September 2014 Archives

How do you feel about a franchisor that promises you a "mutually beneficial relationship"?

Does it make you feel (choose only one):

If you selected "C", I'm with you!

Franchise investments are expensive -- many require your life savings, plus your signature on a note for money that you will owe even if your franchise fails, and your legally binding commitment to pay the franchisor even if your franchise falters or fails -- so I'll pass on anything that's "mutually beneficial." In fact, does that even sound like it's "mutually beneficial"?

Instead, I want a franchisor who's going to do everything possible to make my franchise business successful. Even more, I want a franchisor who has proven time after time that he or she knows how to turn franchisees into success stories, even in the worst of circumstances.

I know a franchisor will not and should not promise to make me a success, but I want the franchisor's word for doing everything possible to help me. Beyond that, I want proof that the franchisor knows how to help me succeed.

I don't expect miracles -- I'll deliver on my end by meeting the franchisor's requirements -- but please, save the "mutually beneficial relationship" hype. That might attract neophyte franchise investors, but not me!

Am I asking for too much? You tell me.

The post Does A "Mutually Beneficial Relationship" Appeal To You When Buying A Franchise? appeared first on How To Buy a Franchise.

We have been very fortunate as the result of the intense emphasis by USA franchisors to sell their franchises to investors in other countries. Franchise proliferation outside the USA is now the fastest growing market, with heavy emphasis on Asia, India and the Middle East.

There are significant differences in selling franchises outside the USA from the selling environment to which USA franchisors have become accustomed when selling to USA investors.

To me the most important difference is that in selling to non USA franchise investors the franchisor is looking more frequently to larger area wide deals and financially well qualified franchisee prospects.

The next most important difference, to me at least, is that the shrewder foreign investors are looking more and more to USA franchise specialist lawyers to aid them in sorting out the deal population to sift out the less desirable candidates and configure the deal to suit their essential circumstances more positively.

Only at the end of the list of salient differences do I consider the various legal structures of what has passed for franchise regulation during the past forty years. While I downgrade any franchisor candidate that balks at providing good requested disclosure in writing, the format for the disclosure has little value. If it passes my vetting tests it will be better than what is required under USA franchise law anyway.

The consequence of these differences will be that non USA franchise investors will be signing better deals than USA investors usually get. The deal quality improvement will, I hope, result in upgrading how franchises are marketed in the USA. While I am always happy to travel to any country to meet any non USA client and get to know them and their environment better, the digital age has made that travel less and less useful. The social aspects of franchise client representation are of much less significance, which makes the lawyer-client relationship significantly less expensive. With 50 years of franchise practice experience, my social presence is not what clients seek.

When representing overseas franchise clients, after vetting the client for financial and operating capabilities, I save them a lot of wasted time and effort sorting through the available opportunities. Working with their own local lawyers, the entire effort becomes almost seamless and much more efficient.

One way in which we improve the process is to eliminate the way USA franchisors tend to treat non USA investors. While the better USA franchisors may tend to be more patrician in their approach with anyone, the lower tier franchisors attempt to mimic this approach. That mistake consumes and wastes a lot of time and energy that our process eliminates. As the franchisor does not get to my clients until later in the vetting process, they seem to know not to waste their breath on the more obvious marketing ploys that work when they deal directly with the investors from the outset.

Potential franchisees from other countries may be accustomed to the way marketing works in their cultures, but their first exposure to some USA franchise marketing organizations makes them quite uncomfortable. Perhaps that is because the non USA well qualified investor candidate is more astute than the single unit franchise investor in the USA who was formerly in a position that had no relevance whatsoever to the business being franchised. That kind of candidate who is represented by a very experienced USA franchise lawyer does not take very well to the "fluff" (to put it nicely).

Many countries are geographically the size of a state here, and the scale of their economies tends to be smaller. Cultural issues also impact significantly upon how the business to be franchised will be operated in the franchisee's home country, especially if it is a Muslim country. Unfortunately, few USA companies have developed sensitivity for these cultural and religious differences. Compared to how the relationship must work elsewhere, the USA seems like a wild west show with swashbuckling conduct freely engaged in here without fear of repercussions.

Foreign franchise investors dealing with USA franchisors can, with experienced representation, change the pitch of the playing field far more than USA investors have been able to achieve. While the differences may seem to be more nuance than role reversal, the impact upon the future financial prospects of the franchisee's business is positive and substantial.

USA franchisors may expect that very few really good prospects for franchise investment in non USA markets will fail to take advantage of effective representation from the very first contact.

Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.  Give him a call at 281-584-0519.

Last week's Wall Street Journal had a story about the franchise systems with the highest default rates for Small Business Administration-backed loans over the past decade.

The Journal reports that franchisees of Quiznos, Cold Stone Creamery, Planet Beach Franchising, and Huntington Learning Centers were among the "bottom 10" brands with the highest rates of defaults ("more than double the rate for SBA borrowers who invested in all other chains") during the period from 2004 through 2013.

SBA-backed loans remain one of the most popular ways of obtaining financing for franchisees.

Through the SBA, borrowers are able to obtain loans that are guaranteed by the U.S. government.

The Journal reports that the 10 brands that make up the list of franchises with the highest default rates represent a total of $121 million in total defaults from 2004 through 2013.

Rounding out the list of the 10 brands with the highest default rates are Aamco Transmissions, Curves International, Cici's Pizza, Minuteman Press, Sylvan Learning, and Cartridge World.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

The franchise industry has for years struggled with financial performance disclosures (Item 19 of the FDD). Some claimed not to give such information at all. Many of those simply arranged for franchise investors to get financial performance information from third parties - usually a subterfuge to avoid fraud claims when the truth came out later on. Others give scanty information that looks good to a novice but in reality is just nonsense. Others have loan brokers insert phony pro forma financial information into the franchise investor's business plan in order to impress a startup lender.

The net result of all this shabby history is that franchisees cannot believe any financial performance information provided by a franchisor or anyone acting with or in any connection to the franchisor. The information is so bad that the franchise agreements themselves provide that none was given or authorized, and that any was received by the investing franchisee, he did not rely on it in making his decision to buy the franchise.

The franchisor bar holds seminars every year that include presentations about how to dance around giving financial information and how to trap a recipient of it through the use of dodgy contract provisions.

Accept that what you get from a franchisor you are thinking of buying a franchise from is unlikely to provide financial performance information that you should rely on. Take what they offer to compare against the information you find on your own as you investigate further.

HERE'S WHAT YOU DO!

If you are thinking of buying a new start up franchise deal where you take all the start up risks, you owe it to yourself to consider the possibility of buying and existing franchise up for resale. Frankly you would be a fool if you failed to investigate resales of existing franchises of this franchisor or in the industry generally.

No one should ever think of investing in a new franchise without going into this resale aftermarket, so to speak, and seeing what the financial picture really is for people who have gone before you.

You would not be misrepresenting yourself by contacting business brokers and telling them you are looking at such and such franchise and that you want to compare buying a start up against buying a resale. In fact you would be more respected for having done this.

There are many business brokers on the Internet. Just search for business resale brokers, agents, business resales.

Obviously you are looking at a particular geographic area, so start there. If you find nothing in that locale, broaden your search. Location is not as important at first as finding the number of them for sale. Find the ones for sale and arrange to be able to research their financial history. A franchisor claiming his is as good as sliced bread needs to be considered in light of his Item 20 and 21 as well as the resale profiles you find on the Internet.

NEVER EVER RELY ON PROFIT AND LOSS STATEMENTS AND BALANCE SHEETS! You must insist upon three to five years of tax returns. Tax returns are filed under penalty of perjury. No one ever overstates his profits on his tax returns. You will have to sign a nondisclosure agreement, but you do not pay money to see tax returns. You also get to show them to your lawyer and accountant. If anyone tells you otherwise, walk away. Refusal to show tax returns usually means that the seller's profit-loss statements are pure fiction prepared for fools.

In most instances you will find resales. When you review the tax returns for 3 to 5 years you will see (be able to derive) magnitudes of profitability and TRENDS. Declining sales/net profit will tell you the truer story. Certain deductions may need to be assessed back into net revenue - your accountant can tell you that. Interest on debt (to someone other than the owner) may impact several financial questions - especially computing the interest rate being paid against current market interest rates. Paying higher interest rates may be a function of business strength or lack thereof, or bad credit. Sound businesses pay their bills unless they are run by people who fly close to the ground, in which instance you don't want to buy from them. Their payment history with vendors will follow you at least for a while.

When you have built up a significant sized file on what these franchises are really doing and what they are really worth, compare that against what the franchisor or someone working with the franchisor may have told you. If there is more than a minor difference, run like hell.

Smart people verify business representations in making investment decisions. Fools get incinerated.