March 2015 Archives

Every franchisor, big or small, has a franchise development department. In some cases it is a department of one that may be manned by a passionate (and quite frequently strange and eccentric) founder. In other cases, it may be a massive "bullpen" of franchise salespeople whose entire function in life is to sell, sell, sell--which, by the way, is common in larger franchising organizations. Regardless of the size of the franchisor, the franchise development department exists for one purpose: to sell franchises.

Franchise salespeople are often among the friendliest and most fun-loving people you'll ever meet.

With a smile in their voice and a twinkle in their eye, they will quickly and easily make you feel like the smart, sexy, savvy businessperson you know you are, and before you know it you'll be singing their praises from the rooftops.

While I'm certainly not implying that there is anything wrong with this process, make no mistake: Franchise development people love you because you represent a big, fat commission check and because they're under tremendous pressure to sell--particularly in the case of a new franchise concept or offering.

But, how much money will you make buying a franchise? And why aren't those nice & friendly salesmen telling you?

Please also note that a reluctance on the part of a franchisor to share performance data does not necessarily mean that the franchisor has something to hide or that the franchisor's model doesn't work.

In reality, it has more to do with the fact that franchisors must be very careful about the claims they make with regard to franchisee performance. In the not too distant past, it was not uncommon for franchise development people to make comments such as, "Unfortunately, I am prohibited by law from providing any financial information"; however, this has since changed based on the amended Federal Trade Commission (FTC) Franchise Rule, which was approved on January 22, 2007 and became mandatory on July 1, 2008.

In a nutshell, the FTC now specifically requires franchisors to state in Item 19 of the FDD that they can provide financial information, but have chosen not to. The specific language can be found later on in this chapter in the detailed description of the 23 mandated Items includ-ed in the FDD.

When I went through this process as a franchise candidate myself, I distinctly remember thinking, "Man, if I could just get my hands on a friggin' profit and loss [P&L] statement or some basic numbers, I could figure out if I can make any money!"

Don't fret--all is not lost. By reviewing each of the 23 items in the FDD carefully, you can piece together a fairly accurate framework of your basic expenses. In addition, by making a number of follow-up calls to existing franchisees, you should be able to fill in any blanks. You see, franchisees aren't prohibited from

sharing detailed financial information because they're considered to be unbiased parties.

Here's the real secret: Make those due diligence calls!

There simply is no substitute for contacting a broad cross-section of existing franchisees and asking the tough questions, so DO NOT skip this step. You'll also want to pay close attention to Item 7 in the FDD, which details the costs of getting into the business, aka the initial investment.

Do all of these things correctly and voila--you'll have a nice, reasonably accurate pro forma!

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The International Franchise Association's (IFA) third annual California "Franchising Day" is set for March 11, 2015. The goal of Franchising Day is to inform California legislators about some of the key issues affecting the franchise industry.

This year, the IFA's Franchising Day will "feature meetings with legislators and staff, allowing members of the franchise community to meet directly with lawmakers to discuss the benefits of franchising in California, as well as the legislative issues facing their businesses."

One of the key legislative issues facing franchisors in California is the state's law on negotiated franchise sales.

As described in my previous posts here and here, the law -- intended to help California franchisees to give them an advantage during negotiations with their franchisors -- actually hurts franchisees in the state because many franchisors would rather refuse to negotiate completely than comply with the law, which franchisors view as burdensome.

If you are attending Franchising Day, this law should be an important topic of discussion.

If you are interested in attending Franchising Day, the IFA has asked you to e-mail Erica Farage at [email protected].

The Coalition of Franchisee Associations (CFA) will be hosting its annual CFA Day Forum March 24-25, 2015 at the Omni Shoreham in Washington, D.C.

This year, the forum will include informational sessions, an attorney's round table, congressional visits, a Cherry Blossom Dinner Cruise and a closing luncheon on Capitol Hill.

This year's agenda will feature subject matter experts on legislative hot topic issues and will boast a variety of informative and educational topics relevant to the franchisee community. The seventh annual CFA Day Forum will personalize the issues happening in Washington, D.C., and allow attendees to gather the necessary information to better prepare their operations across the country.

Along with a congressional luncheon, attendees will head to Capitol Hill to interact directly with their respective members of Congress. Forum attendees will learn how to increase the relevance of their own independent associations and gain the resources needed to advocate for their individual business's rights, with both their franchisor and the government.

"With a new Congress in town, we need to get our story out more than ever,"

"Franchisees need to educate their representatives on the franchise business model, explaining to them that it's their local small-business owner--not the corporation--that is suffering as a result of government mandates. And every new mandate--whether it be Obamacare, minimum wage increases or labor regulations--chips away at the franchisees' bottom line until there's nothing left. If we don't get our story out, no one will."

Speakers at the event will include Rep. Mike Kelly (R-PA-03). Rep. Kelly, a member of the powerful House Ways and Means Committee, is the primary sponsor of legislation which will make permanent the 15-year depreciation schedule for restaurant improvements and new construction, leasehold improvements and retail improvements.

Please let your Pennsylvania-based franchisees know and make sure they attend to meet the congressman from the 3rd District of Pennsylvania!

Sen. Deb Fischer (R-NE) is our second confirmed speaker at the closing luncheon being held in conjunction with the 2015 CFA Day Forum! Sen. Fischer is a member of the Senate Small Business Committee. A former member of the Nebraska legislature, Sen, Fischer defeated former U.S. Sen. Bob Kerrey in 2012. She, her husband and her two sons currently own and operate their family ranch, Sunny Slope Ranch, near Valentine, Nebraska. Please inform your Nebraska-based franchisees and have them register for the 2015 CFA Day Forum!

Also confirmed is one of our closing luncheon speakers--Sen. Joe Manchin (D-WV). Sen. Manchin is one of two democrats signed on to S. 30, the "Forty Hours Is Full Time Act of 2015." His understanding of the need to increase the definition of "full time" to 40 hours per week and leadership in helping his party understand this priority is crucial

Sen. Susan Collins (R-ME) will be our closing speaker at the luncheon. Sen. Collins is the primary sponsor and main driver of the 40-hour per week bill. She is a member of the powerful Senate Committee on Health, Education, Labor and Pensions (HELP), which handles issues including minimum wage, paid sick leave, labor regulations and the Affordable Care Act (ACA). She has received many awards for her support of small business and is one of the most influential women in Washington, D.C.

Founded in 2007, the CFA is comprised of franchisee association leaders dedicated to the development and growth of their own organizations. CFA members include independent franchisee associations from 16 well-known brands, representing more than 34,000 franchise owners with 83,000 locations and employing 1.4 million individuals across the nation.

About the Coalition of Franchisee Associations

The Coalition of Franchisee Associations Inc. (CFA) brings together some of the largest and most reputable independent franchisee associations to form an organization with a mission "to leverage the collective strengths of franchisee associations for the benefit of the franchisee community."

The CFA, headquartered in Washington, D.C., is committed to providing vital support and assistance to the franchisee community at large. To learn more about the organization, please visit our website.

For more information on the CFA Day Forum, please register here.

I overheard an interesting conversation about Item 7s, how much it costs to buy a franchise, and the estimated working capital required.

A lawyer explained that "it was a rule that only 3 months of working capital should be shown on the item 7"

This made no sense to me. It is fine if your franchise system is going to ramp up under 3 months, but what if you have bought a system which is expected to take 12 - 18 months to ramp up? Like a child care system?

Why would a franchisor want to mislead the the prospective purchaser by miscalculating working capital? It won't help either party.

Mike Webster tells me that the 3 month "rule" is misunderstood. It really works like this. If the franchisor doesn't have an item 19, then they cannot have an accurate estimate of working capital, how much you need to break even, because this estimate is a financial performance representation. So, if you don't have an item 19, you cannot have an hidden FPR in your item 7.

This makes sense. But, I looked at some item 7's to see how misleading adherence to the "3 month rule" might be. I looked at Man in Van Franchises, because a big component of the cost is going to be the cost of the vehicle or vehicles.

Here is what 101 Mobility's Item 7, from 2013, reveals about the cost of buying a vehicle.

First, the cost of a vehicle is estimated at $7,360 to $9,400, including any shrink wrap for signage.

Well, that sounds a like a great deal! The franchisor must have an excellent vendor program to pull this off.

Well, no. We have to read the fine print.

We see the "3 month rule" being misused. Knowing the true cost of the vehicle is not going to allow you to make an accurate estimate of your break-even.

Could this just be the way the industry reports the cost of the vehicle in the item 7?

No, I am reliably informed by Jim Norton, Chief Operating Officer at Amramp, a competitor to 101 Mobility that:

"Amramp indicates $$23,950 to $42,500 for the purchase of a vehicle. So, at first glance a potential franchisee would see far less investment for 101 Mobility than for Amramp.

But, what should I expect when the 101 Mobility management team had no franchising experience or industry (healthcare experience) when they started the franchise?"

Jim is right, I think.

In my view, we need better Item 7s and better Item 19s, so that prospect purchasers can get an accurate picture of their expected return on invested cash. Adherence to the "3 month rule" produces dumb Item 7s, which cannot be relied upon.

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