Hotel Franchises

This is an article from the Wall Street Journal on the current hotel market. If you want to franchise your company go to www.francorp.com.

Room to Rise? In Hotels, Operators Have an Edge Over Owners
By ALEX FRANGOSApril 30, 2008; Page C1
http://online.wsj.com/article/SB120950200271853909.html?mod=djkeyword
Heading into an economic downturn, hotels are often among the first industries to suffer as travel slows and room rates weaken. And now, vacancies are on the rise just as the fruit of a hotel-construction boom is set to add a quarter of a million new rooms to the U.S. supply over the next 24 months.
For investors trying to determine which hotel companies are best positioned to ride out a downturn, economic and construction data don't tell the whole story. The industry has evolved over the past decade into two groups. One is composed of companies that manage and operate hotels, such as InterContinental Hotels Group PLC, Starwood Hotels & Resorts Worldwide Inc., and Wyndham Hotels & Resorts LLC, a unit of Wyndham Worldwide Corp. The other group is composed of real-estate investment trusts that build, buy and own hotel properties; most REITs aren't household names.
"The companies that historically are less real-estate-intensive have generally performed better during a recession," says J.P. Morgan Chase & Co. analyst C. Patrick Scholes. That is partly because hotel operators have lower leverage and higher margins. Moving forward, some operators may even profit from the impending oversupply of hotel rooms by garnering management fees from the larger number of rooms. Operators also have broader exposure to international markets.
InterContinental, which besides its namesake owns brands such as Holiday Inn and Crowne Plaza, is signing up two new hotels a day that will in the future carry its brand. It is the largest hotel company by rooms, with 585,000 under its brands. Much of the growth will come in India and China.
Leslie McGibbon, senior vice president at InterContinental, says the United Kingdom company takes a 5% to 6% franchise fee on room revenue, before the local owner has to pay for expenses such as maid service, laundry and electricity. "As long as you can add the amount of rooms, even if overall revenues don't increase, you still grow," he says. In return for the fees, hotel owners get the benefit of the operators' brand recognition, reservation systems, advertising and marketing spending.
Many investors aren't convinced and are punishing both sides of the business. As of Monday, the total return for the 12 hotel REITs tracked by SNL Financial, a financial-research firm, was down 28% compared with a year ago. During the same period, an index of hotel-operating companies, such as Marriott International Inc. and Starwood, is down 15%. Both sectors are hovering around break-even this year.
A few savvy investors are starting to pick over the industry and have decided the biggest operators are good buys. In February, an investment arm of real-estate magnate Sam Zell said it scooped up nearly 8% of Starwood's shares. At a real-estate conference earlier this month, Mr. Zell explained his play: "Cheap is cheap, and I tend to get very motivated by cheap."
Lodging analyst Smedes Rose at Keefe, Bruyette & Woods Inc. sees opportunities for longer-term investors in real-estate-light operators such as Marriott and Starwood. He estimates Marriott, for instance, is trading at 17 times its expected earnings per share this year. It traded as high as 30 times a year ago and on average trades 21 times. (The firm expects to do investment-banking business with several hotel companies.)
The split in the hotel industry between owners and managers dates to the decision in 1993 by Marriott to spin off its debt-laden real-estate assets into what is now Host Hotels. Nearly all other publicly traded hotel companies have followed suit. InterContinental went from owning 230 properties in 2003 to owning 18 today. Starwood, which operates hotels under the Westin, Sheraton and W brands, owns 74 of its 900 hotels. It sold 51 in 2006 and 2007 for $4.6 billion.
Model Business?
The hotel operators praise their low-leverage business model that relies on charging management or franchise fees based on top-line revenue of a given hotel. "We generate our revenues off the top line of the hotel as opposed to taking something off the bottom line," says Stephen Holmes, chief executive of Wyndham, which typically takes as much as 8% of a hotel's revenue in a franchise agreement, even if a hotel itself fails to turn a profit.
The owners of the hotels, meanwhile, carry the burden of paying for staff, energy costs and other expenses. And as owners, they are responsible for capital-intensive outlays such as development costs and renovations. Sheraton, for instance, announced a $4 billion makeover and building plan -- funded by its owners. InterContinental's Holiday Inn brand launched a $1 billion plan to rejuvenate its musty reputation. The hotel owners will carry the weight.
Indeed, DiamondRock Hospitality Co., a Bethesda, Md., hotel REIT, lowered its revenue outlook for the year Tuesday, saying in a statement that "room demand in several of our key markets will be lower than our initial expectations."
'Far Better Shape'
The hotel REITs don't subscribe to the notion that they are worse off, especially compared with past economic cycles.
"We are in far better shape as an industry than in the prior cycle," says Jon Bortz, chief executive of LaSalle Hotels, a hotel REIT that owns hotels in urban downtowns and resorts. Several weaker players were taken out by private-equity firms. His company has learned to cut costs faster in the downturn. And LaSalle's properties, in markets with high barriers to entry such as New York and San Francisco, will benefit in an upturn thanks to limited new competition.
Problem Potential
Still, REITs have more potential for problems during a downturn because of their structure, which requires them by law to pay out most of their profit as dividends. "Operators have less volatile cash flow than the owners do," says John Arabia, a hotel analyst for Green Street Advisors Inc., a Newport Beach, Calif. research and trading house.
That makes it difficult, especially for debt-heavy REITs. In the last downturn, in 2001, most lodging REITs were forced to cut their dividends. Some put off critical hotel renovations that depressed business when the turnaround started. Several hotel REITs that didn't exist during the last recession have high debt loads. Ashford Hospitality Trust Inc., for instance, has a long-term debt to total market capitalization ratio of 72%, according to BMO Capital. The more-experienced hotel REITs carry lower debt ratios. Host is at 37%; LaSalle at 36%.
Perhaps the biggest edge that operating companies have over owners is that they can more easily expand their exposure to foreign markets. Starwood derives around 40% of its fee revenue abroad. Marriott gains around 20% abroad and it was a big part of its profit in the first quarter.
The REITs, because their tax structure is unique to the U.S., tend to stay homebound. That is starting to change, but slowly. Host Hotels has a joint venture in Europe and announced it will enter a Singapore-based joint venture to invest in up to $2 billion worth of hotels in Asia.
--Tamara Audi contributed to this article.
Write to Alex Frangos at alex.frangos@wsj.com

Service Franchises

This article explains more about a new and coming franchise company in the franchise industry. If you want to franchise your business go to www.francorp.com.

Irving franchisor brings assisted living to small towns
07:19 AM CDT on Wednesday, April 30, 2008
By BOB MOOS / The Dallas Morning News bmoos@dallasnews.com
http://www.dallasnews.com/sharedcontent/dws/bus/stories/043008dnbuscountryplace.3b91280.html

What McDonald's legend Ray Kroc once did for burgers and fries, Dallas-area entrepreneur Jack West hopes to do for retirement living.
Franchising has been used to sell everything from fast food to maid service to child care. Now Mr. West's company, Country Place Living, is using it to help bring assisted-living centers to small-town America.
"If you've lived in the same town all your life, you shouldn't have to leave it for the big city when you can't care for yourself anymore," he said. "You should be able to grow old with your family and friends nearby."

Elizabeth M. Claffey/Special Contributor Jack West, founder of Country Place Living, has five assisted-living centers and two group homes in small Kansas towns.
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Mr. West founded the company five years ago and has opened five assisted-living centers and two group homes in small Kansas towns.
The privately held company has relocated its main office to Irving and set its sights on expanding in Texas and other states.
Country Place will build a number of assisted-living centers on its own in North Texas and elsewhere to "prime the pump" and introduce the brand, but most of its expansion will be through franchises.
Since its franchising push started early this year, Country Place Living has received four applications from Texas.
The prospective franchisees include a developer, a former nursing home administrator, a homebuilder and a physician.
Though the aging population has spawned hundreds of franchises that provide in-home care, Mr. West's Country Place communities will be among the first franchises to cater to seniors moving out of their houses.
"It's a logical next step in franchising, given the expected doubling of the older population over the next 25 years," said Alisa Harrison, an executive with the International Franchise Association. "Mr. West is on to something."
Almost 1 million Americans live in more than 38,000 assisted-living communities, most in cities or their suburbs, according to the Assisted Living Federation of America.
Assisted-living residents get help with day-to-day tasks but don't require round-the-clock skilled nursing care.
Twenty-five years in the senior living business have taught Mr. West that older adults prefer homelike settings. So his company is franchising eight-bedroom group homes and 18-unit assisted-living apartments.
Small towns
Small towns tend to have older populations but often lack senior care facilities, which could be lucrative for companies like Country Place Living, said Paul Williams, the assisted-living federation's director of public policy.
"They'll fill a niche passed over by others," he said.
Mr. West said his company is seeking highly motivated, altruistic franchisees who want to make an investment in their communities.
Country Place Living's marketing pitch to prospects plays off that goal: "Do well while doing good."
Getting into the senior care business is not for the fainthearted, industry officials say.
"A group home is about more than providing room and board. It's about caring for residents as their health declines," said Robert Kramer, president of the National Investment Center for the Seniors Housing and Care Industry.
"This isn't just a real estate proposition," he said.
Buying a franchise will appeal to people who might hesitate to build a business from scratch, Mr. West said.
Country Place Living franchisees can turn to corporate staff for help with finding a building site, securing financing, overseeing construction, applying for a state license, training employees and promoting the residence, he said.
"Our franchisees will be expected to follow our already successful business practices," he said. "They won't be reinventing the wheel."
Corporate expertise
Before entering the senior living business, Mr. West owned a number of KFC franchises, where he learned the value of relying on the corporate headquarters' expertise when he had questions, he said.
"I didn't know the first thing about running a chicken restaurant when I started, but I always had the corporate team to support me," he said.
At Country Place Living, franchisees can expect to pay $37,500 upfront and 5 percent of gross receipts as a royalty fee.
An eight-bed group home requires an overall investment of $600,000 to $1 million.
An 18-apartment assisted-living center runs from $1.8 million to $2.3 million. Small-business loans can cover most of that.
Mr. West said a franchise would be a good fit for boomers looking to invest in something that will provide a steady income during retirement.
The company's first franchisees are Diane and Rob Floersch, a 40-something couple who intend to open a group home this fall in her hometown of Scandia, Kan.
The couple said they bought the franchise so families in Scandia can enjoy the same homelike care that Mr. Floersch's mother receives at one of Country Place Living's company-owned residences in another Kansas town.
"People in Scandia cried at the news that we're building a place for seniors," Mrs. Floersch said. "We already have a list of prospective residents."
To finance their investment, the Floersches applied for a low-interest loan through the county's economic development agency.
They will keep their current jobs – he's a grocer and she's an office manager – and hire a staff to operate their new business.
Mr. West hopes to dot the countryside with 200 to 300 Country Place Living residences within five years.
"It's the perfect time for something like this," he said. "Nursing homes have become outdated. People now prefer someplace where they can feel a sense of community. That's what we're creating."

Francorp Client - Auntie Anne's

AUNTIE ANNE'S® ROLLS OUT SEARCH FOR FAMILIES WHO
GIVE BACK
To Celebrate 20th Birthday, Pretzel Chain Offers 20
Families Grants for Giving Back to their Communities
LANCASTER, Pa. (January 29, 2008) - Auntie Anne's® Pretzels, best known for its freshly baked, hand-rolled soft pretzels, is looking for 20 families who give back and make their communities better places to live, and will reward them with grants of up to $20,000. The nationwide search kicks off on the company's official 20th birthday, Saturday, February 2, 2008.

In the Auntie Anne's What a Difference a Family Makes: A New Twist on Giving Back grant program, families who do community service work together can be nominated by themselves or another person for an opportunity to win grants that will help support their philanthropic activities. Whether it's cleaning up a neighborhood's park, volunteering at a senior citizen center or lending a helping hand at a local soup kitchen, any family who is passionate about giving back together is eligible.

"Today's families are busier than ever, but finding time to volunteer together can be a rewarding experience, and easier than many think," says family philanthropy expert Susan Crites Price, national media spokesperson for What a Difference a Family Makes: A New Twist on Giving Back and vice president of the National Center for Family Philanthropy. "Every community has opportunities for its members to give back, and families that do philanthropic work together often find that it can make a long-lasting impact, not only in the community, but also on their family bonds."

Beginning February 2, 2008, application forms are available on www.aTwistOnGivingBack.com. Entries will be judged on the basis of passionate dedication to giving back in their communities, as demonstrated by level of involvement (amount of time spent and years of service), overall community impact and strength of initiative (process of seeking giving back opportunity).

What a Difference a Family Makes: A New Twist on Giving Back nominations will be accepted through April 4, 2008. One grand prize family will receive a $20,000 grant and 19 additional finalists will each receive $2,000.

"Auntie Anne's was founded on the principle of giving back to families, and we want to recognize those families that are working hard to make the world a better place," says Auntie Anne's President and CEO Samuel R. Beiler. "We're excited to see what we know will be amazing examples of good work in communities all across America, and to contribute to expanding that work."

The 20 families chosen as grant recipients will also have an opportunity to share their stories and real-life examples to spread the giving to others by contributing to a "20 Ways to Give Back" e-book developed by Auntie Anne's. Other members of the public will also have a chance to contribute to the book at local events at Auntie Anne's stores around the country in February and March. The e-book will be available to the public in late May for download at www.aTwistOnGivingBack.com.

For a complete list of official rules for the What a Difference a Family Makes: A New Twist on Giving Back grant program, visit www.aTwistOnGivingBack.com.

About Auntie Anne's
Auntie Anne's, Inc. is a Pennsylvania-based franchisor that supports over 940 Auntie Anne's Pretzels locations worldwide. The concept mixes, twists and bakes pretzels to golden brown perfection in full view of customers. Auntie Anne's is committed to pretzel perfection by guaranteeing you will love its pretzels or they will replace it with one that you do.

Jimmy John's

Perseverance pays

By Mary Jo Larson
As published in: Franchise Times - May 2008

Perseverance is a word every entrepreneur—and teenager—should know.

Almost all parents have had the "talk" with their kids at some point or another. When son Ben, now a freshman in college, was in high school, one particular semester didn't go too well. I sat him down and had "the talk"—no, not that one, the one about grades, people—and I admit I was not very sympathetic of his plight. I was angry.
About five minutes after our discussion concluded, I was still a bit miffed. I
was sitting at the computer working, and 14-year-old Sam strolled in.
"Mom, I want to talk to you about next year," said the then-eighth grader. Do you think taking two advanced classes next year might be too much for me?"
Ah, timing is everything. Sam, in an effort to, mmm, suck up, decided to remind me he was going for advanced classes while his brother was taking a semester to goof off. (Yes, he eavesdrops.) His star would rise faster if his brother's was falling, wouldn't it? If not, perhaps he could give his brother's star a kick to speed up the process.
Being the younger sibling isn't always easy—I know, I'm the younger sibling. Ben has had years to experience things first, shine in plenty of ways in his
parents' eyes over the years, and sometimes ignore his younger brother's efforts to be noticed.
But, as I always do, I tell Sam there are plenty of ways to shine. It just takes a bit of perseverance.
And here's this month's link to franchising—indeed, there are many stories of
perseverance to be had in the world of franchising, with both franchisors and franchisees.


Take our cover story this month: Jimmy John Liautaud, the founder of Jimmy John's Gourmet Sandwiches, was just 19 years old when he opened his first store with a loan from dad. As FT Editor Nancy Weingartner reports, Liautaud's first two employees quit and left him to run the store by himself. He worked open to close, seven days a week for such a long time, he even knew which jokes to tell which customers. I guess that's when you see a person's character: how they react when the going gets tough.
But as smart entrepreneurs often do, Liautaud learned from his mistakes and fixed them—there's that persevere word again—because he was driven to succeed. Today, Liautaud has a successful franchise business with almost 700 locations and growing. There's much more to his story than that, so you'll want to read Nancy's account of Liautaud's rise to sandwich fame. He's an interesting character, with some wisdom to impart to the rest of us.
We also have the story of John Rotche, a former Domino's Pizza and Krispy Kreme exec turned Ductz franchisor. Where his days were once a bit more glamorous in a suit and tie working for a high-flying chain during its glory days, he soon found himself driving around with his brother-in-law in a van eating a fast-food hamburger out of a bag for lunch as they headed to their next duct-cleaning appointment. But he turned a not-so-glamorous service into a business that partnered with super companies such as Service Brands and garnered contracts to do post-Katrina clean up on government buildings. He has since sold the franchise to the U.S.'s largest restoration company, but is still in charge of growing the Ductz franchise. We could go on more about Rotche here, but we'd rather you read his full story, which includes other great details of working your way to the top. Perseverance.
My own, personal perseverance plays out in the pages this month with my coverage of Franchise Expo Paris—it was my goal to talk to as many people as I could over the four-day event so I could bring you the true flavor of the show. So it's not quite perseverance on the scale of Jimmy John Liautaud and John Rotche, but my feet did hurt by the end of each day.
Let that be a lesson to you, Sam: Your efforts at perseverance will be noticed—including those advanced classes. Hmmm. Now we'll be expecting you to persevere on logging in some "A"s.

Article on Franchising from New York Times, 1992

Here is an interesting article from the New York Times that quoted Francorp Consulting on the current economic climate of 1992 and how franchising was being affected.

All About/Franchising; Hamburgers or Home Decorating? Businesses That Sell
By VERONICA BYRD
Published: October 4, 1992

Though the harsh economic climate has battered many major corporations, franchisors, the companies that license their names and expertise to entrepreneurs eager for a lucrative piece of the American Dream, have as a group seen increasing gains in both ownership and sales.

In fact, part of that lift has come because of the recession, as companies cut back by dismissing workers with severance pay and offering sometimes-generous buyout plans. Many former executives, managers and employees have turned to buying franchises.

For an initial investment and yearly royalty payments, franchise buyers can often get training, business name recognition, start-up financing and even advertising help.

This weekend, more than 25,000 people curious about joining those ranks are expected at the American Franchise Association show at Nassau Coliseum in Uniondale, L.I. There, some 120 companies have set up booths to display their versions of how easy it can be to prosper as a franchisee.

But a darker side of the industry is emerging. Saying that they were misled by slick or unscrupulous companies, franchisees are increasingly calling for new Federal regulations. Many of these business owners say franchisors hype the potential for profits, pressure them to sign one-sided "take it or leave it" 50-page contracts and provide little help afterward if their operations run into trouble.

The International Franchise Association, a Washington-based trade group that represents more than 800 franchisors, dismisses such charges as the complaints of a small number of people who probably do not have what it takes to run a business. Starting Up The Industry Gains During Hard Times

The total number of franchises in the United States grew 4 percent, to 542,496 in 1991, from 521,215 in 1990, according to Francorp Inc., a franchise development and consulting firm. That is expected to rise nearly 15 percent in 1992, based on the rosy projections of a study this year by the I.F.A. John Reynolds, executive vice president of the association, acknowledged that in light of last year's meager rise, the expected increase "is very optimistic." He added, that "it doesn't mean that every single franchise will do this well."

Continued growth is expected in print shops, restaurants, retail shops and car servicing outlets. New kinds of franchises expected to surge include Kitchen Tune Up, a remodeling business, and United Coupon, a small-business coupon service. And businesses targeting the booming children's market, like USA Baby, a furniture store, and those aimed at older people, like Reading Glasses to Go, should also do well, consultants say.

"The franchise industry thrives during tough economic times," said Michael H. Baum, executive vice president of Francorp, which is based in Olympia Fields, Ill., outside Chicago. "When recessions hit, a lot of people who are out of work start their own businesses. They often don't have a lot of capital, and franchising is the best way to go into business without a lot of capital."

Some franchises, like a simple home decorating or commercial-cleaning operation, can be started for as little as $5,000, but the average investment, including equipment and other initial costs, is about $140,000. And the privilege of owning a top established restaurant or hotel can cost $1 million or more.

In addition to a one-time franchise fees, franchisees are required to pay yearly royalty costs, typically 2 percent to 8 percent of gross sales.

Franchises "come with a lot of the same risks as any small business," said William B. Cherkasky, president of the International Franchise Association. "But because of the many support services provided there is a far greater chance of success than starting a small business on your own." The Competition Sometimes, Dreams End Up Going Sour

Even franchise buyers who thought they had done careful research have ended up losing their homes and cars when their business soured.

Especially vulnerable are franchises built on an idea that is easily duplicated. Owners of The Country's Best Yogurt, also called TCBY, found themselves in fierce competition for customers as the franchisor, based in Little Rock, allowed too many shops to be established near one other. At the same time, two or three other yogurt franchises were vying for the same spaces in shopping malls and business districts around the nation.


Published: October 4, 1992
"Frozen yogurt is a seasonal product with not a lot of upscale potential," said Mr. Baum of Francorp. "Other more diversified snack food companies began offering the same product and taking their business away."

Consultants advise obtaining a copy of the franchise disclosure circular, one of the few documents the Federal Trade Commission requires of all franchisors. The circulars include a detailed description of the business, start-up costs and applicable fees.

But when it comes to dealing with a franchisor, it is wise to remember that "franchising is simply a relationship, a method of distribution," said Edward Kushell, president of the Franchise Consulting Group. "One of the most important things to learn is how to manage that relationship."

Some chains seem to have as many stores close each year as they have new ones opening. But figures from an I.F.A. study found more than 95 percent of companies opened in the last five years were still operating.

Mr. Reynolds of the I.F.A. did note that 15 percent of the franchises that opened in the last five years no longer had the original owner.

"That means that something happened to those people," he said. Making the Choice Shopping Around For a Business

Many of the newest franchise owners are former corporate executives who were laid off or became disgruntled with corporate life.

Donald Boyle opened his Alphagraphics Printshops of the Future store in March 1991 in Stamford, Conn., with a $340,000 start-up investment. He decided he could use his managerial and sales skills -- gained from more than 25 years in retailing -- to break the company's record for first-year sales.

Mr. Boyle, a former executive vice president with Lord & Taylor, and former chairman of Hahnes, a department store, accomplished that and more. His store had almost $500,000 in sales the first year, he said.

Begun in 1970 in Tucson, Ariz., the Alphagraphics chain now has 325 stores in 14 countries.

Wayne Hale and his wife, Carolyn, of Crossville, Tenn., spent more than a year extensively researching restaurant franchises before buying a Krystal Kwik hamburger outlet. The fast-food restaurants have dual drive-through lanes and outside seating only.

In addition to researching food costs, employee training and legal fees, Mr. Hale parked near restaurants and counted the cars in their lots. "That gave me a pretty good idea of the kind of traffic the restaurants were getting on an average day," he said.

The Hales opened their first Krystal Kwik in Crossville, about 80 miles west of Knoxville, in September 1990, becoming the first Krystal Company franchisee. They have just opened a second one in Cookeville, about 40 miles east of the first restaurant.

Mr. Hale, who had owned a medical equipment company, said 18-hour days, seven days a week were typical for the first six months. But he is optimistic that his Krystal Kwiks, where a hamburger costs 43 cents, will be a big draw for families. "People are very conscious of their spending," he said. But at Krystal, you can feed an entire family with $10 and have change left over." OPEN-DOOR RECRUITING

When Renee C. Greenleaf and her family began the search for a franchise, their biggest concern was finding one "that would provide a needed service to the community, rather than one that was a luxury," she said.

Ms. Greenleaf, the owner and operator of a Mail Boxes Etc., which provides postal and business services in downtown Newark, said she; her mother, Marguerita Calloway, the company's vice president, and her brother, Albert Calloway, who is president, were attracted to franchising because of the training and skills they could take advantage of.

"An independent person would have to stumble over and take the hard knocks for themselves," Ms. Greenleaf said. "But the franchisors are there to provide the necessary training and ongoing support."

The Calloways, who are black, are among a small, but growing, percentage of minorities in franchising.

Franchisors say they are increasing their efforts to recruit more women and minorities into the industry by aggressive recruiting, advertising and special programs.

In April, the International Franchise Association created the Alliance for Minority Opportunities in Franchising with the goal of increasing the number of opportunities for women and minorities to own franchises and to expand the use of minority vendor and supplier companies.

About 14,000 -- or 2.5 percent -- of the 550,000 United States franchises are minority-owned, according to the Department of Commerce's Minority Business Development Agency in Washington. In a study of 366 franchise companies, the International Franchise Association reported 9.5 percent were owned by minorites.

Reaching out to women and minorites "is not a social responsiblity but a business imperative," said Ron Harrison, the chairman of the I.F.A.'s Minorities and Women in Franchising Committee.

The committee is encouraging major franchisors like McDonald's, Baskin-Robbins and 7-Eleven to develop programs and become more involved in their local communities.

Blockbuster Video - Francorp Client

Francorp's client Blockbuster Video is looking to acquire Circuit City in order to create a new marketing strategy to give customers the full complete home theater experience. This was written in the Wall Street Journal. For more information on franchising your business go to www.francorp.com.

A Blockbuster Raid on Circuit City
With Support of Carl Icahn, Ailing Video-Rental Chain Bids for Weakened Retailer
By MERISSA MARR and GARY MCWILLIAMSApril 15, 2008
http://online.wsj.com/article/SB120815436563212307.html?mod=dist_smartbrief

When retail veteran Jim Keyes became CEO of Blockbuster Inc. nine months ago, he embarked on a mission to save the video-rental chain from fading into extinction. Monday he unveiled a bet-the-company takeover bid for another troubled retailer, Circuit City Stores Inc.
Mr. Keyes went public with an unsolicited offer of more than $1 billion in cash, or between $6 and $8 a share, for the Richmond, Va., company several months after the two companies began private discussions. Blockbuster said it went public because Circuit City had refused to provide access to its books to allow discussions to move forward.
Circuit City Monday said it would continue to evaluate Blockbuster's bid but urged its shareholders to take no action. "We have a number of questions that have not been answered by Blockbuster," a spokesman said.
The move -- made with the strong backing of Blockbuster's biggest shareholder, activist investor Carl Icahn, and the support of dissident Circuit City shareholder Mark J. Wattles -- set off a furious debate on Wall Street. Blockbuster shares fell 10% as investors questioned how the two companies, which have each seen their stocks plunge sharply in the past year, would be better off together.
Blockbuster's move "borders on being reckless," Wedbush Morgan Securities wrote in a research note, adding that Blockbuster had made good progress in its turnaround in recent months, while Circuit City "appears to be in the middle of a death spiral."
Mr. Keyes argued the $18-billion combination would save money and benefit from offering a broader range of entertainment and products, everything from DVD players and flat-screen TVs to video and game rentals.
The sheer audaciousness of Blockbuster's bid -- its market capitalization of $630 million is smaller than that of Circuit City -- highlights how few options there are for the video chain. The video-rental market has been stagnant for years, as consumers have turned to an ever-growing number of alternatives including mail-order DVDs from Netflix Inc., video-on-demand from cable services, or buying DVDs. Under former Chief Executive John Antioco, Blockbuster tried an array of different diversification strategies, none of which made much impact.
Shahid Khan, a consultant at IBB Consulting Group in Princeton, N.J., said Blockbuster has no choice but to seek a new business. "This [bid] is a clear indication that the DVD rental business is pretty much dead or in the process of dying. Blockbuster has to do something radically different to stay in business."
TALE OF TWO CHAINS

Blockbuster is seeking to take on a larger, loss-making company.
Circuit City
Blockbuster
FY07 Sales
$11.74 billion
$5.54 billion
FY07 Net Loss
$321.4 million
$74.2 million
Stores
1,500
7,800
Market Value
$750 million
$630 million
HQ
Richmond, Va.
Dallas
Note: Market values as of April 11.
The bid also shows the influence of Mr. Icahn, who has been actively involved in Blockbuster since winning a proxy battle for board representation in 2005. He is the financing brains behind the deal and has indicated he will arrange the money himself if needed.
"I am more of an operator than a deal maker, and Carl has provided good counsel on how to proceed with the transaction," Mr. Keyes said in an interview Monday.
Also playing a role on the other side of the table is Mr. Wattles, himself a onetime video-rental chain owner who has his own history with Mr. Icahn. Mr. Wattles founded the Hollywood Entertainment video-rental company, which was the target of a bid by Blockbuster in 2004. At the time, Mr. Icahn was a major shareholder in both Hollywood Entertainment and Blockbuster.
Now, Mr. Wattles has launched a proxy battle for Circuit City, seeking to remove the company's CEO, Philip J. Schoonover. Yesterday he said he supported Blockbuster's bid and would press for acceptance of any offer "north of $6 a share."
The bid comes just as Blockbuster emerges from a long stretch of financial turmoil. The company took on a heavy debt load when it was carved off from its former parent Viacom Inc. in 2004.
Carl IcahnMORE

• Deal Journal: More Explanation, Please
• ROI: Look Before You Leap on Circuit City
• Text of Blockbuster's Feb. 17 letter to Circuit City CEO
• Circuit City's public response, advising shareholders to take no actionRELATED ARTICLES

• Circuit City Sales Continue Slide 4/10/08
• Heard on the Street: Activists Circle Circuit City 3/24/08
• Boss Talk: Can Circuit City Survive Boss's Cure 2/11/08
As of Jan. 6, Blockbuster had outstanding debt of $758 million. Buying Circuit City would likely add significantly to that debt load.
Mr. Wattles said in an interview Monday that he had spoken to Mr. Icahn by phone and the billionaire investor confirmed he would backstop the deal if needed. "He said, 'I'm available to put the capital up in a rights offering,'" said Mr. Wattles. "Carl Icahn can clearly do this transaction. He wants to do the transaction and is excited about it," he continued.
Mr. Icahn couldn't be reached for comment.
His support enabled Blockbuster to make a cash offer, Mr. Keyes said. However, it's unclear how the deal will be structured, and there may end up being a stock component, he said.
Mr. Keyes, who previously headed the convenience-store chain 7-Eleven, was credited with helping revive that company before he retired in 2005. He came out of retirement to join Blockbuster this past July. He focused on slashing costs and making radical changes in Blockbuster's online strategy. He took steps to improve the availability of titles in stores and also added more merchandise for sale.
His efforts showed signs of paying off in the fourth quarter, when net income more than tripled. On Monday, Blockbuster projected first-quarter net income of $30 million, compared with a year-earlier net loss of $49 million.
Circuit City, meanwhile, has been trying to shore up its fading business amid fierce competition from rivals such as Best Buy Co. and Wal-Mart Stores Inc. It replaced thousands of staff with lower-paid employees, a move that hurt its business.
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Mr. Keyes said he first approached Circuit City last year as he was casting around for potential partners for Blockbuster. He quickly concluded that a partnership wouldn't be enough to achieve the benefits of a combination, and he brought up the idea of an acquisition.
He argued that cost savings alone justify the deal. They include closing some stores where there is overlap, cutting duplication at each company's head office, delivering products to stores more effectively and teaming up on advertising. The plan is to keep a combination of big-box stores and smaller locations.
Mr. Keyes foresees that within six months of the proposed merger's closing, customers would likely see movie and game rentals available at Circuit City stores. Further down the line, he also sees hardware like portable-media players being sold at Blockbuster locations.
Circuit City seemed open to the offer at first, he said. But as talks progressed the electronics retailer started to drag its feet. Mr. Icahn played a key role in the decision to go public with the bid.
Mr. Keyes described the deal as "game-changing" and said for Circuit City shareholders, the offer is "simply too attractive to ignore."
"Our view of the change that's occurring in consumer electronics and the movie-rental business is one of convergence," Mr. Keyes said. He sees Apple Inc.'s stores as an example of "a user-friendly one-stop shop with solutions for the consumers" that could be a model for Blockbuster-Circuit City combination.
Write to Merissa Marr at merissa.marr@wsj.com and Gary McWilliams at gary.mcwilliams@wsj.com

For more information on franchising and franchise development please visit, www.francorp.com.

Francorp Client - Spectrum Home Services

Spectrum Home Services is a Francorp Client that began working with Francorp in 2003 In just a few short years they already have nearly 40 locations and continue to grow. They are a service franchise company that specializes in home cleaning, maid service, lawn services, handyman services, senior care services, and relocation services. They were recently featured in the San Diego Business Journal and it talks about how this franchise is a good option in today's economy. Spectrum Home Services can be found at www.spectrumhomeservices.com.

If you are considering franchising your business and would like to talk with professional franchise consultants, please visit to www.francorp.com.

Posted date: 3/31/2008
Franchise Ownership Offers Comfort in Tough Economy
Franchising Has $1 Trillion Impact on Economy, Report Says
By LIZ WIEDEMANN
San Diego Business Journal Staff
http://www.sdbj.com/industry_article.asp?aID=53045197.9287073.1605825.6295696.9942067.936&lid=&sid=&cid=&page=1

A period of economic uncertainty is not the time to sink one’s life savings into a restaurant or shop, but it may be the perfect time to consider owning a service franchise, according to local franchise consultant Cheri Carroll.
One factor in franchise choices is home equity — how many new franchisees financed their businesses in the past, she says.
“Since equity loans aren’t as available or as generous as they once were, service businesses with their much lower entry costs offer a path that many are taking to beat the economic blues,” said Carroll.
An 11-year volunteer with the San Diego chapter of Score, a nonprofit organization providing free consulting and inexpensive workshops for small businesses and new startups, Carroll was recruited by Score to provide franchise expertise.
“While a franchised sandwich shop may cost $120,000 or more for the build-out and equipment, or $300,000 for a retail shop, a service business can cost as little as $20,000 to get started, with almost no overhead,” she said.
Some growing service businesses among San Diegans are Gurnee, Ill.-based BrightStar Healthcare and Sandy, Utah-based Spectrum Home Services, which offer nonmedical services to seniors such as running errands and yard cleaning.
Consulting businesses such as the Carlsbad-based Expense Reduction Analyst, along with executive training services such as the La Jolla-based Renaissance Executive Forums also offer popular franchising opportunities, says Blair Nicol, president of the Louisville, Ky.-based Franchise Network Group’s San Diego and Orange County operations.


The Numbers
With a countywide unemployment rate of about 5 percent in the first two months of 2008, up from about 4 percent in early 2007, according to the Employment Development Department of California, franchising is bigger than ever in San Diego, says Nicol.
Franchise businesses now make up $1 trillion in U.S. direct economic output, according to an International Franchise Association report sponsored by the U.S. Small Business Administration.
More than 3,000 companies are franchising nationally, and franchise businesses account for more than 50 percent of total retail revenue, according to the report, which was released in March.
“High-level executives are saying they don’t want to go through layoffs again, so, ready to leave the corporate world, they’re using severance packages to start a business,” Nicol said.
He says that former business executives are ideal candidates for franchising because they can apply their existing skill sets in a white-collar environment, while investing between $80,000 and $100,000 in office-based types of franchises such as executive coaching, financial consulting and information technology businesses, as opposed to a storefront business that costs a minimum of twice the money.

Ruben Garcia, district director of SBA’s San Diego office, says that he cautions potential business owners to be ready for the challenge.
“Only a small percentage of business owners are franchisees,” he said.
“The tried-and-true format and trademark you’ll use as a franchisee is certainly the benefit, but those same regulations are going to limit the leverage, the freedom that you may have considered a benefit to owning a business,” Garcia said.
He says that some executives coming out of corporate America like the strategic action plan franchising offers because it mimics the business world with which they are familiar.
“It’s not just about having the capital; it’s energy, skills, time and the capability to put up with all the nuances of starting a business,” he said.
The No. 1 tip for budding franchisees is to know and love the product, according to Carroll. “If you’re considering a high sales business, but you hate sales, choose something else — no matter how much money other people are making in that business,” Carroll said.
Because of the night-and-day effort required at the beginning of opening a franchise, Carroll says that passion for the mundane tasks at hand is the biggest factor in choosing the right business.
In the wake of corporate downsizing, or perhaps chasing a dream of autonomy in the workplace, San Diegans might be surprised to find harbor in the franchising arena.

Francorp Client - Coachman Motor Homes

Francorp developed the franchise company for the world's largest manufacturer and seller of motor homes and RV's, Coachman Motor Homes. Coachman is one of many different public companies that Francorp has worked with. More Francorp clients have gone public than any other franchise consulting group in the world. Coachman continues to lead their industry and support both their franchisees and provide premium products to their customers. Francorp Consulting has worked with many different types of manufacturing companies to improve their distribution of products and development of their brand.

Company Profile More Information

Founded in Middlebury, Indiana in 1964, Coachmen Industries, Inc., through its prominent industry subsidiaries, is one of America's leading manufacturers of recreational vehicles (RVs) and systems-built single family homes and multi-family residential structures. The Coachmen RV Group produces a complete line of RVs under several well known brand names including Coachmen®, Georgie Boy®, Sportscoach®, Adrenaline™ and Viking®. The full line of RV products includes Class A and Class C motorhomes, fifth wheels, travel trailers and folding camping trailers which are produced at manufacturing facilities in Indiana, Georgia and Michigan. The RV Group markets its products through a network of independent dealers throughout the United States and Canada.

The Coachmen Housing Group includes All American Homes, LLC and Mod-U-Kraf Homes, LLC, which combined are one of the nation's largest builders of systems-built homes. Through All American Building Systems, LLC, the Group also builds apartments, condominiums, dormitories and hotels. The Housing Group's manufacturing facilities are located in Colorado, Indiana, Iowa, North Carolina, and Virginia.

A publicly held company, Coachmen Industries' stock is listed on the New York Stock Exchange under the ticker COA.

For additional information please visit Francorp's site, www.francorp.com

Francorp International

Francorp Phillipines is a very successful and well established office of Francorp International. The Francorp office in Manilla has developed and played an integral part in literally every major franchise organization in the Phillipines. Here is an overview of some of their successful clients.

Jollibee

"The country’s No. 1 fastfood chain and one of the most admired companies and brands in Asia "

"One man’s gain is another man’s gain. This is what franchising can do for you. It is a business concept which can create a win-win-win situation for the franchisor, the franchisee and the customer. Francorp, the world’s most sought after franchise consultant today, has explained why franchising is a very attractive means of expanding one’s business. They mentored us to do the right franchising from the very start and all the way to the maximum growth of our enterprise.”

Tony Tan Caktiong
Chief Executive Officer
Jollibee Foods Corporation




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Bench

“The vision of BENCH is to be recognized as an international brand that will instill a sense of pride and inspiration to the Filipino people. When BENCH decided to pursue its international franchise operations, FRANCORP made sure that our franchise agreement was at par with world standards.”

Ben Chan
President
BENCH




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Reyes Haircutters

Ang salon ng bayan and the no. 1 family salon chain in the country today!

Franchising enabled my company to be ahead of the competition in myriad ways, achieving a phenomenally strong market positioning, within the shortest possible time. However, I learned for myself that franchising is not an easy game. Through Francorp’s guidance, I discovered that a carefully planned expansion strategy, professionally developed operations manual and franchise agreement, and a cost-effective franchise sales and marketing program, are necessary components for a stronger franchise system. Francorp helped me in every stage of my growth - giving me all the support and opportunities needed to break into the franchise market. The encouragement and confidence they provided were driving forces in our company’s growth.

Mr. Les Reyes
President & CEO
Reyes Hair Company Int’l





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Crystal Clear

"At a time when the economic situation is forcing companies to cut back on expansion plans, the Crystal Clear Water Stores franchised stores per month. Today, we have a total of 285 stores with international franchise outlets in Indonesia, Malaysia, Singapore and soon in other Asian countries. Francorp has provided support to this growth through strategic development planning and franchise training. In fact, Solerex recently launched “Juice Ko!”, its own brand of health juice drinks; the orange, apple, grape, and strawberry flavors are fast becoming a hit among canteen concessionaires, sari-sari stores, and the parent/child consumer bracket."

Jose Antonio Soler
President
Solorex Water Technology




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Islands Souvenirs

"Over the past years, Islands Souvenirs has received several franchise inquiries from around the globe. Acknowledging the potential of our brand internationally, we felt that Francorp was the only international franchising consultant that was capable of structuring a franchise program that would protect our brand and our business interests overseas. Today, we have stores in Okinawa, Japan, Singapore and San Francisco."

Jay Aldeguer
President & CEO
Islands Souvenirs Inc.




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Potato Corner

"I am very happy with our partnership with Francorp. Our partnership gave birth to the start of our venture into the global arena. Francorp has and is helping us with our expansion in Asia, Middle East and in the Americas. Aside from the international credibility that Francorp has given us in the local arena, we are now in the same league as the "big" players and it is this distinction that we are very proud of."

Jose P. Magsaysay, Jr.
Chairman
Potato Corner




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Bayo

"FRANCORP has paved the way for Lyncor, Inc./BAYO to share the business with willing persons who wish to run a business for themselves but not entirely by themselves. It has also provided BAYO Franchising Corp. with customized guidelines and tools in making our franchise entity work and run efficiently.Their continuous support and ready assistance is also beneficial to us. And we cannot discount the fact that with Francorp’s reputation of being the best in the industry, we easily gained our franchisee’s trust. To date, we have 4 franchise owned stores and we are still getting more inquiries from prospective franchisees for provincial and international branches."

FERDINAND V. AGUSTIN
President
BAYO Franchising Corporation




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Penshoppe

Francorp has been very instrumental in the creation of the Penshoppe Franchise Program. With their help and expertise, our franchise program covers all the areas necessary for a successful franchise. This has paved the way for the opening of our first international franchise in Xiamen, China. With Francorp’s assistance and consultation, our franchise program has attracted franchise inquiries from the Middle East, United States and Europe to name a few, proof that when a franchise program is developed in coordination with Francorp, the program is bound to be compelling and successful.

Bernie Liu
Chairman/CEO
Golden ABC (Penshoppe)




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Plains And Prints

“Francorp helped us in all aspects of franchising – from developing our franchise program to finding qualified franchisees. In just a few months after Francorp developed our program, we were able to open three franchise outlets. With Francorp helping us in our franchise efforts, we became more confident in offering our business because we knew that our franchise program was developed by trained professionals who have years of experience in franchising. With Francorp, you get the feeling that they really care about you and want to see you succeed in your franchising efforts. It’s as if they had a personal stake in your business.”

Erickson and Roxanne Farillas
Owners, Plains & Prints




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Kamiseta

Francorp helped us organize our Franchising Department. If you are planning to franchise, it would be a good first step to ask the experts.

Mr. Gonzalo A. Roque III
President-Kamiseta




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Hot Shots Flame-Grilled Burgers

Hotshots Flame-grilled Burgers is now 3 years old. In those three years, it has grown into 7 branches strategically located in Metro Manila. This has been possible through the assistance and guidance of Francorp. Francorp first approached us in May of 2000. They offered to do our franchise package and operations manual. We were barely six months in operation then. Several companies had offered to do our franchise package, however, we felt most comfortable with the people that comprised Francorp. They were very professional to talk to. We saw in them a sincere intention to help us chart our future. We believe that our decision to choose Francorp as our franchise consultant has opened for us a network of opportunities. In the three years that we have been working with them, they continue to provide channels in order for our company to grow. They have given us exposure in radio, newspapers and magazines. They have introduced us to the Small Business Guarantee Fund Corporation. SBGFC provides financing to our qualified franchise applicants. Recognizing the value of continuing education, they invite us to various seminars and talks. In short, they have made franchising a simpler task to manage. Our sincerest gratitude for your guidance these past three years, we hope that you will continue to be with us as we enter another stage of our growth---Provincial expansion.

Carlo de Guzman, John & Anjanette Decena
Owners, Hotshots Flame Grilled Burgers




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Biggs Restaurant's Inc.

"Having been in the business for over 15 years, we thought it was ripe and right to expand our successful restaurant concept through the failsafe format of franchising. We thought it proper to travel to the United States, ’the mecca of franchising’, to attend the World Franchising Exposition, and seek a reputable and established franchise consulting firm, and Lo and Behold, FRANCORP fit the bill. We were impressed with the long list of successful concepts that they help catapult into proliferation. Instantly we were convinced that our concept would fall on very adept hands if we commissioned Francorp to architect our franchise program. One year later, we opened our first franchise under their program, and since then, we haven't stopped growing. I don't think there are any other franchise consulting firms in the world that can match FRANCORP's track record in helping successful concepts franchise their systems effectively and confidently."

Carlo B. Buenaflor
Managing Director
Make It Bigg Restaurants Inc.
Franchisor of "Bigg's Restaurants"




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California Nails And Day Spa

"It took years for us to make the decision to franchise California Nails & Day Spa. There were days when we thought, ‘No, it’s not for us.’ and then days that, ‘Yes, let’s do it!’ It even took a while before I could get the courage to see Francorp; I was in doubt that our concept would be accepted. But the foresight and enthusiastic assurance of Francorp, made this big step sound like a winner. So we bit the bullet and signed up with Francorp in May 2002. We never looked back. Francorp is an excellent team of consultants. There is genuine concern, love and support that started from the receptionist, to the team of consultants who cheered us on in every step, up to the level of their management leadership. This helps a lot when you are taking a risk with a new venture."

"Putting up a franchising company is another ball of wax. With Francorp it was an easy transition, they actually take you by the hand and teach you step by step how to make your business succeed. There’s a comfort in knowing that when you have a concern, someone just a ‘text message’ away has the answer. The guidance at the Franchise Expo 2002 we received, the setting up of operations manuals, going over the legalities of the Franchise Agreement, Sales Seminars, the meetings and more meetings were all done professionally. We had to do our homework but we didn’t mind. There’s lots of motivation we get from our up-beat consultants. The day came where we would sign up our first franchisee! My staff and I were so ecstatic and Francorp was there to share it with us."

"Thanks to our marketing strategies by Francorp, we have a pile of inquires seeking out our franchise. We are so busy we don’t have time to check on them! Lastly, we can say is that we prayed for the right franchise consultant to come our way and the Lord led us to Francorp, because they are there for you all the time, all the way!"

Leslie Matta
President, CANS




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Sari-Sari Bread Store

It was in the 2nd quarter of 2002, that we approached FRANCORP to study SARI-SARI BREADSTORE with about 70 outlets in the Visayas if it can be franchised. We lacked the confidence but they were there to give us the necessary boost and professional advise to set up our franchise system and operations manual. In November 28, 2002, the first franchise store of SARI-SARI BREADSTORE in Luzon was opened in Araneta Center, Cubao, Quezon City. In just a little over 6 months, we have 6 operating franchise stores located in Cubao, Novaliches, San Mateo, Rizal, C.M. Recto in Manila, Bacoor, Cavite and Sta. Cruz, Laguna. One will soon open in Malinta, Rizal, another 2 in Caloocan City and Blumentritt, Manila are under construction, and now more whose applications are still being processed. Thanks to FRANCORP!

Jerome J. Genson
President-CEO
Sari-Sari Breadstore Ventures Int’l Corp.




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Unica Hija

In the garment retail industry, growth for us means broadening our reach, improving more the quality of our service to fulfill the desires of our valued customers while increasing the awareness of the brand, UNICA HIJA. When we first felt that there was a need for the company to expand, the question of capacity and readiness came into mind. To address this, we decided to expand thru franchising and the only way to go with it is to get Francorp. Their incomparable list of clientele proves what they have attained. To have their name alone as our consultant gives us enough encouragement that we can reach our aspirations for the company. Right now, we are on our third quarter going onwards to our first year in franchising six deals successfully closed and still targeting more. For this, we recognize their efforts not only for the dedication they have shown in their work but also in the commitment they have given us.

Ronaldo R. Villon
President
R & V Unica Hija

Franchise Law

Interesting Article on The New Rule Changes regarding Franchising your Business.

FTC Rule Change: The Question Of When

By:
Franchise Update
FranchiseLawNews.com
NOVEMBER 08, 2005 08:11:00 AM

For those of you who have been living under a rock for the past 10 years, I have a newsflash: Since 1995, The Federal Trade Commission has been involved in a rule- making process to amend the FTC Rule (the "Rule") to change certain disclosure requirements and to recognize certain changes to the franchise business sales model and use of technology in the franchise sales process. What we know is the likely substance of the changes; what we don't know is when they'll be implemented.

There has been almost as much written about when the Rule changes will become effective, as about the Rule itself. The smart commentators are exercising restraint in making even the next estimate of when the Rule changes will become effective. If you are dying for the Rule change, blame the spammers, telemarketers, and junk faxers for consuming all of your regulatory resources.

Many of you remember, if not the entire process, many pieces along the way. After nearly a decade of soliciting comments on the Rule, receiving and reviewing countless written comments on the Rule, and holding six public workshops to address the Rule in a round-table fashion, the FTC released the Report Regarding Disclosure Requirements and Prohibitions Concerning Franchising last August and solicited public comments through November, leaving only the finalizing of the Rule, and drafting the Statement of Basis and Purpose to be completed and submitted to the Commission for review and approval. These final 2 steps have been completed, and the entire package is awaiting action by the Commission. There are no time limits within which the Commission must begin or complete the review, because the Commission has the authority and discretion to devote resources to the most compelling matters.

Ultimately, the Report proposes that the FTC should retain the Rule as it continues to serve a useful purpose. The Report essentially makes three broad recommendations to the FTC:
Narrow the Rule: The Report suggests that the Rule be narrowed to focus exclusively on franchises.

Adopt Changes to the Disclosures: The Report suggests that the Rule be revised in such a way that its requirements regarding disclosures be more consistent with NASAA's UFOC disclosure guidelines.

Regulations Affecting the Franchise Relationship are Unnecessary:
The Report suggests that further regulations affecting post-sales
franchisor-franchisee relationships are unnecessary.In addition, the Rule joins the 21st Century by permitting the use of electronic disclosure and eliminates disclosure for brokers (including their litigation and bankruptcy history), resolving a sea of uncertainty precipitated by the modern use of multi-broker franchise lead referral methods, which has suffered from overdisclosure in the past few years.

Narrowing the Rule:The Report recommends that the Rule be amended to focus solely on business-format franchises by revising the definition of "franchise," and thus eliminating coverage of business opportunities from the scope of the Rule. The Report stated that the principal concern regarding business opportunities is outright fraud. Under the new definition of "franchise," the franchisor would have to offer significant assistance "extending beyond the start of the business operation." This recommendation benefits franchisors significantly as business opportunities have traditionally generated a greater number of complaints and the disclosures required by the FTC can be more narrowly tailored to business format franchising.

Disclosure Changes:Many of the Report's recommendations are intended to update the Rule to be more consistent with the UFOC guidelines used in the various franchise registration states.

The major highlights regarding the new disclosure requirements are outlined below: Item 3: Litigation - Item 3 would require the same disclosures as the UFOC guidelines; however, franchisors would be required to disclose actions involving predecessors, as well as routine litigations impacting the franchisor's financial condition. Furthermore, the Rule would be expanded to require franchisors to disclose material franchisor-initiated litigation against franchisees involving the franchise relationship and permit like claims to be presented together-such as royalty collection actions. There is no 7- or 10- year carryover; the Rule would require disclosure of pending actions only. Actions involving "the franchise relationship" are defined as those contractual obligations between a franchisor and franchisee directly relating to the operation of the franchised business - like royalties and training obligations. It does not include third party or tort claims. This disclosure is different from the UFOC Guidelines and current Rule. The practical effect of these changes is that a franchisor will likely direct more resources to alternative forms of dispute resolution, which are not disclosable, prior to initiating an enforcement action against a franchisee.

Item 4: Bankruptcy - Item 4 extends the disclosure period to 10 years rather than the existing 7 years to match the UFOC Guidelines and retains the requirement to disclose a parent's bankruptcy.

Item 10: Financing - Item 10 would expand the current FTC Rule to require a franchisor to disclose all material terms and conditions of any financing agreements. Franchisors would be required to disclose the annual percentage rate of any financing and would require more disclosure about what the financing covers, waivers of defenses, and the franchisor's practice or intent to sell or assign the obligation to a third party.

Item 19: Earnings Claim - The new Rule significantly affects an earnings claim disclosure. Under the new Rule, the name of the disclosure is changed from "earnings claims" to "financial performance representation." The new Rule permits franchisors to provide financial performance information to prospective franchisees for all or a subgroup of company-owned and/or franchised outlets if it discloses the number and percentage of outlets that attained or surpassed the stated results based on the number of outlets in the subset rather than the number of outlets in the entire franchise system, along with any characteristics of the measured subset that differ from the offered unit. The new Rule eliminates the geographic relevance requirement under the Rule. The new Rule also adopts the approach taken under the UFOC format which permits franchisors to provide financial performance information within the body of the main disclosure document, thus eliminating the need for a separate earnings claim disclosure document.

Item 20: Outlets and Franchisee Information - Item 20 would expand the scope of the current FTC Rule to mirror the UFOC Guidelines; however, the proposed Rule would differ from the UFOC Guidelines in two respects. First, the proposed Rule would eliminate a double-counting problem by adopting and using a "first-in-time" approach. Second, the Rule would require a franchisor to identify any franchisees subject to a confidentiality agreement, presumably to advise prospects that certain franchisees have signed contracts restricting their ability to discuss the relationship. Franchisors can express this measure either in terms of the number or percentage of franchisees under a confidentiality order and explain the circumstance surrounding such orders. Franchisors must also disclose any franchisor created franchisee organizations and incorporated independent organizations that request inclusion.
The Report recommends that the existing five-business-day rule within which a franchisee must obtain a final version of his proposed franchise agreement with all of the blanks filled in, be changed to five calendar days with a three-day extension for mailing. The proposed Rule eliminates the "first personal meeting" trigger of when you must give disclosure in favor of a 14-day prior-to-sale disclosure requirement.

The information contained in a disclosure document will be required to be updated quarterly, but updates may be sent under a separate cover to franchisees who have already been disclosed. The plain English requirement has been retained and the Rule does not provide a private right of action to franchisees.

New Exemptions There are also exemptions for large/sophisticated franchisees that are part of the franchisor's ownership/management, and franchises that involve investments exceeding $1,000,000. The Report also makes clear that the proposed Rule would not apply to international franchise transactions.

Electronic DisclosureElectronic delivery of the disclosure document will be permitted without any requirement to deliver a paper copy of a Receipt. Documents may be transmitted by fax, e-mail, and electronic copies (cd-rom or similar medium), or through directions for accessing the document on the Internet. The prospect must be able to store, download, print or otherwise retain the document for future reference. While scroll bars, internal links and search options will be permitted, no enhancements, such as video, pop-up menus or similar techniques may be used. Before furnishing a disclosure document, the prospect must be advised of the formats in which the document is available and any computer programs needed to view or obtain the document. Franchisors who offer the document in different formats will be permitted to use a prescribed statement on the cover page of the disclosure document. Prospective franchisees will be permitted to execute a Receipt with an electronic signature and password and may return them by mail, e-mail or facsimile. In addition, franchisee representatives, like lawyers or accountants, will be permitted to receive a disclosure document and sign the Receipt on behalf of the prospect.

During the comment period, franchisee advocates sought to have the scope of the Rule extended to regulate post-sale abusive franchise relationships. Franchisees urged the FTC to adopt changes to the Rule prohibiting post-term covenants not to compete, prohibiting encroachments, and restricting regulations regarding approved products and services. The Report concluded, however, that the extensive pre-sale disclosures protect prospective franchisees from fraudulent and deceptive franchise sales practices and in turn protect prospective franchisees from abusive franchise relationships. Ultimately, the Report stated that the FTC lacks the statutory ability to broaden the Rule to address post-sale franchise relationship issues, as franchise relationships are private contractual matters that are regulated by the individual states. The Report noted that most injuries to franchisees can be prevented as franchise purchases are strictly voluntary.

The Report has recommended a Rule that will ensure ease of compliance as it is consistent with the requirements of the UFOC Guidelines. Once the FTC adopts a new Rule, each state will likely amend state laws to be more consistent with Rule changes.

By Lane Fisher

Francorp Clients - Francorp Connect

Here is a great article that talks about buying a franchise in today's economy. If you want to buy a franchise go to www.francorpconnect.com and if you want to franchise your business go to www.francorp.com.

Posted date: 3/31/2008
Franchise Ownership Offers Comfort in Tough EconomyFranchising Has $1 Trillion Impact on Economy, Report Says
By LIZ WIEDEMANN
San Diego Business Journal Staffhttp://www.sdbj.com/industry_article.asp?aID=53045197.9287073.1605825.6295696.9942067.936&lid=&sid=&cid=&page=1A period of economic uncertainty is not the time to sink one’s life savings into a restaurant or shop, but it may be the perfect time to consider owning a service franchise, according to local franchise consultant Cheri Carroll.One factor in franchise choices is home equity — how many new franchisees financed their businesses in the past, she says.“Since equity loans aren’t as available or as generous as they once were, service businesses with their much lower entry costs offer a path that many are taking to beat the economic blues,” said Carroll.An 11-year volunteer with the San Diego chapter of Score, a nonprofit organization providing free consulting and inexpensive workshops for small businesses and new startups, Carroll was recruited by Score to provide franchise expertise.“While a franchised sandwich shop may cost $120,000 or more for the build-out and equipment, or $300,000 for a retail shop, a service business can cost as little as $20,000 to get started, with almost no overhead,” she said.Some growing service businesses among San Diegans are Gurnee, Ill.-based BrightStar Healthcare and Sandy, Utah-based Spectrum Home Services, which offer nonmedical services to seniors such as running errands and yard cleaning.Consulting businesses such as the Carlsbad-based Expense Reduction Analyst, along with executive training services such as the La Jolla-based Renaissance Executive Forums also offer popular franchising opportunities, says Blair Nicol, president of the Louisville, Ky.-based Franchise Network Group’s San Diego and Orange County operations.The NumbersWith a countywide unemployment rate of about 5 percent in the first two months of 2008, up from about 4 percent in early 2007, according to the Employment Development Department of California, franchising is bigger than ever in San Diego, says Nicol.Franchise businesses now make up $1 trillion in U.S. direct economic output, according to an International Franchise Association report sponsored by the U.S. Small Business Administration.More than 3,000 companies are franchising nationally, and franchise businesses account for more than 50 percent of total retail revenue, according to the report, which was released in March.“High-level executives are saying they don’t want to go through layoffs again, so, ready to leave the corporate world, they’re using severance packages to start a business,” Nicol said.He says that former business executives are ideal candidates for franchising because they can apply their existing skill sets in a white-collar environment, while investing between $80,000 and $100,000 in office-based types of franchises such as executive coaching, financial consulting and information technology businesses, as opposed to a storefront business that costs a minimum of twice the money.Ruben Garcia, district director of SBA’s San Diego office, says that he cautions potential business owners to be ready for the challenge.“Only a small percentage of business owners are franchisees,” he said.“The tried-and-true format and trademark you’ll use as a franchisee is certainly the benefit, but those same regulations are going to limit the leverage, the freedom that you may have considered a benefit to owning a business,” Garcia said.He says that some executives coming out of corporate America like the strategic action plan franchising offers because it mimics the business world with which they are familiar.“It’s not just about having the capital; it’s energy, skills, time and the capability to put up with all the nuances of starting a business,” he said.The No. 1 tip for budding franchisees is to know and love the product, according to Carroll. “If you’re considering a high sales business, but you hate sales, choose something else — no matter how much money other people are making in that business,” Carroll said.Because of the night-and-day effort required at the beginning of opening a franchise, Carroll says that passion for the mundane tasks at hand is the biggest factor in choosing the right business.In the wake of corporate downsizing, or perhaps chasing a dream of autonomy in the workplace, San Diegans might be surprised to find harbor in the franchising arena.

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