A Timbit of Trouble

570 News in Toronto reports that Tim Horton’s franchise owners have launched a near $2-billion lawsuit claiming lost profits since the iconic Canadian company switched from fresh-baked to frozen donuts. The $1.95-billion suit is scheduled to go to court in November and it has even divided franchisees, as a large group of store owners is trying to stop a smaller group from following through on the lawsuit.

“It really plays out as a battle between those ‘old school’ guys who were loyal to the Ron Joyce era and Ron Joyce himself against some of the newer store owners who have come in under the new guard in the last 10 or 15 years,” explains Michael Friscolanti, senior writer for Maclean’s, where the story appears this week.

Joyce, a co-founder of the Tim Horton’s chain, revealed in 2003 that the company had stopped baking donuts on-site and had instead turned to the “par-bake” method where a donut was 95 per cent prepared, flash frozen, and then later re-heated for sale.

At the root of the lawsuit is the cost of these new donuts. The plaintiffs in the case allege the company told them it would cost no more than 12 cents per donut, while the true cost today (according to Tim’s) is 17.9 cents. One franchise owner claims that increase cost him as much as $57,000 in profits at one store.

“What you have here is this classic case of a few disgruntled franchisees who are saying we’ve lost some money (and) Horton’s needs to pay us back some of this money that we’ve lost,” Friscolanti tells 570′s Gary Doyle Show. “And at the same time you have a much larger group of franchise owners who have come forward to say ‘no, no’ no, that’s totally wrong, we’re doing very well.’ ”

Friscolanti says the concern of the franchise owners opposed to the lawsuit is that trade secrets and their bottom line will become public fodder, making them appear greedy. There is also concern over negative media coverage of the iconic restaurant chain.

One of the franchise owners opposed to the lawsuit is Graham Oliver, who owns five Tim’s stores in Kitchener. In an affidavit obtained by Maclean’s, Oliver writes “I do not agree with many of the material allegations and claims advanced by the plaintiffs. In fact, they are patently wrong and cannot be supported. Negative publicity has the potential of tainting the public image of the Tim Horton’s brand, which is vital to our business.”

To read Friscolanti’s full story in Maclean’s, click HERE.

Debt on the Menu at Burger King

Steve Rosenbush writes at Portfolio.com here’s something for Burger King Franchisees to consider as the restaurant chain is sold to yet another private equity owner. Who will pay for the $2.8 billion in bank loans that are financing the buyout, worth an estimated $4 billion, including debt and equity?

3G Capital, a heretofore obscure investment company with holdings in CSX and Coca-Cola Bottling, is offering $3.26 billion for the company, a 46 percent premium to its pre-announcement market price. The new owners are taking on Burger King’s existing debt, bringing the total cost of the deal to $4 billion. About $2.8 billion will be financed with bank loans. 3G is run by Brazilian billionaire Jorge Paulo Lemann, a veteran of private equity firm GP Investments, America Latina Logistica, and Anheuser-Busch, where he has a seat on the board.

Burger King has been fried by the recession. It has gone through a series of ownership changes since 2002, when private equity players TPG, Goldman Sachs and Bain bought the company from British booze giant Diageo.

It went public in 2006, although the private equity group still holds nearly one third of the shares.

Those three private equity companies—regarded as among the best in the business—have failed to prevent a decline at Burger King. The recession has hit its core customers, who are in their late teens to early 30s. Revenues are down about 1 percent, while McDonald’s has a broader menu, double digit revenue growth, and a market cap of $80 billion.

Burger King is in need of new technology, a facelift for its aging stores, and probably an overhaul of its menu and general strategy. Its marketing campaign—featuring a bizarre-looking character—probably hasn’t helped, either. Needless to say, relations with franchisees could be better.

It’s not clear what 3G will bring to the table, so to speak. It once had minor holdings in Wendy’s and Jack in the Box, but that’s not the same thing as financial control, let alone operating responsibility.

What is clear, is that that debt is on the rise. It appears that less than $500 million of equity will go into the deal. That’s less than 20 percent of the purchase price, and about 12.5 percent of the value of the deal, including the assumption of existing debt. The economy remains weak. Any turnaround will require investment in the business.

Debt is cheap right now, and if the new owners can raise enough, they stand to make a profit by acquiring the company now, when equity values and interest rates are low.

But they need a great strategy to turn around sales and position the company for an upturn in the economy. That isn’t clear. What is clear is that the restaurants will have to support a higher level of debt.

Portfolio.com

Burger King in Advanced Sale Talks

(Reuters) – Burger King Holdings Inc (BKC.N) is in advanced talks to sell itself to investment firm 3G Capital, the New York Times reported on Wednesday, boosting shares more than 16 percent .

3G could not immediately be reached and a Burger King spokesman declined comment.

The second-biggest U.S. hamburger chain has underperformed rivals like McDonald’s Corp (MCD.N) as its key customer base of young men has been hit harder by unemployment in the past two years.

That group has suffered massive job losses in industries like construction and manufacturing.

The company, which has a market capitalization of about $2.3 billion, debuted as a public company in May 2006 with an initial share price of $17.

Shares were up 15 percent to $18.92 in midday trading.

Famed for its flame-broiled Whopper, Burger King had previously been owned by private equity firms, which still hold a stake in the company. TPG, Bain Capital and Goldman Sachs purchased Burger King from British beverage company Diageo (DGE.L) in 2002 for about $1.5 billion.

One of the potential suitors, British private equity firm 3i Group Plc (III.L), distanced itself from a possible deal.

“We can confirm that we are not in discussions with Burger King,” a spokeswoman for 3i said.

Burger King last week forecast weak demand during its new fiscal year due to the U.S. economy’s slow pace of recovery and government austerity programs in several European countries. The company said it was unsure how costs for key ingredients like beef would impact the company.

Its shares hit a low of $16.30 in mid-August, but surged to $19.50 in premarket trading on Wednesday.

Private equity firms have become increasingly active and last month was the busiest August since 1999 in terms of the value of merger and acquisition deals struck.

In August, Blackstone Group struck a deal to buy power company Dynegy Inc for $543 million, or $4.7 billion including debt.

DDIFO at the CFA Franchisee Forum in Washington DC July 2010

The Coalition of Franchisee Association held their Capital Hill Forum in Washington DC, July 15th – 17th attracting franchisee leaders from the Meineke, Hardees, Pizza Hut, Burger King, Super Cuts, Buffalo Wild Wings, Subway and Dunkin’ Donuts franchise systems.  Rob Branca and I attended the Forum, representing Dunkin’ Donuts Franchise Owners.

Watch the slide show below!

There was a star studded and information packed agenda, we started Wednesday night when Congressman John Campbell (R) from California’s 48th Congressional District. John lives in Irvine, CA.  joined us for dinner. John has a reputation as a dedicated fiscal conservative, he is an advocate for sensible public policy, and lower taxes for business owners.  As a member of the House Commitee on Financial Sevices, he has taken an active part in addressing the country’s top economic issues, including reducing credit card interchange fees, banking reform, and insurance regulation. He spent a majority of his professional career as a taxation specialist representing several automobile franchisees, in Southern California.

Next US Senator Scott Brown from Massachusetts  joined us at a CFA PAC Lunchon where we had the opportunity to sit and eat with the Senator and discuss small business and franchisee issues. Later that day Senator Brown voted to pass the Financial Services bill which included the Durbin Amendment to reduce Debit Transaction swipe fees.

Some of the other speakers were:

George Will, Washington Post Columnist

Sam Donaldson, Retired ABC Correspondent

Mike Bober , Coalitions Director for the National Republican Congressional Committee

Katie Hays Strong, Executive Director of the US Chamber of Commerce Public Affairs Division

Rick Berman, President of Berman and Company

Douglas Kantor, of Stephen Johnson LLP

David Kreutzer, Ph.D. Research fellow in Energy and Climate Change

Representative Steve Kagen (D-WI) 8th District of Wisconsin

Representative John Boehner (R-OH)8^th District of Ohio

Hudson Riehle, VP Research, National Restaurant Association

James Hammersley, Office of Policy and Strategic Planning at the US Small Business Administration

Robert Skelton, CAE Chief Administrative Officer for the ASAE

Ten Most Powerful Franchise Associations

Blue MauMau attempts to rank the ten best-known and influential associations.

When it comes to industrial might and lobbying power, the franchise industry is lopsided. A few big groups have the lion’s share.

Franchise Association	Revenue ($1000)	PAC (x$1,000)	Paid Members
Auto Dealers (NADA)	$45,000	$5,100	17,000
Franchising Firms (IFA)	$10,578	$315	2,238
Hotel Owners (AAHOA)	$6,200	$300	10,216
7-Eleven (NCASEF)	$4,000	$2,500	3,500
Burger King (NFA)	$1,200	$200	5,200
KFC Franchisees (AKFCF)	$1,100	$150	600
Subway (NAASF)	$650	$0	4,000
Franchisees & Dealers, AAFD	$300	$0	400
Coalition of Franchisee Assns	-	$20	8
International Assoc., IAFD	-	$0	3

It is not a complete list. Although 130 of an estimated 250 franchisee associations in the U.S. are listed in Franchipedia, a social media-based wikipedia for the franchise industry, many remain in the background, unnoticed by almost all.

Survey sources

The Asian American Hotel Owners Association (AAHOA) and the International Franchise Association (IFA) provided numbers to Blue MauMau. A representative for the National Automobile Dealers Association (NADA) provided guidance. The numbers for all other groups were much harder to obtain and are this journal’s best guess, with the help of group and industry insiders. The revenues and paid members are for 2009. PAC money is for the end of the last election cycle, 2008.

Franchise associations range from representing franchising firms, like the International Franchise Association largely does, to those who solely represent owner-operators under a single brand, like the National Franchisee Association, which represents Burger King franchisees.

Read More at: BlueMauMau

Support the Arbitration Fairness Act

Binding arbitration clauses are increasingly being inserted by businesses when entering into contacts with other parties. These clauses, which often provide businesses with an advantage and go unnoticed by the signer, drastically limit the legal options available to the signing party. The Arbitration Fairness Act bans mandatory binding arbitration clauses in consumer and employment contracts, including franchise agreements. Specifically acknowledging the disparate economic power between the parties, the bill invalidates the enforceability of pre-dispute arbitration agreements in franchise disputes.

History: The Arbitration Fairness Act (H.R. 1020) was introduced by Representative Henry “Hank” Johnson (D-GA) in March, 2009 and currently has 99 co-sponsors. Its Senate companion bill (S. 931) is sponsored by Senator Russ Feingold (D-WI) and has 11 co-sponsors. While the bill has strong opponents, including the International Franchise Association (IFA) and the U.S. Chamber of Commerce, there has been a strong lobby by franchisors to specifically have the franchise provision removed.

 

Support the Arbitration Fairness Act!

Do Not Let them Remove the Franchise Provision

 

Talking Points:
• The Arbitration Fairness Act protects franchisees from having binding arbitration imposed as their only means of dispute resolution
•  Binding arbitration clauses most often benefit franchisors. Generally, franchisors draft the contracts, select and pay the arbiters (who then have a financial incentive to rule in their favor) and determine the venue for arbitration. 
• Binding arbitration clauses are often buried in the fine print of franchise agreements; franchisees are left unaware that their rights have been taken away until a dispute arises.
• Franchisees are often forced into signing binding arbitration clauses as a condition of their contract; if they don’t sign, they cannot start running their businesses.

Senate Set to Pass Small-business Bill

Jay Heflin reports at The Hill that Senate Small Business Chairwoman Mary Landrieu (D-La.) on Wednesday said her chamber will pass legislation by the end of the week that creates a $30 billion lending pool for small businesses and provides approximately $12 billion in tax relief for these organizations.

We believe we have the 60 votes to get this done,” she told reporters, adding, “We’re hoping at the end that we actually have some Republicans join us for a bill that makes so much sense.”

Landrieu said negotiations were ongoing with Sen. George LeMieux (R-Fla.) on getting him to support the bill.

Click Here to Take Action Now!

 

Help Create Jobs, Give Small Businesses Access to Capital

: Extend Recovery Act’s SBA Loan Provisions

Landrieu did not say if she expected other Republicans to support the bill.

A vote on the measure is expected to occur after the Senate extends unemployment insurance, which is expected later today.

The lending pool in the small-business bill has come under fire by Republicans who contend it will create another TARP scenario by giving the Treasury authority over which small banks receive the funds to lend to small businesses.

Landreiu said the lending provision will be stripped from the original bill and then will be offered as the bill’s only amendment to illustrate who supports the pool.

“We want to highlight the fact of who’s actually stepping up to help small businesses through small banks,” she said.

An amendment on the estate tax offered by Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) will not be offered.

Landrieu said if the lending amendment fails the other portions of the bill will move forward. The other sections provide small-business tax relief and extend Small Business Administration loans. However, without the lending provision, the senator does not think the bill will pass.

“I don’t think it will pass without this in it,” she said.

 Learn more at: National Association of Government Guaranteed Lendors

Krispy Kreme Wins Trademark Claims Against Franchisee

Mark Hamblett reports in the New York Law Journal and published at Law.com that the franchisor Krispy Kreme Doughnut Corp. has won an injunction blocking a delinquent franchisee from operating in New York’s Pennsylvania Station and another location.

A federal judge granted the preliminary injunction to the doughnut maker on the grounds that franchisee Satellite Donuts was behind on its obligations under its agreements with Krispy Kreme and is in violation of the Lanham Act.

Judge Lewis A. Kaplan made that ruling after considering allegations by Krispy Kreme that Satellite was infringing its marks by continuing to operate without authorization and diluting the marks by making substandard doughnuts in Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC, 10 Civ. 4272. Satellite Donuts filed for Chapter 11 bankruptcy and had an automatic stay under §362(a), but the bankruptcy court modified the stay to allow Krispy Kreme to pursue its injunction before Kaplan.

Satellite Donuts entered into a franchise agreement for Penn Station in 2008 and a second agreement for a commissary facility in Baldwin, N.Y., where the Penn Station doughnuts are made, in 2009.

But in a May 12, 2010 letter to Satellite, Krispy Kreme said Satellite had failed to make payments of $310,046. When Satellite principal Alexander McCourt, one of two people who had personally guaranteed the company’s performance, said he had a third party willing to invest in Satellite, he was told by a Krispy Kreme employee that it was “too late in the game.”

Krispy Kreme filed a letter on May 23 telling Satellite to cease and desist, and it terminated the franchise agreements.

Krispy Kreme then sued in the Southern District of New York, where, on May 28, Kaplan granted a temporary restraining order that allowed Krispy Kreme “to have a quality control manager on site” at the franchises at Penn Station and in Baldwin.

Kaplan also ordered the defendants to “comply with all quality control standards set forth in the franchise agreements.”

In his opinion Thursday, Kaplan rejected Satellite’s argument that Krispy Kreme denied it the opportunity to cure the defaults, overstated the amount of the debt and refused to allow it to bring in a new investor.

The judge also called “entirely conclusory and unavailing” Satellite’s claims that the doctrine of unclean hands bars Krispy Kreme from obtaining relief and that the agreements’ noncompetition covenant is void as a matter of “strong public policy against enjoining a person from engaging in one’s chosen profession.”

Kaplan found that Krispy Kreme had easily shown it would suffer irreparable harm if an injunction was not granted.

He noted that Krispy Kreme’s quality control manager had stated that the Penn Station and Baldwin operations were failing to meet “the most basic quality control standards” for Krispy Kreme franchises.

Read more at: Law.com

Tight Credit Is Turning Franchisers Into Lenders

Kermit Pattison writes in the New York Times that Mr. Tessier had owned a liquor store for nearly a decade. He had a good credit score and a solid track record as a businessman in central Georgia. He assumed lenders would be happy to help. “I went to several banks and they acted like they could do loans,” Mr. Tessier said. “But when it came down to it, it was ridiculous. Ultimately, the terms and conditions were just outrageous.”

So Mr. Tessier turned to another source of capital, his franchiser. He financed the $250,000 cost of opening his pizza restaurant though a leasing program established by Marco’s Pizza to help franchisees unable to obtain traditional loans. The case is one example of a trend that is rattling the chains of franchising: facing a $3.4 billion credit shortfall, franchisers are trying to spur growth by offering franchisees new financing approaches and incentives.

“When you talk to anybody in the franchising industry, financing is the No. 1 concern,” said Sean Fitzgerald, vice president for franchise development at Wireless Zone, a cellphone retailer that has introduced in-house financing programs to cover part of its franchise fee and opening costs. “And it’s not going to get better anytime soon.”

Chains are facing the worst credit squeeze since the franchise model boomed in the years after World War II. This year, the franchise industry is expected to seek $10.1 billion in capital, but banks are expected to lend only $6.7 billion, according to the International Franchise Association.

The big national companies that dominated franchise lending before the 2008 collapse have stopped or reduced financing. The remaining lenders — often local banks — have been more restrictive in their credit underwriting, and they have been demanding more collateral (like home equity), more cash liquidity, more experience in the industry and outside sources of income, like rental income or a working spouse.

“Banks have hit the reset button,” said Reginald Heard, president and chief executive of Bankers One Capital, a company in Danbury, Conn., that specializes in financing franchises. “They’re just holding onto capital and being conservative on how they approach new deals going forward. The franchisee who left I.B.M. and now wants to open a Dunkin’ Donuts or Subway, those deals are a lot more challenging to get done.”

Robert C. Seiwert, senior vice president of the American Bankers Association, said the tighter credit standards affected first-time franchisees in particular (especially those trying riskier ventures like restaurants). Beyond the concerns about lacking collateral, experience and cash flow, lenders are often wary of franchisees who are unable or unwilling to make a large equity investment in their business. And lenders are likely to be especially cautious with newer chains that lack a track record.

That is why the franchisers are getting involved, Mr. Seiwert said. “Financing for franchisees has always been tough,” he said. “But in today’s economy, it’s even tougher.”

Some franchisers have gone a step further and put their own balance sheets to work by creating captive financing programs, pooled credit support or leasing programs. Others have tried “credit enhancement” in which the franchiser guarantees part of a loan to encourage tight-fisted lenders to free capital. Some franchisers are submitting themselves to the bank credit report process — essentially getting their credit-risk language translated into banking terms — so that franchisees have a lender-friendly package ready to take to banks that might have never seen a loan application from a particular chain.

Besides financing, many franchises have also taken steps to help potential franchisees by reducing fees, waiving royalties or reducing square-footage requirements. Whatever the tactic, the motive is the same: playing a more active role in helping franchisees gain access to capital. “We had to get into the financing space to be able to deliver a solution to our franchisees,” said Peter Taunton, founder and chief executive of Snap Fitness, a national gym chain based in Chanhassen, Minn.

Read more at: New York Times

DDIFO Road Show Stops in Newark

Coming off the announcement that 400 Dunkin’ shops in the Chicago region have joined the DD Independent Franchise Owners (DDIFO), the organization will host a meeting for franchise owners in the New York Metro area and Mid-Atlantic region on Thursday June 3, 2010, at the Sheraton Hotel in Newark, NJ.

“We are very excited about the meeting at the Newark Sheraton,” said Jim Coen, President of the DDIFO. “So far, pre-registration has been very strong, in part because of our dynamic roster of speakers, including Tom Colitsas—a member of the board of directors for the Independent Association of Franchise Operators (IAFO) the area’s newly created franchisee association.” Coen says IAFO is requesting recognition as a Local Members Committee of the DDIFO, similar to the recently created Chicago members committee.

Presently, over 2300 Dunkin’ Donuts shops are represented by DDIFO, making it the largest association of DD franchise owners in the U.S. Coen says his goal is to make DDIFO a nationally organized association. .

Joining Colitsas on the agenda for the meeting is Seth Ellis of Ellis & Goldberg, P.L. a trust and estate planning firm with areas of practice in administration and litigation for probate, trust and guardianship cases. Ellis currently represents a number of DD franchise owners in New England and Florida.

Also on the agenda are: Kevin McCarthy, Esq., Chairman of DDIFO and Gary Joyal, Managing Partner of Joyal Capital Management, LLC and Affiliates. There will be a Q & A session of Brand Advisory Council members that will be moderated by Jim Cain.

Over the past year, DDIFO has joined with a number of sponsors to provide direct access for franchise owners to vendors and service providers. 16 sponsors have signed on to be part of the Newark meeting.

Among the strengths of DDIFO is its independence. As McCarthy wrote in the upcoming edition of Independent Joe magazine, “There is no stronger rationale for the existence of DDIFO than its exclusive focus on the welfare of its franchisee members. Forceful, exclusively focused, well financed and independent strength is available to you as a Dunkin’ franchise owner through DDIFO.”

The DDIFO Mid Atlantic Franchise Owners meeting kicks off at 10am. You can register to attend here.

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