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Is a Franchise for you?

January 27, 2013

We were contacted by a news organization the other day, to ask our opinion on several issues regarding Franchises.  One of the fundamental questions that came up is whether franchising is really worth it?

The answer is – as in many questions – it depends…  In the case of franchising, it depends on you, the Buyer; and it depends highly on the Franchise, itself.

As far as you are concerned, what are your skills?  If, for example you are contemplating a Fast Food Franchise, do you know cooking?  Do you know Food Costs?  How adept are you in Estimating Food Supply questions?  How much Waste do you need to estimate?

How many Employees do you need at any one time?  Do they all need to be there at once, or can you bring in some people early and the majority of them at other times?  And what kinds of skills do they need?  (A Food Prep person does not have the same skills as a Server, who in turn is not the same as a Bartender, and so on.)

Designing the Restaurant is key.  We consulted with an Architectural Firm that was designing spaces for an intended, multi-location Restaurant chain.  The Architect put together a wonderful design for the seating area, but the Kitchen area was a mess!  He had placed equipment in such a manner that the Prep Area was at one end of the Kitchen, but when his/her foods were finished, the Prep Cook had to take physically transport the products to the Main Cooking area, which was almost at the opposite end of the Kitchen.  Then, the finished plates had to be moved to another area of the Kitchen for delivery to servers, so that people were constantly crossing each other with hot platters and knives at a rapid pace, potentially on wet and sometimes even greasy floors…if you charted it, the traffic pattern looked like a plate of linguini!

Even food presentation systems sometimes need to be thought out carefully, in terms of need and progression.  We recently saw a buffet, where the Diners were directed to one end of a food line.  The rolls and butter were at the beginning of that line, then silverware, then a huge salad bowl, THEN plates.  A diner was left either to cross in front of people who putting salad on their plates in order to get a clean dish, or stuffing rolls and butter into his/her pockets in order to free his/her hands to fill them with salad, and finally arriving at the available plates.

These sound like simple, common sense issues, but unless you have been in the business, they can escape your notice until you actually become operational, in your own Restaurant.  And then, it can be too late:  You have already designed your Restaurant, spent a lot of money on equipment and space build-out, and to change it can be cost prohibitive.  Moreover, every space you lease can be different; so even if you have owned a place before, the next one can have its own challenges, due to the amount of square footage and shape of the location.

Most Franchises can help you with all of those decisions and provide the training and support that helps you through these decisions.  They can guide you with Cost of Goods, Pricing suggestions and Expense planning and containment.  They normally even have the kind of Software and certain customized Equipment, specific to your business that can save you thousands of dollars, compared to researching, designing and buying such equipment and services on your own.  If you do not need that kind of support, then maybe franchising is not for you.

Not all Franchise Companies are created equally.  Some profess to have great training and ongoing support, when in fact they do not.  In Food, some require the Franchisee to order specific brands and ingredients, which may be far higher than the norm.

(In some cases of that kind, the Franchise Company gets a percentage of the purchases you make, from the Manufacturer or Distributor; that’s one of the reasons your Food Costs can be so high.  The same can be said for your Furniture, Fixtures and Equipment – known collectively as FF&E. The Franchise Company may demand specific equipment that is the Rolls Royce of such equipment, when you only need a Hyundai to get you where you want to go.  And the demand may be because the Franchise Company, again gets a slice of your pie.)

Many Franchises would seem to offer innovative products and services that would appear to offer incredible earning opportunities for the Franchisee, but those earnings never seem to bear fruit.  And to be fair, sometimes the failures are the fault of the Franchisee.  The Franchisee can take a great idea and screw it up, if he/she thinks you do not have to do anything at all, in order to make it successful.  Or, the Franchisee can decide he/she knows more than the Franchisor, and ignore the Franchise proven practices, thus destroying some of the very real advantages the concept offers.  The fact that is it a Franchise does not guarantee success.  Just as with any other business, you need to critically analyze the Business Plan offered by the Franchisor, and then adapt your own to the local area you plan to serve.  Even McDonald’s has had periodic failures, due to location.

A lot of what you pay for, as a Franchisee, is the BRAND.  Brands like McDonald’s are worth an incredible amount, to a new Franchisee.  Compare the opening of a McDonald’s, where kids start screaming at their parents for a Happy Meal immediately upon seeing the Golden Arches from at least a block away, to something (as an example, we will call) Buford’s Burgers, with a poster-board sign, (because Buford did not understand how long it takes to order and install electric signage,) in the window of a small shop at the back corner of some shopping center – and those same kids are too young to read.  Make a difference?

Brands can hurt, as well.  We know of one Franchise that suffered a scandal in one area of the Country, and it hurt all of the remaining Franchises, as a result.  The Law requires full disclosure of any legal action against a Franchise Company, and it is found in the publication the Franchisor is required by Law to provide you, in advance of any discussions you have with them.  READ THAT CAREFULLY!

And read not only that part of the disclosure, but all of it.  Know what you are agreeing to.

There is one, very successful Franchise Company that does not really sell one (1) unit.  When you sign up, you are contractually agreeing to develop one (1) location, then another three (3) over the next five (5) years.  One person we know bought into that Franchise in 2007; he could not get funding for additional locations when the recession hit and had to forfeit his Franchise to the parent Company, for defaulting on his expansion requirements.  Another chose poor locations, which then did not do well; she also had to close shop then the poor performance of the two (2) original locations did not allow her to launch the required third, which was to be located in an area that may have actually saved the others.

In another, extremely prominent and successful Franchise, the Franchisees’ territory protection was threatened by the demands of the parent Company, and eventually led to costly damages to the Franchisees.

The Franchisor decided that a cooperative venture with another organization was a great idea, and the new venture operations would be located within a number of current Franchise territories.  The affected Franchisees were told they HAD to open these new locations, or the Franchisor had the right to put someone else in place, legally destroying the territorial protection – not only in those specific locations, but completely.  The Franchisees felt they had no choice, despite attempts in court.

The problem is that the expansion was a terrible idea!  The Franchisees knew that, going into it.  But the Franchisor insisted…then four (4) years later said, “Maybe that was not such a great concept…”  But it was not the Franchisor that lost its shirt; it was the Franchisees that were coerced into the expansion that never should have been!

The moral of that story is that you need to retain an Attorney that specializes in Franchise Law, BEFORE you sign anything!  Franchisors literally have teams of Attorneys on their side.  You need at least one.  You may not be able to change the Franchise Agreement, but you at least need to know exactly what you are signing.

The Franchise Company does not have all of the offers, and is not infallible.  We know of several Franchising Companies, and one, superlative Franchisor that bought Franchises back from their Franchisees, when the Franchisees decided to retire and voluntarily sell.  In these cases, the Franchisor bought the operations back because they were particularly profitable, and the Franchise Company felt it could run the sites itself, getting far more than the 6% it had been receiving from the Franchisee, in return.

“Crash and burn”, is the best way to define the Franchise Companies management of these terrific sites.  It was so bad, they could not even re-sell the locations to another Franchisee, in order to salvage them.  They had to drag the previous Franchisee back from retirement, sell these locations back to his at a radical discount, and give him the opportunity to turn them around and then, finally sell them to another Franchisee.  The work ethic of the individual location Owner is sometimes just as important as the Brand, itself.

Moreover, in many Franchise Companies, new innovations and improvements in service are derived not by the Corporate or Franchisor Offices, but by individual Franchisee, themselves.  That does not mean the value of the Franchisor is diminished; the Franchise Company can serve as a critical link to other Franchisees, telling them of these improved methods of operation.  Or, helping the Franchisee in improving such operational techniques and perfecting new methodologies.

Finally, there are some Franchises that are simply, terrible!  There are some we refuse to list or recommend.  Invariably, these are companies where the Franchisee is never going to build any value that he/she can later sell for much of a profit.  The Franchise, in these cases, legally demands that the vast majority of the re-sale value belongs to it, and at the time of sale, the Franchisee finds that he/she is turning over the majority of the sales proceeds to the parent Company.  In buying that kind of operations, all the prospective Franchisee can hope for is to spend a lot of money in buying him/herself a job.  Nothing more.

Our perspective is that, if you took the risk going into the deal and put your own sweat and blood into the operation, you should damn well get the lion’s share of the benefit coming out of it!  Otherwise, why bother?

So again, is franchising a good thing?  Generally, we believe in franchising.  But it really depends on a lot of variables.  It can provide you with a proven product or service which CAN, but does not necessarily guarantee a much better chance for success.  The Franchise can offer training, support, advertising, branding, product/service enhancements over time…lots of advantages.

But some disadvantages also exist.  Research, research, research – that is the only way to either validate such an opportunity, or determine it does not meet your fundamental need.

The real question for each individual is whether the cost is worth the benefit.  Those of you who have read our other blogs know:  This comes back to the Business Plan!!!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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4 Comments
  1. george meade permalink

    I am thinking of opening an education franchise. I have been researching different companies. I had narrowed down my search to Kumon Math & Reading centers, EyeLevel centers and JEI Learning centers. Then I read about the child abuse, child sex scandals, child molestation cases at franchisee centers of Kumon Math & Reading. I don’t know if the others too have similar franchisee sex scandals going on. I do not want to associate myself with a company like Kumon that is in childrens’ education but actually victimized innocent children. What would you advise?

    Like

    • George, I am traveling now and would have difficulty giving you an immediate, detailed answer. I will reply to you privately, via your email address.

      Like

    • The problem with Kumon Math & Reading is that sex scandals have been perpetrated by the Kumon family themselves. So who can blame many of the franchisees for sex crimes?

      http://archives.starbulletin.com/2004/09/17/news/story2.html

      When my sister first opened a Kumon center in Atlanta the son of the founder of the Kumon Math & Reading company was involved in a major sex scandal with a franchisee Debra Tajiri, who owned two Kumon Math & Reading centers in Manoa and Kailua. She later claimed that Hiroshi Kumon had ruined her life after they had an affair and began asking him for money over a 21-month period beginning in March 2002. An employee of Debra Tajiri, the Kumon franchisee, later allegedly extorted $150,000 from a son of the founder of the Kumon learning method in exchange for 2,000 “compromising” photos. Debra Tajiri and one Sean Yonehiro, whom she hired to work in her centers as an assistant, were later arrested and faced a charge of sending international extortion communications which is punishable by up to 20 years in prison. Both were arrested after Yonehiro met with an FBI agent posing as Kumon’s attorney at Ala Moana Park and took from him a bag containing what he believed to be $150,000. At the time of the affair, Hiroshi Kumon was Director of Kumon Institute of Education in Japan, the parent company of Kumon North America, one of five regional headquarters worldwide responsible for operations in Canada, the United States and Mexico.

      An individual who went by the name “Max Lee” and who had been e-mailing Hiroshi Kumon while he was in Japan threatening to release compromising photos of Hiroshi Kumon if he didn’t pay for them. The complaint does not describe the photos but does say that Lee threatened to release the photos if Kumon also did not send more pornographic pictures of himself. More than five years after their affair, Debra Tajiri (the Kumon franchisee) allegedly began e-mailing Hiroshi Kumon asking for $500,000 to remodel her house, the complaint said. In those e-mails, she allegedly told Kumon that “you have taken a lifestyle from me,” and that she was considering filing a lawsuit. She also accused him of infecting her with a venereal disease and said that he should pay for her medical treatment. Kumon allegedly paid her more than $350,000. Later Debra Tajiri, the Kumon franchisee, allegedly continued asking Kumon for money, saying electricity at her home was shut off and that she could not pay contractors to finish work on her home. Debra Tajiri, the Kumon franchisee, e-mailed Hiroshi Kumon again, saying she needed $550,000 to secure a building contract. When he didn’t respond, she e-mailed him saying her life was “hell” and was over, and asking him why he had not sent money. Investigators learned that the e-mails sent by “Max Lee” came from an account belonging to Debra Tajiri and from her Nipo Street home.

      One of three vehicles spotted at Kumon franchisee Debra Tajiri’s residence was a white Ford pickup truck that was later seen at the Hawaii State Library — the first meeting Lee allegedly requested for Kumon’s representative to bring the money. A man was seen walking around the library on that day before leaving in the white truck registered to Yonehiro, who lists a Nipo Street address as his residence.

      Like

      • Wow! There is a lot going on here. There are a couple of ways to look at this, but first and foremost, I’m uncertain I understand your one comment where you stated: “So who can blame many of the franchisees for sex crimes?” The issue here would tear to the that neither the Kumon family nor the Corporate entity appeared to have been officially implicated in any of the scandal. Moreover, thus far the facts seem to suggest that all of the sexual implications were outside of the business, other than the fact that the two consenting adults involved in the scandal, were also involved in the business. But no children appear to have been affected or otherwise involved in the scandalous actions. The sole family member, Hiroshi Kumon, is no longer with the Company, so that there should be no lingering implications as to the continuing threat to any business interests, employees or clients.

        That is the good news, if you are a current franchisee or thinking of purchasing a Kumon franchise. The bad news is that many people (and specifically, perspective clients,) will not read through the details of the investigation and jump to the conclusion that child molestation may have occurred. This could have a terribly negative affect on each and every franchise involved, particularly if there is any long and dragged out investigation and the media keeps up high profile coverage. And frankly, that has more to do with the fact that one of the parties involved has the same last name as your franchise, so the association is inescapable. My feeling is that if you currently have such a franchise, I would not panic and hope that the goodwill that you have generated in your own community will carry you through. But frankly, if I were contemplating the purchase of a new franchise, I would probably walk away from it, at this point. If the business itself is such a terrific model, I would probably monitor the situation and take a look at what damage might have been done by the media over the next year, and then reconsider whether it would be a good time to buy, hopefully after the dust settles a little bit.

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