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Troy Jensen
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Troy Jensen is Chief Executive Officer and Managing Director of nxVenture Capital, a rapidly-growing and innovative Private Equity Management Firm based in New York City. As well as overseeing the firm’s global operations, he is the Managing Director and head of the Investment Committee. Jensen... More
My company:
nxVenture Capital Ltd.
My blog:
solventusenergy.com
  • Does Franchising Truly Lower Your Risk Profile In Starting A New Business? 0 comments
    Mar 3, 2014 2:53 AM

    Franchising can be a fantastic way to earn a very solid return on capital invested, but while some of the risk associated with starting up, say, your own fast food burger venture or hotel is indeed mitigated by being part of a strong franchising company, it by all means is still a "Venture Startup" in the end, and that said, there are major risks still involved in the deal.

    Infographic - 11 Steps to Becoming a Franchiser

    Steps to becoming a Franchiser...

    Entrepreneur Magazine's Top Franchising Opportunities in 2013:

    1. Hampton Hotels (Startup Costs: US$3.7M - $13.52M)

    2. Subway (Startup Costs: US$85.7K - $262.85K)

    3. Jiffy Lube Int'l. Inc. (Startup Costs: US$196.5K - $304K)

    4. 7-Eleven Inc. (Startup Costs: US$$30.8K - $1.5M)

    5. Supercuts (Startup Costs: US$103.55K - $196.5K)

    6. Anytime Fitness (Startup Costs: US$56.3K - $353.9K)

    7. Servpro (Startup Costs: US$134.8K - $183.45K)

    8. Denny's Inc. (Startup Costs: US$1.18M - $2.4M)

    9. McDonald's (Startup Costs: US$1.03M - $2.18M)

    10. Pizza Hut Inc. (Startup Costs: US$297K - $2.11M)

    Courtesy Entrepreneur Magazine's Franchises Special Edition...

    Some of the top franchisers in the world...

    That said, I am by NO MEANS in this posting disparaging this new breed of "Franchise Consultants" - I have several upstanding friends and associates who run fantastic operations. That said, there is some important background information to be aware of - especially the difference between today's Franchise Consultant, as opposed to a certified Franchise Broker.

    For example, what I have offered twice as advisory, or consultancy services, to clients looking into purchasing a franchised businesses (primarily in the QSR industry segments, as well as the upper-scale hotel and resort segment). This is a far, far different service than what is now typically known as a Franchise Consultant today.

    If you feel your deal is taking much too long, would like more information on the process and your rights, or are starting to wonder if you have been the victim of fraud, here are a few links to read through carefully:

    Franchising

    Franchise Rule

    Franchise disclosure document

    Franchise and Business Opportunities Rule

    Buying a Franchise

    Franchising Overview:

    As of the late 1990's the term 'consultant' was adopted by franchise salesmen and brokers that began representing themselves as "free" consultants to prospective franchise buyers. These 'free consultants' provide introduction services for franchise opportunity sellers with whom they have worked out a pay-for-sale agreement. Therefore, they are driven by the desire to connect the 'client' to a particular franchise.

    There are still franchise consultants who charge clients for input whether the client desires advice on buying a franchise or assistance becoming a franchiser of their own (hopefully quality) business. Know the difference between a commissioned salesperson and a fee-for-service consultant.

    So, I can go on, but I did grow up around franchised fast food restaurants, and actually just last year recently consulted (the traditional role of a consultant-to-client relationship as any other industry wherein the consultant charges a fee for services, as opposed to this new role of "Franchisee Consultant" I will explain below). This is my take on two factors:

     

    1. What exactly is a "Franchisee Consultant" versus a "Franchisee Broker."
    2. Why we see a lot of long delays in this new "Franchisee Consultant's" promised scope-of-services to their clients once the Franchised Business is sold.

    Franchise Brokers versus Franchise Consultants - The Facts:

    Especially since the Federal Trade Commission Franchise Rule on Franchising changed the requirement that representatives of franchisers as salespeople disclose their past personal and professional history, there has been an onslaught of salespeople titling themselves 'consultants', and that includes several firms offering to train new members in as little as two weeks to become franchise experts prepared to advise new buyers as to the best opportunity in which to invest their available funds. Certainly there are competent 'franchise brokers' that understand the industry who can help advise buyers, but for the most part, a freshly minted broker (self-titled 'franchise consultant') is not equipped to assist a buyer with decisions concerning their entrepreneurial future.

    The following is the way that some may describe the broker, or in their language, a consultant:

    Much like a real estate agent, the franchise "recruitment consultant" typically charges no upfront fees to "buyers" (franchisees); instead, he or she receives the bulk of his or her income from "sellers" (franchisers) and thus operates as a biased conduit between the two. It is important to understand that franchisers do not employ franchise consultants, but they do employ franchise brokers who call themselves franchise consultants. They establish relationships with these franchise consulting firms. The role of the franchise consultant is to build a win-win relationship between the franchiser and the potential franchisee. Quality franchise consulting firms that have a large footprint in the franchising industry and help screen out the franchises that don't meet the high standards that are set by franchise experts.

    Consultants' services are "free" to the potential buyer or franchisee only to the extent payment goes from the franchisee to the franchise company then into the brokers pocket, but these franchise brokers receive a substantial commission of up to 50% or more of the franchise fee the buyer pays to the franchise company. The potential buyer would pay exactly the same franchise fee as he or she would pay if they had contacted the same franchise on their own. It is illegal for the franchiser to charge anything additional for the use of a Franchise Consultant, unless this is disclosed in the Franchise Disclosure Document (NYSEARCA:FDD).

    So why would a franchisers work with franchise consultants? They do because franchise consultants screen out all of the under qualified candidates and only introduce to them highly screened quality candidates that fit their business model. Quality franchises are not concerned with paying the consultant a percentage of the initial franchise fee because they are looking at the long term residual value of on-going royalties from the franchisee. Of course, there are a substantial number of franchises that use franchise brokers (misleadingly called "franchise consultants") as a way to sell a large number of franchises in a network where maximizing franchise sales is paramount over franchise network survival.

    There are many licensed attorneys who act as franchise consultants and who center their practices on their expertise in franchising and who will consult/represent the franchisee or the franchiser under a fee agreement. Attorneys cannot take fees from franchisers and consult with the franchisee at the same time because this would represent a conflict of interest for an attorney under state laws. A consultant package from an attorney will, of course, be expensive, but the attorney has the incentive and the duty under the law to "vet" the franchiser and perform "due diligence" on the offering on behalf of his/her client when he/she offers a consultant package to a client. It is critical to use a franchise attorney who also has an MBA, as this will ensure due diligence from both a legal and business perspective.

    A few larger franchise consulting firms have branched out themselves, essentially "franchising" their franchise consulting businesses. And industry publications such as Franchise Business Review and Entrepreneur regularly quote high performing franchise consultants as reliable article sources. High performing franchise consultants are those who have a past performance record of providing quality matches for clients and a high success rate of their clients.

    But buyer beware applies - many of these highly touted franchise consultants represent franchise companies that have little, if any, name recognition.

    In addition however, smaller and more pragmatic consultancy practices may work much closer with smaller businesses and work with them to franchise their business over time. This enables the business to begin franchising their business much sooner, often within two years of successful operation of a local model and for much less money - therefore risk, than using some of the larger consultancy practices. These kind of franchise consultancy are paid for by the franchiser not the franchisee - therefore mitigates risk on behalf of the franchisee of being sold something which is not necessarily "right for them" but rather gives the franchise consultants a nice commission.

    My own and my family's long history with franchised businesses:

    • My Uncle (James A. Jensen) was the Senior Vice President and Chief Operating Officer of Hardee's Food Systems until 1995 (Hardee's today was acquired and is now a part of CKE Restaurants, which currently operates Carl's Junior, Hardee's, Green Burrito and Red Burrito).
    • In my Uncle's reign, Hardee's operated Sandy's - where my Uncle James Jensen entered the Hardee's system; Roy Rogers; Dee's Drive In; Burger Chef; and Rax Roast Beef - most of these locations were converted to Hardee's or Hardee's Hybrid restaurants.
    • As a family, right out of college I worked for several years before heading West to California to pursue my Digital Dreams operating multiple Hardee's franchised restaurants in the Outer Banks of North Carolina (part of my Uncle's very lucrative severance package).
    • In the late 1980's, my father (Jerry J. Jensen) was a part-owner and President of Transpacific Hotel Corporation, which was a company founded by R.H. Kaufman, who had founded and operated the Pioneer Chicken chain of quick-service chicken restaurants, primarily in Southern California, Arizona and Nevada.
    • Pioneer grew to become in the mid-80's the second largest QSR (Quick Service Restaurant) chicken chain (behind of course the Colonel, Kentucky Fried Chicken), and for many, many SoCal peeps Pioneer Chicken to this day elicits a very positive emotive reaction...they had an incredible growing franchisee-driven chain in Pioneer.
    • My family owned two franchised outlets in Arizona (western Arizona, on the California border, in Lake Havasu City and Bullhead City, AZ), but of course because of my father's position we never dealt with any Franchisee Broker or Consultant.
    • My father, during the early 90's and difficult financial times for Pioneer, did assume an interim CEO role in the company briefly - interestingly he was negotiating with his twin brother, my Uncle at Hardee's, regarding a potential acquisition.
    • My Uncle has been CEO of other very large franchisee corporations, including The Texas Bagel Group (franchised Bruegger's Bagels, the company rapidly expanded in the mid-to-late 1990's and owned & operated several dozen locations across Texas) as well as a San Francisco Bay-Area based large franchiser of Pizza Hut restaurants.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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