,060. By contrast, the companies with the 10 best default rates - or the 10 companies with the most loans and no defaults - had an average loan of $742,594.

Lenders commonly performed less due diligence on smaller loans, because the amount of paperwork required for an SBA loan is the same whether it's $50,000 or $500,000. So banks didn't take as deep a look at borrowers of loans for less than $150,000 - the peak amount in the agency's now-defunct "low documentation" program that required less paperwork. "The smaller size loans were getting less bank scrutiny, that's the issue," Johnson said. "With less bank scrutiny, they were defaulting at a higher rate."

"In a rising economy, it's still problematic," he added, "but it is accentuated because of the down economy, when defaults would be up, anyway."

Johnson attributed much of the reduction in SBA lending to a reduction in bankers making smaller loans because of the default rate and the departure of some large lenders that had specialized in low documentation loans. Indeed, the most significant reports of lending problems have come from franchises that have a lower initial investment cost.

Johnson doesn't think the lending environment will change anytime soon. Lenders are making fewer, more conservative loans and given the cost are likely to focus on bigger amounts. Banks "are being overly conservative now," he said. "And that over-conservatism is being applied to a greater extent to smaller loans."

That franchisees had a 1.5-percent higher default rate isn't entirely a surprise - Johnson himself authored a report more than a year ago with a similar finding. He believes it's rooted in the fact that many franchises require smaller loans and are therefore more likely to default.

And Bob Coleman, publisher of the Coleman Report, stressed that not too much should be read into the difference. He said that the majority of franchise loans are in the 7(a) program, which has a higher default rate than the 504 program, which is tied to property. The default rates include numbers for both programs.

Fixing the problem?

The higher rate of defaults has not gotten past the SBA, which in attempting to solve the problem announced in early February that lenders should restrict the value of "goodwill" in a loan to 50 percent of the total amount and no more than $250,000.

The SBA's decision led to an outcry among brokers and lenders who said the restriction would bring loans for business acquisitions to a virtual standstill. "Moving goodwill to 250 does not help us in any way, shape or form," said Steve Mariani, founder of North Carolina-based Diamond Financial. "All the people on employment lines who would like to get a loan to buy a franchise or a business, you're stopping them from getting that business. It's just been an absolute mess the last couple of weeks."

That outcry did cause the SBA to back off a little by the end of the month. The agency said any loans exceeding the goodwill cap could be submitted to its central processing office for the next six months. That didn't pacify critics of the plan, who say that at the very least sending the applications to central processing would delay loans and generate more paperwork. And a definitive goodwill cap is still possible.

Goodwill is the value tied to a business above its physical assets, or the premium associated with buying an established business, rather than starting one from scratch. Many established businesses on the market have some sort of goodwill value attached to them, especially service-oriented companies that have less equipment and buildings.

Franchises likewise have a certain amount of goodwill value, such as the brand name and the territory rights, said Steve Mize, managing partner at Gulf Coast Financial Valuations, a business valuation firm.

The SBA contends they're also the riskiest. In a memo to SBA employees in February, Grady Hedgespeth, director of the agency's office of financial assistance, said that many lenders don't finance goodwill on conventional loans, and that neither should an SBA backed loan.

Mize disagreed, and he noted that the number of service-oriented businesses with higher amounts of goodwill value is increasing. "The less risky deals are the deals with simple business models and higher amounts of goodwill and good customer diversification and good management," he said. "The riskiest are high capital businesses with higher capital expenditure requirements and high working capital requirements."

Mize said that 76 percent of the loans made for business acquisitions last year would not qualify under the new cap. It's uncertain how many SBA loans are for business acquisitions, but Mize said those sales nevertheless represent an important piece of any economic improvement.

Sales at businesses tend to stagnate in the years when the owner is closer to retirement, he said. If the business can be sold, then it would bring in a young, energetic owner who could bring in new ideas and generate sales and employment. Restricting goodwill would keep those owners from selling. "By limiting financing on goodwill, they're limiting the value on the most valuable assets that the business can own," Mize said.

25 Worst Franchises to Buy

25 Worst Franchises to Buy
Submitted by Mr. Blue MauMau on Sat, 2009/01/24 - 08:35


LEXINGTON, Ky. (Blue MauMau) - Sub shops, car care and quick printers dominate the list of worst franchises to buy, according to a Small Business Administration list given to lenders.

Blue MauMau once again gained access to this banking list and is publishing it to help inform franchise investment decisions. Taken straight from an SBA's loan performance list covering the years from 2000 to 2007, this is the list that the agency provides loan officers of its most trusted lenders and banks throughout the country.

This is how the list is used. It is a quick filter of loan risk, of what franchise brands to navigate around and what looks less risky. For example, with a 48% failure rate on SBA loans, Mr. Goodcents Sub has the dubious honor of being at the top of worst investments. Compare the 48% to another sub chain, Subway's, which had only 4% failures out of 1,974 disbursed loans.

The good news for Quiznos is that it didn't make the worst 25 list. However, it was #26, worthy of a dishonorable mention. Blimpie, a sub maker that belongs to Kahala Corp's group of franchising firms, ranked considerably worse at #5.

The loan officer and the franchise buyer realize that there are thousands of franchise opportunities to buy from, so why mess with the riskiest? Unless there is a miraculous reason why concepts with high failure rates are a great investment, the franchise buyer may want to move to other brands with lower failure rates.

Each franchise brand listed has Small Business Association loans with at least 51 disbursements, a substantial number. Having larger figures for the disbursement of loans filters out most of the small franchise systems. What is left is largely major franchise brands with the worst failure rates of nearly 115 big brand concepts.

These are the worst franchise brands, where franchise owners struggled more than others to pay back their SBA loans. To put it another way, this group is the lowest performing quintile (20%) by loan failure rate of major franchise brands in the SBA list.

So here it is: The list of 25 of the worst franchise investments, ranked from worst to bad, from the viewpoint of being a lender of SBA loans and wanting to ensure the best chance of having the loan repaid by franchisee borrowers.

Click HERE to view the list/online article.

Ritter’s buyer retools chain

Ritter’s buyer retools chain
Turnaround plan goes beyond frozen treats
Sat. May 02 - 2009

Sam Stall
Special to IBJ


This St. Patrick’s Day, Tru-Foods LLC executive Gary Occhiogrosso got an object lesson in why his company’s acquisition of Ritter’s Frozen Custard either could be a great opportunity or a royal pain—or both.

He visited the chain’s ill-starred 10450 Allisonville Road location on a blustery March day. The shop, which sits in the middle of an empty field and offers only picnic table seating, closed in 2008 when its previous owner threw in the towel. Now it was being readied to reopen under new management.

Apparently the store’s potential customers just couldn’t wait.

“It was obvious that they weren’t open, yet people were pulling into the parking lot,” said Occhiogrosso, TruFoods’ chief development officer. “I hadn’t tasted the product at that point, but when I tasted it I knew immediately why everyone was passionate about it and addicted to the stuff.”

Indianapolis residents have been passionate about the company’s handmade frozen custard ever since it debuted almost two decades ago. But while the ice cream is sweet, the story of the former momand-pop company’s attempts to morph into something grander is decidedly bitter.

Now, New York-based Tru-Foods, which bought the company in May 2008 for an undisclosed price, is trying to get the formula right.

TruFoods plan includes finding more and better-financed franchisees; rationalizing the systems needed to run a successful location; making the point of entry a bit less pricey; and creating more reasons for people to visit stores.

The company also wants to drive lunchtime traffic by serving food. Some locations have begun selling Nathan’s Famous hot dogs, and TruFoods is working on an expanded relationship with Westbury, N.Y.-based Nathan’s that would roll out hot dogs, chicken fingers and French fries chainwide.

TruFoods specializes in buying and turning around underperforming brands. The company’s other holdings include Arthur Treacher’s Fish & Chips, Pudgie’s Famous Chicken and Wall Street Deli.

Even while making changes, TruFoods wants to stay true to the original concept, which Chicago expatriate John Ritter and his wife, Bonny, launched in Franklin in 1989. At the time it was a novelty—frozen custard made fresh each day inside a retrolooking circular building with outdoor (and only outdoor) seating.

Customers lined up, and soon the company was off to the franchising races. By 2000, when Saul Lemke became CEO, the chain boasted 18 locations. By 2005—its peak—there were 60.

But along with growth came problems. Lemke, who acquired control in 2003 (with the Ritter family retaining a major stake) was at the time roundly criticized by some franchisees for expanding too quickly while neglecting day-to-day operations.

By the time the Ritter family reacquired control in 2004, installing John’s son Bob as CEO, there were 53 units—a number that by November of 2007 had dwindled to 48 in nine states.

Steve Delaney, a partner in SiteHawk Retail Real Estate (and former owner of several ice cream shops), said many factors may have contributed to the chain’s troubles, including a lack of well-heeled franchisees, a comparatively high cost of entry, and competition.

“They were on the cutting edge of the boom in fresh, gourmet, handmade ice cream when they first came out,” Delaney said. “But then there were several imitators,” such as Culver’s Frozen Custard and Maggie Moo’s. “So the competition increased dramatically.”

It didn’t help that opening a traditional Ritter’s location could be quite expen sive. Once an operator acquired the land, then built and fitted out the distinctive structure, startup costs could soar past $500,000. This for a building that had few alternative uses and no interior seating—meaning that locations in colder climes must close during winter.

Reviving expansion

Under TruFoods, the number of locations has slipped to 33. The new owners are determined to revive expansion, but not by franchising to operators unlikely to succeed.

“Number one, it’s about selecting proper franchisees,” said TruFoods’ Occhiogrosso. ”Proper franchisees are people who have the mindset that agrees with our mission statement, of putting the best prod uct out there and creating an enjoyable and memorable experience. Not just selling franchises for the sake of selling a franchise.”

A trickier question is addressing the store’s often idiosyncratic locations and store designs. In its pre-TruFoods days, the company experimented with strip mall locations that offer all the amenities missing from traditional stores—chief among them indoor, all-weather seating. But there’s a problem.

“Oddly enough, they don’t perform as well financially as the freestanding units,” Occhiogrosso said. “Because this isn’t just about selling ice cream. It’s about summertime and making memories and creating moments with your neighbors. You’re selling the entire experience.

“The minute you move the concept indoors—not in all cases but in some cases—you become like any one of the hundred competitors that are out there.”

The company will try to capture the best of both worlds by offering franchisees a new, modular building that looks pretty much like a traditional Ritter’s, but costs less to build and features a drive-through.

It’s also exploring growth on a new front. TruFoods said it might offer Ritter’s frozen custard in some form to convenience stores—a thorny proposition, since the product is made in small batches several times a day.

The last component of the TruFoods approach is to further infiltrate the markets where the chain already has a presence: Indianapolis, Houston and Dayton, Ohio, as well as Tampa, Orlando, Fort Lauderdale, and West Boca, Fla.

The bottom line is that while there’s definitely demand for the product, it can’t perform up to par until the franchising system is ironed out.

“When you’re in the franchising business, that’s very different from being in the frozen custard business,” Occhiogrosso said. “And sometimes franchisers, or founders of concepts, are challenged crossing that bridge between being in the ice cream business and being in the franchising business. We are in the business of putting people into a cash flow vehicle whereby they operate the system and the system runs the business.”

Franchisee closes

That effort comes too late for longtime franchisee Bill Osler. A couple of months ago, he shuttered his Hilton Head, S.C., Ritter’s after five years of operation—a period, he said, that was punctuated by (among a great many other problems) relentless difficulties with getting supplies in a timely manner. That and overly optimistic estimations of what the sales of his business would be.

“They said it would be in the $300,000 to $350,000 range,” Osler said. “I assumed they knew what they were talking about. But it never came close to that. The sales were never what they represented.”

Bob Ritter, the former CEO, now is Ritter’s director of franchise development. In Indianapolis, he’s concentrating on getting several dormant locations running again. Resurrection of the Allisonville Road store was this year’s biggest achievement.

“Nationally, I would have to say we’d like to do 20 (new locations) in the next couple of years,” Ritter said. “In Indianapolis I think we could do another four or five—reopening some and adding a couple.”

Though TruFoods has helped drum up leads, finding franchisees for anything these days is tough. Ritter says the biggest challenge, not surprisingly, is securing financing. He sees a lot of people who already own businesses and want to diversify, and others who have been downsized and are looking for a new line of work.

Career change

One recent franchisee is 30-year-old Josh Austad, who was formerly based in Minneapolis as an operations manager for Northwest Airlines. He took a buyout package when the company merged with Delta and used it to purchase an up-andrunning Ritter’s in Palm Harbor, near Clearwater, Fla.

“I got lucky because I was buying an existing location,” Austad said. “A lot of the up-front costs that you would have if you actually had to construct a building or renovate a space, I didn’t have to do.”

Austad hadn’t even heard of Ritter’s until he started investigating business opportunities. He wasn’t put off by the chain’s small size or limited (five stores, including his) Florida presence. Quite the opposite, in fact.

“I liked the fact that it was small,” Austad said. “I didn’t want to be store No. 1,000. I didn’t feel like I’d get the personal attention I need, because I’ve never owned a business before.”

Austad hopes to open a second location within five years.

Bob Ritter is optimistic there will be many more opportunities for expansion. The distinctive custard that caused customers to flock to his parents’ Franklin store still is the company’s biggest selling point.

“The brand following is so strong,” Ritter added. “In most markets that we’ve gone into, we get voted best ice cream in those markets. We got voted best ice cream in Detroit by the Detroit Free Press, and we only have one location there, in the suburb of Brighton. That says a lot for the brand and the marketing, and without a doubt about the product.” •

Don't Buy a Franchise In a Hurry

Don't Buy a Franchise In a Hurry - click on title to view original article online

Submitted by Granville_Bean on Fri, 2009/04/24 - 22:46.

I have been a franchisee for more than a decade. We don't make as much money as a lot of people in the community seem to think, but we do make more than 90% of the households in America. I read all the horror stories on Blue MauMau, and contrast how people are buying bogus franchises with how we got into our system.

People talk about dealing with sales people who want to sign them up for that deposit or franchise fee. People talk about how THEN they might work in a store "for a few days", or go to a training that takes a week or two.

And they think that a week or two will make them into business people???

What is really scary are the poor folks who decide to buy a franchise BECAUSE THEY ARE GETTING LAID OFF. That is a TERRIBLE motivation because the fearful job-losing employee will want income IN A HURRY. Franchising has been around for decades, perhaps a century, and yet the job-loser will feel pressure to find the franchise and buy it in as little as a few weeks. No, no, no. It can take YEARS to find the right business opportunity.

About that salesperson and that fee: For contrast, in the McDonald's system you have to be approved as a Registered Applicant before you will be considered to buy a store, and you don't pay the fee UNTIL you buy a specific store. And to BECOME a Registered Applicant you have to first prove yourself to be operationally qualified.

You might work in the stores for a year, not a week. You go through four levels of courses and you don't just walk in and attend the course. You have to prove yourself operationally qualified and pass an assessment as to your operational knowledge, before even being allowed into the course. You can't just read manuals in your office or at home, you have to prove yourself in the restaurants. And this is BEFORE you are ALLOWED to pay a franchise fee to acquire a restaurant.

Contrary to sentiment from some of Blue MauMau's columnists and commentators, I am NOT a big fan of "due diligence" to the extent that it implies that if you just hire enough consultants, you can indeed walk right into a business that you knew nothing about 2 weeks ago, and the "diligence" will save you and make your success guaranteed.

Nope. People do come into McDonald's from outside but they gain their own knowledge of the industry before they buy a store. They don't throw it over a consultant's transom and ask if it is okay. And let's face it, most McDonald's franchisees came with prior McDonald's experience.

Corporate franchisor employees aspire to become franchisees (and often do). General Managers with decades of experience buy their stores when the prior franchisee retires. Whether or not they buy their parents' stores, second and third generation franchisees DO buy McDonald's stores.

I am VERY skeptical when people who know NOTHING about an industry except what the franchisor told them, or that plus what they looked up on the internet in two days, think they can run a successful business in that industry just because it is a franchise. And I am ESPECIALLY skeptical about folks who were employees all their lives and who, now that they are laid off, think they will magically be transformed into employers overnight, by virtue of a franchise.

Folks, being laid off doesn't qualify an employee to be a business owner. Being dissatisfied with how your employer treated you as an employee doesn't make you qualified to be an employer yourself. People who run successful businesses have often been entrepreneurial all their lives, they didn't become transformed just because they couldn't find a job. (Lots of them quit good jobs because they preferred to be on their own, the opposite of going on their own because they couldn't find a job.)

So: Don't buy a franchise in a hurry. Be darn careful about buying into an industry you didn't know much about UNTIL you became interested in a franchise in that industry. Be careful of franchisors that want your fee NOW, and then they'll find you a location later.

Franchising can be lucrative because owning a business can be lucrative. Buying a franchise is buying a business. Just because a business is a franchise doesn't guarantee success. Oh yeah, and "concept" isn't worth squat. It's all in the EXECUTION!

Good luck.

Buying a Franchise: A Consumer Guide

Buying a Franchise: A Consumer Guide
When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: there’s no guarantee of success.

The Federal Trade Commission, the nation’s consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.

I. The Benefits and Responsibilities of Franchise Ownership

II. Advance Work: Before You Select a Franchise System

III. Selecting a Franchise

IV. Finding the Right Opportunity

V. Investigating Before You Invest

VI. Before You Sign the Franchise Agreement
....

Click HERE to view the rest of the article.

Franchise Article: Don't Be Foolish

Don't Be Foolish, They Don't Love You - click title to view original article online
Submitted by Mark Frank on Tue, 2009/03/31 - 20:12.

A friend let me know that a mutual friend; someone we both know well, recently closed his franchise business. The particular friend and subject of this post cashed in his company profit sharing account with about 100K net (ten years of service with the company) and borrowed an additional 400K in opening his franchise two years ago. When all this was in the initial phase and only an idea this friend called and since this is the business I’m in asked, “what should I do before entering into a franchise agreement”, I provided for free what I normally charge others for, hoping he would take my advice.

A couple of times before he signed the agreement he asked fairly standard questions and I provided honest and time proven answers I’ve learned through experience. I was troubled by his responses and in some instances lack of response he provided. I got the feeling he had fallen in love with the franchise and was not willing too find conflicting facts; his mind was made.

He was unable or unwilling to push hard enough getting specific and verifiable answers to even the most basic questions; every corporate response was clouded in secrecy and propriety. Calls to franchisees were not much more revealing, he reached out to at least 25 franchisees and only spoke with one and that franchisee was not of much value in terms of information. All the while the franchise sales pitch continued, weakening under the overall pressure and rationalizing that the company has over 100 franchise owners and they must have already done the work, he signed up.

The reality of his situation is now different than the original Alice in Wonderland depiction. His business is gone, along with his money; he has substantial bank debt, a long term personally guaranteed lease, an additional personal loan, his home signed as collateral, no job and significant challenges in his marriage that he and his wife may not overcome. Troubling too, he has no job and may actually be forced to move in with his in-laws, assuming his marriage survives.

My friend is well educated and intentioned, his success in his corporate work life should have translated into success in his business, but in this instance it didn’t. While he looks in the mirror and blames the economy the real reason for his failure is that he did not complete a modicum of due diligence and bought the franchisor’s music lock-stock-and- barrel.

I’ve seen this happen time and time again, intelligent managers making poor franchise decisions. At least twice in the past four years friends have made disastrous decisions because they fell in love with a franchise business model as presented, making this life-changing decision based upon little more than a peek under the tent. Anyone considering franchising should take due diligence very seriously and like the old maxim about marriage, while looking keep both eyes fully open and once married keep both eyes half closed.

Did the franchisor break any laws, more than likely not? Were proper documents provided, more than likely yes? Was the franchise honest, more than likely yes (at least in answering those questions asked)? Was the franchisor an open book and absolutely transparent? No. There is not one franchisor in the world, even world-class franchisors that will absolutely provide every ghost in the closet scenario for you as a would-be franchisee.

The franchisor’s job is not protecting you from yourself, but rather selling franchisees. In the case of smaller upstart franchise operations in particular selling is virtually all they care about. As they grow and mature greater care is taken regarding the selection process. The job of the prospective franchisee is making a well-informed decision considering all the facts (those pesky little things) beforehand. You're being sold and as such should have your guard up. You wouldn’t buy a car because you like the sales pitch, the salesman, or well appointed restrooms? I doubt the size of the conference room; the sales manager's nice suit and polished presentation would be considerations in the deal.

Yet, purchasing a franchise simply because the franchise broker is a good salesperson, or the franchisor put his arms around you and told you how wonderful you are and how much he wished he had more franchise owners like you. No, your job is finding answers, never rest until you have determined the facts as presented are verifiable; this is your life after all. Historically, I have found most put forth too little effort before making a franchise decision, blinded by the clever sales pitch of the franchisor (they’re getting better all the time) during the early courtship stage.

I written before about this, as have hundreds of others, there is absolutely no shortage of information on the Internet and print designed too help any person make a better, more informed decision, if one will only take the time and put forth a little effort. Do I feel sorry for my friend? Absolutely. Could this disaster have been avoided with a little effort and perhaps a few dollars comparatively speaking, absolutely? There are no shortcuts for due diligence, either complete it in earnest yourself, or hire someone who will.

Local Franchise News

Click the article link below to get the latest news on Noble Roman's, a local Indianapolis franchise.

Franchisee Legal Action May Bankrupt Noble Roman's

Considering Buying or Starting Up a Franchise?

If you have considered buying an existing or start-up franchise, please read this article:


Blogs Provide Insight to Would-Be Franchisees
Sites Offer News, Comments, Updates on the Happenings at Other Businesses; Complaints Are Welcome Too

By RICHARD GIBSON

Would-be franchisees searching for investment ideas can find a bevy of information on franchising blogs.

Such sites offer news, advice and comments by people already in those franchise businesses -- giving others a head's up on what to watch for and how to proceed.

Tim RobinsonFor example, the Franchise Pundit blog reports that sandwich franchiser Quiznos is helping its franchisees renegotiate their store leases, resulting in an average 15% to 20% reduction, at no cost to them.

Here's a look at some blogs...

To continue reading this article/view the full article, click HERE

Thinking of Buying a Franchise??

Read this article to find out who is struggling. These are important numbers to review in making an informed decision about buying a franchise.

Click here: Loan Defaults by Franchisees Soar - WSJ.com

Cautionary Tale--Buying a Regional Franchise and Moving it into Virgin Territory

Our office was recently approached by an individual who had bought development rights to a sub/pizza franchise for the Indy metro area. It was a small franchise - 42 units nationally - and virtually no presence in the Midwest. The owner had simultaneously opened two units in Indianapolis last spring at a cost in excess of $900,000. Unfortunately, they were losing money at a very brisk rate and the owner could not keep the doors open.

The main lessons from this tale are three fold:

Don't assume that a concept that is popular on either the east or west coast will successfully transfer to the Midwest or vice versa. Be very aware of the regional cultural and taste differences.

It costs a great deal of money to establish a new concept in a new area! Be prepared for the operating losses until your concept catches on with the public.

Don't double down on your bet. Open one store and see if you can establish the concept and then grow if your first unit prospers.