How do you invest in a franchise successfully? The Franchise King, Joel Libava, has an excellent post with a Powerful 10-Step Checklist to Use Before you Buy the Franchise of Your Dreams. I love posts like the one Joel has written. His post has honest, straight-forward advice every person investing in a franchise should follow. The problem? So many investing in a franchise fail to do it.

The biggest piece of advice Joel touches on is “you have got to do the work.” Not only up front in your research but also as you move forward in the business. You would not believe how many times I have talked with people that essentially believe the franchise is going to do it all for you. Just know when you are investing in a franchise, the success of the operation falls squarely on your individual shoulders. No franchise can do it all for you. If it is to be, it is definitely up to you!

Another suggestion from Joel is to have 6 to 12 months of capital built up to survive during the start-up and lean times. You will have considerable expense in starting your franchise. But you need more than just the initial investment in order to be successful. The number one reason I see business people fail with franchises is that they are undercapitalized. The person may have just enough money to get in business, but do not have the funds for the long haul. Don’t be one of those people. Make sure you have enough capital to last through an initial ramp up period of several months.

Finally, Joel suggests seeing a franchise attorney. He suggests this EVEN IF there is no possibility the franchisor will negotiate the franchise agreement. Why?

So you have a complete understanding of the terms of the agreement, including what the franchisor is responsible for and what you are-as a franchisee. Plus, do you really want to pour over pages and pages of legal terms, some of which only a lawyer can understand?

In practice I have found that even those clients who could not negotiate their franchise agreement benefited from a review. It gave them a far better understanding of the business issues, and potential pain points. It also opened their minds to aspects of the business they had not considered previously. Plus, you are able to establish a relationship with an advisor who can likely help you on other aspects of the business such as forming a corporation or LLC, reviewing your lease, and help you draft employment policies and procedures.

Joel is one of the best in the franchise business. I highly recommend reading his post and reviewing his site. He has lots of good franchise investment advice and helpful tips.

2020 has been tough. And with the pandemic continuing, unfortunately it does not appear the challenges will end for franchise businesses any time soon. Governors around the country, including Iowa, are issuing new shutdown orders. What are key considerations for franchises as 2020 closes and we head into the new year:

  • Leadership. A couple of blog posts ago I talked about a franchisor that actually told its franchises that they were “on their own.” Franchisors need to show empathetic and encouraging leadership in the face of challenging times. A failure to exercise effective leadership will result in more franchisee closings, lost earnings, and upset franchisees. Franchisors and franchisees should continue to discuss best practices in order to improve and keep business profitable.
  • Keep Franchises Financially Viable. We know shutdowns mean decreased revenues for many franchises. Franchises must adapt in order for the business to remain viable as the rules change. As an example a primarily sit-down franchise restaurant may begin to emphasize take-out and delivery. Perhaps even a drive-thru, if possible, is now necessary to maintain a viable business. A business that routinely relies upon face-to-face meetings with clients and customers may need to find new ways to attract these customers to Zoom meetings or other methods.
  • Provide Relief to Franchisees. Franchisors may need to consider reduced ongoing fees and royalties in the short term in order to maintain the franchise long term. This may be difficult for franchises without significant cash reserves but giving some relief could go a long way toward keeping franchisees happy and operating.
  • Communication. Franchisors and franchisees need to improve communication during this tough period. Would you believe I have represented franchisees whose franchisors have not spoken to them once during the pandemic? Not a single email, phone call, or text. This is unacceptable. A lack of guidance and assurance from the franchisor will only give rise to feelings of isolation from and discontent toward a franchisor. Franchisors should have a carefully crafted plan to communicate with its franchisees during this difficult time period.
  • Messaging to Customers. Customers want to feel safe during the pandemic. There should be clear messaging that the franchise is operating within the health guidelines. This messaging requires coordination between the franchisor and franchisee. Effective messaging is critical to maintaining customer relationships that will not only survive the pandemic, but continue for years to come .

Set yourself up for better success during the pandemic by following these key considerations. If you need assistance during this difficult time period, whether you are a franchisor or franchisee, please take the initiative to contact us.

Multiple unit franchising has the most risk but offers the most reward. In my experience, owning multiple franchise units allows you to harness the true power of franchising. The franchisees I see who are the most successful are all multi-unit owners. Substantial investment is required in order to purchase multiple units and should not be considered unless you have sufficient capital. But owning one franchise unit of system is unlikely to ever make you wealthy and often just results in buying yourself a job. So having the ability to scale your operations is critical if you hope to move past a single unit operation.

Scaling your operations is not easy though. And if you haven’t done it, it is best to find mentors and examples of business people that have been able to scale operations. I recently found an interesting example about a Jimmy John’s franchisee who scaled his operations to 59 locations. Most of the article focused on how the franchisee led and motivated employees. The former teacher has over a thousand employees!

There are also a few other things that stood out to me from the article about this franchisee:

  1. Follow the franchisor’s example. As the franchisee explained, he followed the franchisor’s example to become more successful. He created a Love, Hugs and Smiles position in his organization. This happened to be a long-time employee who had held almost every position in the organization. But the main role of this employee now is that he provides positive reinforcement to employees. This wasn’t a creation of the franchisee though. He readily admits that the Jimmy John’s franchise founder created the role and he just followed his successful lead.
  2. Create a transparent organization. The franchisee meets routinely each month with all his managers and most of his assistant managers. They discuss results, go over policy changes, any other changes that may be upcoming and any issues coming up with the franchisor. The managers are also encouraged to discuss how their doing, how their operating the business, and the struggles they are facing. Talking with the other managers enables the organization to challenge and support one another, and also learn from one another.
  3. Have an abundance attitude, not scarcity. One of the unique perspectives is that the franchisee actually believes that the more he pays to the franchisor, the more the business will take care of him. All too often, franchisees look at franchise fees in a negative way. It’s rare that a franchisee that approaches paying fees in a positive manner or looking at those fees as an investment. The franchisee also sets aside 25% of store profits for bonuses to managers if they meet their goals with food, labor and a couple of other key metrics. And there is no cap on bonuses! This insures that managers are aligned with the business to make it as successful as possible.

I encourage you to read the article to find some tips on how you can successfully scale your franchise operations.

 

This past week I had the opportunity to participate in the 43rd Annual Franchise Forum. As only one of two Iowa lawyers participating in this year’s Forum, it was an all virtual event for the first time in its history. The Forum is essentially the franchise lawyer bar association meeting. Every time I participate I love hearing the insights from other franchise lawyers across the country.

Again this year, I was reminded of the stark contrast and perspectives between predominantly franchisor lawyers and their predominantly franchisee counterparts. I practice in both segments quite often so I feel as though my ingrained biases don’t run quite as deep. And while my practice involves substantial work for franchisors these days, it did not take me long at this year’s forum to understand why franchisees and their lawyers become frustrated.

One franchisee lawyer shared his views on franchising during the pandemic. In his experience many franchisors have been willing to help franchisees by making certain concessions and providing some royalty and other relief. However, he also said that he had experienced a franchisor who simply told its franchisees, “you’re on your own!”

Imagine yourself as a franchisee in a franchise system that tells you you are on your own. That’s cannot be a good feeling. Most franchisees I know set out to buy a franchise because they are looking for a proven system, guidance and support when times get tough, and hopefully a business model that can stand the test of time. But it is a great lesson that I have talked about many times on this blog. Franchises are not all the same. There are good franchises and bad franchises. The key is to do your homework BEFORE you make the investment. Don’t assume a franchisor has a wonderful franchise system and business model just because it appears on certain lists and runs lots of advertisements. Dive deep into research. Conduct extensive interviews of the executives on your own. And interview franchisees.

I recently reached out to a franchise business on my own accord to see if it was a business I might want to purchase. It was a great exercise to go through the process myself. In the initial conversations the franchisor told a compelling story. However, as I continued my research, those initial positive thoughts began to diminish and I determined that it was not in my best interest to move forward as I learned more about the franchise system. It is OK not to move forward with a business opportunity. When you are investing your life savings  you better make sure it is the right opportunity for you. Franchise businesses do fail. Profits are not guaranteed. Set yourself up for a better chance of success by choosing a franchise that won’t tell you that “you are on your own.”

 

 

There are no little things.

Corporations and limited liability companies in the State of Iowa are required to appoint a registered agent and office within Iowa to receive service of process. We are able serve as your business entity’s Iowa designee to accept official documents on your behalf such as original notices for lawsuits and communications from various Iowa state agencies. If your business is a corporation or LLC, we also provide services to file your biennial report with the Iowa Secretary of State office.

You may see other organizations and businesses on the Internet that provide registered agent services. Many of those organizations are unable to provide you with legal advice and may not fully understand the implications of Iowa law. Our law firm is located in the State of Iowa and we provide these registered agent services for companies and franchises in the State of Iowa.

You can also serve as your own registered agent if you are an Iowa resident, but we have found that individuals often do not understand the consequences of a failure to respond within the applicable deadlines set forth in lawsuits and other communications served. It is best practice to have an attorney serve as the registered agent so that a professional familiar with responding to lawsuits and other communications has the opportunity to review such documents immediately rather than waiting until the 11th hour or until it is too late.

It is a small investment to protect your business. Amazingly, the registered agent is one of the  “little things” often overlooked by business people. A small fee for a business can prevent a huge headache. The lack of attention to filings and other important communications can have disastrous consequences for a business or franchise including a default judgment where monetary damages are entered against your company without the opportunity to defend a lawsuit filed against you. Unfortunately, I have seen it too many times to count.

So if you need a registered agent in Iowa, we can help.

 

Recently I reviewed a franchise offering for a prospective franchisee. This particular franchise made financial performance representations in Item 19 of the Franchise Disclosure Document (FDD). The financial performance representations revealed some impressive numbers at first glance. After all, the highest performing franchisee was earning in excess of million dollars per year. And the “average” franchisee revenue was nearly $700,000 per year. The problem? Only three franchisees in the system were earning the average revenue or greater. The rest of the franchisees were below the average revenue amount and the lowest had revenue of just over $100,000. The disparity between the franchisee earning the most and the franchisee earning the least was over $1 million per year. It was clear the top performing franchisees were propping up the revenue figures for the franchise system.

I much prefer franchises that deliver consistent success. While all franchise systems will generally have high performers and low performers, consistency of financial performance across all franchisees is a major factor in determining whether a new franchisee will have success. All too often I review franchise systems where far MORE than 50% of the franchisees are BELOW the average sales in the franchise. This means a small number of high performers skew the results and make the franchise system appear more successful. I know everyone wants to believe they are the best. But for purposes of reviewing FDD financial information, I suggest you concentrate on the averages. And not just average revenue itself. If the information is available in Item 19, concentrate on the number of franchisees that are hitting the average revenue. A low number of franchisees hitting the average is indicative of a franchise that is not delivering consistent results to franchisees.

The best franchises will deliver consistent results across the board. If you want to own your own business and dream big, I say more power to you. But don’t let those dreams color your expectations. Franchise businesses do fail. Profits are not guaranteed. Set yourself up for a better chance of success by choosing a franchise that is a consistent winner.

As a lawyer representing both franchisors and franchisees I have somewhat of an unique perspective on franchisor / franchisee relationships. Most franchise lawyers tend to represent one side or the other. But it is somewhat rare for a franchise lawyer to represent both sides. I have spent over two decades now reviewing franchise agreements. I started out representing primarily franchisees, but as my law practice evolved, I turned to representing franchisors in developing their franchise systems. I have always believed that franchisors need to care more about their franchisees.  Franchisors often need to do more than just get their franchisees in business. All too often I have seen franchisors fail to support and guide franchisees. Instead, many franchisors look to the franchisee as a revenue source and not much more.

A couple of instances lately have done nothing to change my mind and prompted me to write this blog post. First, I reviewed a franchise agreement that was not just one-sided, but could only be described as incredibly restrictive against the franchisee. If there was ever a protection created for a franchisor over a franchisee, this franchise agreement seemed to have it. From a franchisor legal perspective, it was no doubt written by an experienced franchisor lawyer who had painstakingly taken the time to protect the client in almost every respect. But from a practical perspective, the franchise agreement could spell doom for a potential franchisee and signaled to me a hardened approach that did not bode well for a franchisee.

The next instance involved my discussion with a new franchisor. He told me his story of how he actually started in business as a franchisee. He explained to me how his former franchisor “sold him a bill of goods” and had failed to support him in any way after starting his business. And to make matters worse the franchisor made no concessions to allow him to stay in business when the economy turned poor in 2008. So his vow is to create his own franchise system that will use “almost the exact opposite approach” of his former franchisor.

Does it have to be this way? Do franchisors need these overwhelmingly restrictive franchise agreements? Do franchisors have some obligation to support their franchisees and help them through the bad times? A couple of my new franchisor clients say their sole focus is developing franchise brands that are franchisee-centered businesses. As one new franchisor describes, “my financial success will come if my franchisees are successful.” And while that seems like a simply thought most franchisors should have, I can tell you in experience that is not a common mindset. Many franchisors from what I can tell do not really care all that much about franchisees. What they care most about is receiving a fee. They care about protecting themselves against defaulting franchisees. And they care about their own interests often to the detriment of franchisees.

What I am NOT suggesting is that franchisors should put franchisees first. Of course franchisors need to protect their businesses and systems. Of course franchisors should be concerned about their own profitability. What I am suggesting is that franchisors take a franchisee-centered approach. What does a franchisee-centered approach entail? To me, it means having empathy for franchisees. It means practicing attentiveness to franchisees’ questions and issues. It means communicating regularly with franchisees (which remarkably does not occur with many franchisors). It means developing effortless experiences with franchisees in terms of ease of doing business, training, and helping franchisees innovate their businesses. And finally, it means adding value for franchisees so you have created franchisees for life.

For many franchisors this may require a shift in mindset. A mindset that is not so rigid like your typical franchise agreement along with system rules, but instead that is more of a growth mindset where there is an emphasis on learning what works and does not work. And may require franchisors to listen much more to franchisees in order to improve in the future. Those are the types of franchisors I want to work with and I think it is the type of franchisor most franchisees want to associate with as well. And in the end, it is my strong belief that Franchisors who can take this franchisee-centered approach will set themselves apart to dominate the competition.

I recently formed a corporation and within a short time I received a flyer in the mail from a company operating as IA Certificate Service. The flyer (see a similar one from a Mississippi article) explained that the next step for me after filing my Articles of Incorporation was to obtain my Certificate of Existence (the fine print did state this was optional but the language of the flyer would lead most unsuspecting new company owners to believe they needed to obtain it right away and contained a response date). The charge for this service was $67.50 and the “service” would send your hard copy certificate to you within two weeks.

Just know that obtaining a Certificate of Existence could not be easier and it only costs $5.00 to immediately download your Certificate of Service. Each company information page on the Iowa Secretary of State’s website contains a link to Print the Certificate of Existence. It is so easy I frankly would never consider charging a client a fee for the service.

Further, Certificate of Existence forms are not generally not needed unless and until requested from a third party. Examples of times you may need a Certificate of Existence include:

  • Registering your business in a different state;
  • Selling your business;
  • Obtaining a loan;
  • Registered with certain agencies.

Also  know that a Certificate of Existence is usually only good for a certain period of time with third parties. So, obtaining a Certificate of Existence, without a request from a third party to do so, usually isn’t going to do you any good because the Certificate of Existence time period would probably have expired if you are using a “service” like the one I described.

Bottom line, skip the “service”. You don’t need to pay the additional money for the Certificate of Existence. Simply download it yourself for $5.00 from the Iowa Secretary of State’s website if a third party ever requests it from you. Search the database for your Company’s name and then print the Certificate of Service from the link.

This is the final post in a series of posts on the Secret Sauce of Franchise Investing based upon an excellent article I read some time ago on what private equity likes to see before investing in a franchise. In this post I am highlighting the eighth ingredient which is whether the franchise has a runway for future growth.

Franchise investors will want to see whether there are enough open territories for expansion. Often, you will see a franchise that is concentrated in a certain region of the country. This may mean there is plenty of opportunity for the franchise to expand to different regions of the country. It is important though to identify the stage in which the franchise is in their expansion. Sometimes a concept only has appeal in that territory. For example, maybe a restaurant has appeal in the South but not necessarily in the Midwest. If you find a concept that has more universal appeal across geographies (discussed in a prior post in the series), then you can potentially hit a home run.

I have found it best not to chase business opportunities, whether franchise or otherwise. Don’t get into a hurry and make sure you are getting a reasonable deal. There are lots of times I have seen franchise concepts become hot and then the price goes through the roof for a territory. Often, the unit economics (discussed in a prior post in the series) no longer hold water because the investment buy-in has become too expensive for profitability.

I hope you find the series of posts on franchise investing informative. Please be sure to let me know if you have any questions if you intend to start or invest in a franchise.

I am blogging a series of posts on the Secret Sauce of Franchise Investing based upon an excellent article I read some time ago on what private equity likes to see before investing in a franchise. In this post I am highlighting the seventh ingredient which is whether the franchise has successful franchisees.

Good franchisors want franchisees to be successful and happy. But let me tell you from experience in practicing franchising law for over 20 years, not all franchisors are created equal. There are numerous franchisors with unhappy and struggling franchisees. Do not make the mistake in investing in such a franchise. Do your due diligence and interview franchisees before you invest your hard earned savings. If franchisees tell you the franchisor does not support them, or if franchisees wouldn’t do it all over again, rule out that franchisor. Because things are not likely to be different for you.

Franchisors need to do everything they can to make sure franchisees are successful. Much like having raving customers, franchisors need raving franchisees. Often it is a good sign when a franchise has many multi-unit franchisees. This suggests that franchisees were happy and impressed enough with their investment that they wanted to open additional locations. A franchise system with successful and happy franchisees is much more likely to be primed for growth and an ability to attract other franchisees to the system.

Always check online to see if you find numerous complaints about a franchise online in Google searches or on websites such as Unhappy Franchisee. If you see lots of complaints or indications of frequent litigation, you should strongly consider investing your savings in a different option.