DEFICITS EXPLODING, INFLATION UPTICKING, CRYPTOCURRENCIES LOSE THEIR LUSTER, WHILE GOLD RESUMES ITS UPWARD RUN

Posted on May 20, 2021May 27, 2021 by Franchise Strategist

DEFICITS EXPLODING, INFLATION UPTICKING, CRYPTOCURRENCIES LOSE THEIR LUSTER, WHILE GOLD RESUMES ITS UPWARD RUN

As far as the debt is concerned, under Obama the debt went from $10.6 trillion at 1/20/09 to $19.9 trillion at 1/20/2017, an increase of $9.3 trillion over EIGHT YEARS. The debt under Trump increased to $27.8 trillion at 1/31/21, an increase of $7.9 trillion over FOUR YEARS.
Don’t believe anything you hear and very little of what you read!

By Roger Lipton

I cannot resist commenting on, and correcting the latest version of revisionist economic history.
Just yesterday Maria Bartiromo was interviewing Peter Navarro, President Donald Trump’s Director of Trade and Manufacturing and a frequent economic spokesperson. After predictably predicting a weak stock market, burdened by the poor policies of President Biden, his description of the last ten years went like this: “Under President Obama, coming out of the 08-09 crash, the GDP grew by a meager 2%, and the debt doubled. Under Donald Trump, we grew at 3% and the economy was roaring before the pandemic hit.”

Not quite:
Under President Obama, the GDP grew by an average of 1.6%, held down by a negative 2.5% in ’09, coming out of the crash. Excluding ’09, GDP grew at an average of 2.2% over seven years.
Trump’s four years went +2.3% in ’17, +3% in ’18, +2.2% in ’19 and -3.7% in pandemically driven 2020. Excluding the last year, out of Trump’s control, just as Obama’s first year, Trump’s economy grew at an average of 2.5%.

So: A reasonably fair comparison would be that Trump’s economy, buttressed by lower taxes, a trillion dollars of overseas corporate capital repatriated, less legislative burden, and a friendlier business climate, grew three tenths of one percent faster than Obama’s. If one wants to include the first year under Obama and the last under Trump, under control of neither, the average would be 0.95% under Trump and 1.6% under Obama.

With that off my chest, the fiscal/monetary chickens are coming home to roost. The factors that we have been discussing for years are becoming too obvious for the financial markets and policy makers to ignore.

The table just below shows the monthly deficit numbers. For the month ending April, the deficit was “only” $226B, down from the explosion of $738B in the first full month of the pandemic last year. Still, we are running 30% ahead of a year ago, which finished in a $3.1 trillion hole, and there is huge spending ahead of us this year. With the trillions that are being thrown around, it seems likely that the deficit for the current year will be over $4 trillion. Keep in mind that our Federal Reserve is buying the majority of the debt that we are issuing to fund this deficit, so we are literally “monetizing” the debt by paying for the deficit with freshly printed Dollars. It is in this context that we have suggested that there is no need to raise taxes on anyone, rich or poor. None of it will supply more than a few hundred billion dollars per year, and there is much less aggravation for everyone if one of Jerome Powell’s hundreds of PHDs pushes a computer button and produces the US version of a digital currency. Of course, inflation will be the cruelest tax, especially on the middle and lower class citizen, but they will likely never understand the cause.

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Inflation in consumer goods, rather than the asset inflation we have seen in the last ten years, is finally rearing its beautiful (as far as the Federal Reserve is concerned) head. Post pandemic demand, along with looser purse strings as pandemic relief checks are distributed, is replacing the pandemic induced reduction of demand that has suppressed the economy over the last year. As we wrote last month, some very bright economists are agreeing with Jerome Powell that inflationary indications are “anchored” and “transitory”, but we believe transitory may last longer and not so well anchored as expected. The last twelve months of the CPI are now above 4%, and the CPI is widely considered to be understating the inflationary facts of life.

We consider that there has been an undeniable bubble in all kinds of assets, from Tesla to Bitcoin, to collectible homes worth a hundred million dollars to crypto-art and lots of individual stocks that trade for 50x sales instead of a more modest multiple of earnings or cash flow. Investors of all stripes are reaching desperately for a “return”, as evidenced by the historically low yield spread between high yield debt and US Treasury securities, as well as the asset classes referred to above. As we write this, a number of these upside distortions are in the process of being corrected. Tesla is down from over $900 to under $600. Bitcoin is $43k, down from $64k three weeks ago, the bloom is coming off the SPAC rose, and GameStop is down well over 50% from its ridiculous high. However, the process has just begun and will no doubt play out over a number of years.

Gold and gold mining stocks seem to have consolidated adequately since last August, when interest rates went modestly higher, and have just now established new bullish chart patterns. Negative “real interest rates”, subtracting the inflation rate from the yield on short term treasuries, has a strong correlation with the price of gold. The more negative the “real” interest rate, the more attractive is gold bullion, with no dividend or interest. Almost to the day, last August, when interest rates moved higher, reducing the degree of negativity, the gold price started drifting lower. Real treasury rates never turned positive, but the smaller degree of negativity reduced the urgency for ownership of gold. While interest rates have not gone back down to levels of nine months ago, inflation has picked up substantially, so short term treasuries yield several points less than the 4.2% trailing twelve month inflation rate and gold therefore protects purchasing power very well without paying interest or a dividend. The result is that gold bullion, as well as gold mining stocks have now broken out above their 200 day moving average price lines, so technicians will reprogram their algorithmically driven computers. While gold bullion is still down a percent or two for the year, gold mining stocks are positive for the year and have never been fundamentally cheaper.

It continues to be our conviction that gold mining stocks, in particular, are the single best place to protect one’s purchasing power over the long term, and our investment partnership is invested accordingly. Since there seems to be an increasing interest in this subject, in very quick summation: I am personally the largest Limited Partner, by far, as well as the Managing General Partner of RHL Associates LP, as I have been for the 28 year life of the Partnership. The minimum investment is $500k and the fee structure is “1 and 10”. Funds can be added on the first of any month and withdrawn at the end of any quarter with 30 days written notice. We remain open to new investors, keep our investors apprised on a monthly basis as to our performance, and can be contacted through this site or by email at [email protected].

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About Roger Lipton

Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

He also invested in gold mining stocks and studied the work of Harry Browne, the world famous author and economist, who predicted the 2000% move in the price of gold in the 1970s. In this regard, Roger has republished the world famous first book of Harry Browne, and offers it free with each subscription to this website.

In the late 1970s, Roger left Wall Street to build and operate a chain of 15 Arthur Treacher’s Fish & Chips stores in Canada. In 1980 he returned to New York, and for the next 13 years worked at Ladenburg, Thalmann & Co., Inc. where he managed the Lipton Research Division, specializing (naturally) in the restaurant industry. While at Ladenburg he sponsored an annual Restaurant Conference for investment professionals, featuring as keynote speakers friends such as Norman Brinker (the “Babe Ruth” of casual dining) , Dave Thomas (Wendy’s) , Jim Collins (Sizzler & KFC), Jim Patterson (Long John Silver’s), Allan Karp (KarpReilly) and Ted Levitt (legendary Harvard Business School marketing professor, and author). Roger formed his own firm, Lipton Financial Services, Inc. in 1993, to invest in restaurant and retail companies, as well as provide investment banking services. Within the restaurant industry he currently serves on the Board(s) of Directors of both publicly held, as well as a private equity backed casual dining chains. He also serves on the Board of a charitable foundation affiliated with Israel’s Technion Institute.

The Bottom Line: Roger Lipton is uniquely equipped as an investor, investment banker, board member and advisor, especially related to the restaurant, franchising, and retail industries. He has advised institutional investors, underwritten public offerings, counseled on merger transactions, served on Board(s) of Directors, public and private, been retained as an expert witness, conducted valuation studies and personally managed a successful investment partnership, all specializing in restaurants/retail. He has studied great success stories over the last 40 years, from McDonalds to Shake Shack. Even more important he has watched scores of companies stumble and sometimes fail. It is this insight that Roger brings to this website.

Strategy – The Most Successful Franchises Know Their Competitors

Posted on May 20, 2021May 20, 2021 by Franchise Strategist

Knowing which franchises, are a threat to your franchise growth and development requires diligence and having the proper information. No franchise program is so unique it is impervious to competition.

The Most Successful Franchises Know Their Competitors

FRANCHISING, — Ed Teixeira is Chief Operating Officer of Franchise Grade and was the founder and President of FranchiseKnowHow, L.L.C. a franchise consulting firm.

By Ed Teixeira
VP Franchise Grade, Author, MA Economics, Industry Partner Stony Brook U. and member of Advisory Board Pace U. Lubin School of Business.

A sign of a successful franchise system is knowing your competitor’s franchise offering. When speaking with top performing franchisor executives regarding their success, a common response was how well they knew their competitors. This knowledge was the result of hard work on the part of the franchisor and its franchisees. It means that each competitor is carefully analyzed which identifies their strengths and weaknesses from a competitive standpoint. It requires knowing how the key components of your competitor’s FDD compares to your FDD.

Knowing which franchises, are a threat to your franchise growth and development requires diligence and having the proper information. No franchise program is so unique it is impervious to competition.

The most effective and productive way to know how your franchise compares to competitors is to use data from Franchise Grade. There are two types of competitors that franchisors should know: direct competitors; who represent franchises in their own business segment and indirect competitors; which represent franchises in a related segment. For example, among children’s franchises, children’s fitness and enrichment programs could represent direct and indirect competitors of each other.

The first step towards knowing your competitors is to identify franchises that most closely compare to yours. You can do an analysis of their FDD’s which is time-consuming or use our website to search our index of thousands of franchise systems, all indexed and analyzed to make your research easier.

This product allows you to understand:

* How you compare to top franchise competitors in the key performance areas

* Which areas of your franchise you need to improve on.

* The parts of your franchise program that you will want to emphasize and promote to candidates.

* What areas sets you apart from your competitors such as fees, territory, franchise term, etc.

* If you use a third party like Franchise Grade, for a detailed analysis you will have the advantage of objectivity. This is important to prospective franchisees.

Franchisors compete with other franchisors for the same investment dollars. It is vital that a franchisor is aware of their competitors and how their franchise compares to them. This process is needed to construct a successful franchise marketing strategy. Any franchise expansion strategy should follow the lead of the most successful franchises. Be sure to know your competitors and find the data to help you promote your investment value to stand apart from them.

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About the Author
Ed Teixeira is currently the VP of Franchise Development for Franchise Grade.com. I’ve had the opportunity to spend over 35 years in the franchise industry as a franchise executive and franchisee. I have an MA in Economics from Northeastern U. My franchise experience has included the retail, manufacturing, home health care, medical staffing and GPS fleet tracking industries. I’ve done international licensing in Asia, Europe, and South America and was a contributor to Forbes Magazine. I’ve been qualified by the International Center for Dispute Resolution as an international franchise expert. I am a faculty member of LawLine.com I have Lectured at Stony Brook University Business School on the subject of Franchising. Been interviewed by the Wall Street Journal, Forbes, Bloomberg, Franchise Times, Franchise Update, New York Newsday and Long Island Business Review. I wrote and published The Franchise Buyers Manual a comprehensive book for people considering investing in a franchise. In 2004 I wrote Franchising From the Inside Out an overview of the franchise industry. I have established numerous franchise concepts for independent business owners and with my affiliates do international franchising. I’ve been designated a franchise industry expert by The Business Broker Press. Am a member of the Advisory Board Pace University Lubin School of Business and Industry Partner Stony Brook University.

DOORDASH – IN A HUGE STATE OF FLUX AS THE PANDEMIC WINDS DOWN

Posted on April 2, 2021April 2, 2021 by Franchise Strategist

The business model is relatively simple. Once on the DoorDash platform, the company will take orders and deliver those orders for a fee ranging from 15-30%. At the same time, DoorDash charges the customer a service fee and a delivery fee that ranges from 15-25% of the cost of the order.

DOORDASH (DASH) – IN A HUGE STATE OF FLUX AS THE PANDEMIC WINDS DOWN
By Roger Lipton with permission

DoorDash is one of the largest “local logistics platform” i.e., food delivery firm, with 450,000 merchants, over 20 million consumers, 1 million Dashers (drivers) and 1.2 billion orders completed since the founding. The company has a 50% market share in the U.S. Revenue growth over the last five quarters has averaged over 211% with Q4 2020 revenue growth coming in at 226%. However, the company has lost over $1.2B since inception and lost $312M in Q4 2020. In preview of our summary: the fact the company cannot make money in the most ideal environment for its business model in 2020 is concerning. So is the fact the company has 46 pages of risk factors listed in its 10K.

We also point out that, while we are providing some “food for thought” below, third party delivery is a complex subject and in an enormous state of flux, so we don’t expect that we can answer every potential concern within these pages. We have stated before our reservations about the enormous capitalization of DASH ($42 billion as of today) and our concern about future operating margins for all the major third party delivery companies. Our intention here is to present what we can, in the hope that our work will be useful to the restaurant companies with which we have a working relationship.

THE BUSINESS MODEL

DoorDash and the other food delivery companies such as GrubHub and Uber Eats, were primary beneficiaries of governmental policies that either closed or significantly restricted seating options for most restaurants. Adding a delivery service through DoorDash, GrubHub or Uber Eats was one of the few options available to restaurants and was therefore a requirement to stay open. Obviously when demand for your service is almost mandated by the government, you are going to grow your business tremendously.

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While DoorDash holds a 50% market share nationally, the company’s dominance is not universal across the country. In many of the major markets the company’s market share is less than 40%, which means that competition remains fierce, and this should keep margins under pressure in the long-term and advertising costs and competition for drivers increases. The lack of customer loyalty, as illustrated by the large overlap of usage of other deliver platforms, is also a long-term problem.

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THE REVENUE BASE

DoorDash makes money by charging both the restaurant and the customer. While the company does not report its actual fee structure, the practical result is that DoorDash is charging the merchant an average of about 18% of the cost of the order, though that fee is apparently negotiable from 15-30% of the cost of the order. In addition to charging the merchant, DoorDash also charges the customer fees ranging from 12-18% of the order. The average order size is approximately $37 and only 20% of orders are for more than $50. It remains unknown to what extent this is a long term sustainable model, when the profit margin of the restaurant is materially compromised and the customer ends up paying 40% or more above dining within the restaurant or picking up the food themselves. It is also not yet clear to what extent delivery cannibalizes dine-in or pick up sales.

It is important to note that cities are passing “Temporary” Price Control Regulations in response to high delivery fees.In response to companies such as DoorDash charging upwards of 30% of the cost of an order in fees. cities are starting to pass regulations to cap the fees third-party ordering services can charge restaurants. For example, in the company’s Q4 2020 investor letter, DoorDash co-founders, Tony XU and Prabir Adarkar, stated that there are now 73 jurisdictions imposing temporary price controls, which is more than double the 32 jurisdictions in the third quarter. Generally speaking, these price controls cap the amount of delivery fees charged the merchant to 15%. The controls have predictably negatively impacted DoorDash’s profitability.

The company disclosed that the net impact of price controls in Q4 2020 was $36M or 44bps of profitability. The company expects the impact of price controls to almost double in Q1 2021. In the meantime, DoorDash is trying other measures to manage these caps. The company is charging an additional $1 to $2 fee in at least 11 municipalities that have caps in place. In Denver and Chicago, DoorDash began charging customers a $2 “Denver fee” and $1.50 “Chicago fee” per order. While these price controls are said to be temporary, that remains to be seen.

THE ECONOMICS FOR RESTAURANTS, CONSUMERS, & DRIVERS (“DASHERS”)

The Restaurants

The pre-tax profit margin of a restaurant generally ranges from 5-10% of revenue at the corporate level. If a restaurant is having to pay DoorDash 15-30% of an order, and DoorDash does a material portion of the sales, the company’s profit margins can easily drop by a couple of hundred basis points. If deliveries become 30-50% of total revenue the company could turn unprofitable. While some of the deliveries may currently be incremental business, and a year ago publicly held companies were accepting that premise, we haven’t heard anyone making that claim recently. While we have no doubt that delivery sales in aggregate will be higher going forward, it is questionable whether the current growth is sustainable because of the high cost to both consumers and restaurants.

In addition, by utilizing drivers from third parties, the restaurant loses the direct relationship with the customer and there is no incentive for the driver to enhance the customer experience with any particular restaurant. This lack of control and incentive could negatively impact the customer’s relationship with the restaurant. Drivers for pizza chains like Domino’s and Papa Johns are more incentivized to enhance the customer experience because they can move up the ladder at these firms and many have eventually become franchisees. There is no upward mobility for drivers at DoorDash.

Every major restaurant chain has its own app that it uses to take orders and communicate with its customers. More importantly, when a customer uses the restaurant’s app, they gain valuable information, such as order size, composition and frequency, that the company can use to improve customer relationships. They can also offer loyalty rewards and other customer-centric offers, such as sales on specific food items.

On the latest Brinker International earnings call, CEO Wyman Roberts said that DoorDash only offers high level information about orders for their Just Wings virtual brand offered on DoorDash. Because they do not share individual customer data, it complicates their marketing and data collection efforts. In the long run, we think most major brands will try to increase customer usage on their proprietary apps and reduce reliance on third-party delivery services for customer acquisition.

As more people go back to work, we believe the necessity of paying huge markups for food delivery will diminish and DoorDash will lose a big tailwind. We also believe that companies like Brinker or Darden that already have large To-Go offerings will try to replace delivery with more To-Go orders. It is a win-win for the company and customers. Customers pay significantly less, even including drive time to pick up their food and the company saves the fee they pay DoorDash. The restaurant leverages their existing infrastructure and gains more valuable data on their customer that can be used to increase sales and profitability. It can also improve kitchen efficiency.

The Consumers

To recover some of the fees, many restaurants are increasing the menu prices for items ordered for delivery. Researchers in Minneapolis recently conducted a case study of delivery platforms to compare pricing and consumer fees.

There are several takeaways from this case study.

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Since restaurants appear to be marking up the menu price to recoup most of the DoorDash fee, the customer is paying 40-60% more than they would by eating in the restaurant and this is before the tip. It is therefore clear that DoorDash is the largest beneficiary, in this simplistic example, without considering the customer acquisition cost or the sustainability of the model in terms of satisfying the drivers and food consumers.

The Restaurant Business editorial staff did a test ordering chicken sandwiches from various fast-food concepts. It reported that some editors paid $15 or more for a single sandwich to be delivered. As one editor stated,
“My cost to have Chick-fil-A delivered to my home was roughly the same cost as I paid to east out at a local Mexican restaurant.”

The “Dashers” – a few problems

Similar to Uber and Lyft, the DoorDash business model relies on independent contractors utilizing their own vehicles to provide the service to customers. According to the 10K, there were 1 million Dashers (drivers) and their total earnings were $2B. Though Doordash says on their website that a Dasher can make between $15-$25 an hour, dividing $2B by 1M drivers amounts to $2,000 per year, $167/month, or $40/wk. Since over 90% of Dashers work less than 10 hours a week, this would amount to only about $4.00/hr. The company touts examples in California where Dashers earn $33-$36 an hour working less than 7 hours a week ($1000 a month) in various cities. We believe these figures are clearly outliers and not representative of the true earnings potential of a Dasher. Moreover, relying on a worker that only wants to work 10 hours a week for less than $167 a month does not seem to us to be a way to maintain a consistent, quality experience for the customer.

There is also a growing political pressure to increase the pay and benefits to so-called “gig workers”. A group in Washington state called Working Washington is running a “Pay Up” campaign to increase the income of these workers. The group published a study on the net income of Dashers in Washington state. We encourage subscribers to read it. The conclusion was startling, supporting our calculation above:

“On average, DoorDash pays just $1.45 per hour worked, after accounting for the expenses of mileage and the additional payroll taxes borne by independent contractors. The average job requires 6.8 miles of driving and takes 30 minutes to complete. “

As a result of negative publicity and new legislation, the company has already been forced to increase the amount it pays Dasher on a per order basis. The passage of Proposition 22 in California and the potential for other states to do enact similar legislation could cause the company to raise wages again. As discussed in the 10K, the impact of Proposition 22 on the company were as follows:

Amongst the 46 pages of risks in the 10-K are a few nuggets as they relate to these costs.

Several other states where we operate may be considering adopting legislation similar to Proposition 22, which we would expect to increase our costs related to Dashers in such jurisdictions. This could result in lower order volumes if we charge higher fees and commissions and could also adversely impact our results of operations.
Several jurisdictions where we operate may be considering adopting legislation that would pair worker flexibility and independence with new protections and benefits. To the extent these are adopted, we would expect the costs related to Dashers in such jurisdictions to increase and we could experience lower order volumes if we charge higher fees and commissions.
The necessity for DoorDash to improve the economic proposition for their Dashers will most likely reduce DoorDash operating margins because the merchants and consumers are already more than adequately burdened.

NOW – THE RUBBER MEETS THE ROAD – AND OUR CONCLUSION

Before presenting our conclusion, the following post by an industry insider on an investment website supports our concerns.:

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As the pandemic winds down, it should be no surprise that recent guidance shows sharp deceleration in revenue growth for 2021.In the Q4 2020 earnings release and shareholder letter, the company issued guidance for 2021. While the company guided for 187% growth in revenue in Q1, revenue growth for all of 2021 is only expected to be 28%. This is a significant deceleration from the 200%+ growth in 2020. Wall Street is expecting revenue growth in 2022 to slow ever further to 26%. In addition, because of the increasing costs and limits on fee and commissions discussed above, the company guided adjusted EBTIDA to $0-$200M, considerably below the $250M Wall Street was expecting going into 2021. Underlying the slower growth, we think it likely that as more people go back to work, we believe the necessity of paying huge markups for food delivery will diminish. We also believe that companies like Brinker or Darden that already have large To-Go offerings will try to replace delivery with more To-Go orders. It would be a win-win for the company and customers, as customers pay less, even including drive time to pick up their food and the merchant saves the DoorDash fee. The restaurant also gains the valuable customer data that can be used to increase sales and profitability.

We believe the DoorDash business model is far from sustainable in its present form. It is especially concerning that DASH has reported nothing but red ink in an environment so enormously supportive of third party delivery agents. Though the stock is 50% off its highs, we do not think the Enterprise Value, still over $40 billion, is justifiable. The EV multiple is over 10x 2021 projected sales and an indeterminate multiple of the ridiculously large guided range of Adjusted EBITDA from zero to $200M. We are not long or short the stock, just saying 😊

About Roger Lipton
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Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

Franchise Disclosure Document vs. Franchise Agreement

Posted on March 30, 2021March 30, 2021 by Franchise Strategist

Our article contributor today is Jonathan Barber, Partner at Franchise.Law. Jonathan review the differences between the Franchise Disclosure Document(FDD) nand the actual contract you’ll be asked to sign upon entering into an agreement with a Franchisor. Purchasing a franchise can be a complicated transaction and understand these documents is critical. Jonathan shaes some great insight here but to truly understand the issue please feel free to contact him at the link below in the article.

Franchise Disclosure Document vs. Franchise Agreement
By Jonathan Barber

When most people buy a franchise, they look at the Franchise Disclosure Document (FDD) and believe that everything within that document is their contract with the franchisor. However, this is not the case. It is important to understand the difference between the franchise disclosure document versus the franchise agreement when looking to enter a franchise.

What Makes the FDD Distinct from the Franchise Agreement?
What some do not realize is that the FDD is merely an overview of the franchise relationship and includes the experience of the franchisor and its officers; the litigation and bankruptcy history of the franchisor and its officers; the costs the franchisee candidate can expect to incur in building out and operating the franchise; a history of the franchise itself; and the support that the franchisee can expect to receive. The FDD is not a contract itself, although a franchisor can be held legally liable for its contents if an issue of misrepresentation arises. The FDD contents are dictated by federal and state regulations which have several limitations on what franchisors can and cannot include such as financial representations and disclaimers.

When reading the FDD, a franchisee candidate will find several exhibits which include financial statements for the franchisor, a sample copy of the franchise agreement, other standard contracts that the franchisee may be required to sign, if any, state amendments to the franchise agreement and FDD, and receipts to acknowledge that the franchisee candidate received the FDD.

The franchise agreement, on the other hand, is the actual contract between the franchisor and franchisee. The terms of the franchise agreement are binding between the parties, subject to certain changes by some states and allowable variances through operations manual revisions. Although many portions of the FDD are reflected in the franchise agreement, such as ongoing fees, default and termination provisions, and territory size, the franchise agreement goes further into detail to address the rights, roles and obligations of both the franchisee and franchisor in legal terms.

Additionally, when reviewing the franchise prior to purchasing, a candidate should understand that any changes made will be made exclusively to the franchise agreement, not the FDD. In most cases these changes, if any, are made through an amendment to the franchise agreement and must be signed along with the franchise agreement. If any changes are not made in writing and signed by both franchisee and franchisor, then either side risks these changes not being enforceable.

Because of the differences between the FDD and franchise agreement, we highly recommend having a franchise attorney review both documents thoroughly before purchasing the franchise or launching the franchise brand. If you need assistance, please reach out to our team today.
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About the Author:JONATHAN N. BARBER MANAGING ATTORNEY
Jonathan Barber is a passionate and experienced corporate transactions and litigations attorney. He has ample experience with large finance corporations, but his true passion lies in working with entrepreneurs and small businesses. This led him to the Liberty University School of Law where he studied transactional law.

After graduating with his JD, Jonathan became an adjunct professor of business law at a local community college, then began working as an associate attorney under Jason Power. Like Jason, Jonathan’s drive comes from his “healthy disregard for the impossible.” Ready to take on any challenge, Jonathan will do everything possible to find a solution. His diligence and commitment to law has led him to being named a 2019 1851 Magazine Franchise Legal Player, 2019 and 2020 Franchise Times Legal Eagle, and 2016, 2017, and 2018 North Carolina Pro Bono Honor Society.

Cabin Fever Will Drive a Franchise Explosion

Posted on March 23, 2021March 23, 2021 by Franchise Strategist

There are available franchise opportunities that can satisfy a wide range of prospective franchisees. From fast food concepts to children’s services there are franchises that require an affordable investment that can meet an increase in customer demand.

Cabin Fever Will Drive a Franchise Explosion

By Ed Teixeira. VP Franchise Grade, Author, MA Economics, Industry Partner Stony Brook U.,Advisory Board Pace U. Lubin School

The havoc caused by the Pandemic has given a new meaning to the term cabin fever which is typically attributed to a bad winter. Instead, this recent case of cabin fever has lasted throughout the spring, summer and winter. As the disruption caused by the Pandemic begins to subside with more of us getting vaccinated people are looking to break out from being stuck at home.

Whether its recently overcrowded restaurants, golf courses or a surge in vacation rentals, people want to get out. This movement has started to translate into an increased focus on franchise opportunities. Every credible franchise forecast predicts a very active 2021 for the franchise industry. If there is one thing the franchise model proved during the Pandemic is its resilience to withstand it’s negative impact that caused so many independently owned small and medium businesses to close.

Consider the disruption in children’s lives by their not being able to attend school or participate in recreational actives. Parents of school age children will want to make up for these losses by utilizing the various services provided by children’s franchise brands from tutoring to creative arts to recreational programs.

A good resource is, https://www.franchisegrade.com/search which presents over 2,500 franchise opportunities that prospective franchisees can view at no cost. Visitors can use filters to find the type of franchise they prefer, the amount of investment and compare various franchise opportunities.

Now is the time to shake off that cabin fever and take that next step by finding that franchise opportunity that fulfills your vision and meets your budget.

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ABOUT THE AUTHOR:
Currently the VP of Franchise Development for Franchise Grade.com. Ed has over 35 years in the franchise industry as a franchise executive and franchisee. He has an MA in Economics from Northeastern U. Mr.Teixeira franchise experience has included the retail, manufacturing, home health care, medical staffing and GPS fleet tracking industries. Ed has experience with international licensing in Asia, Europe, and South America and was a contributor to Forbes Magazine and is qualified by the International Center for Dispute Resolution as an international franchise expert. He is also a faculty member of LawLine.com and have Lecturer at Stony Brook University Business School on the subject of Franchising. Contact Ed at: [email protected]. Visit his website: www.franchisegrade.com

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

Posted on March 9, 2021March 9, 2021 by Franchise Strategist

We thought that the last twelve months of performance for individual restaurant stocks might give us a hint as to where to focus going forward. Since some of the obviously large stock gains have taken place among those with the heaviest short position, we have focused on the “short interest ratio”, the number of shares sold short divided by the average daily trading volume.

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

By Roger Lipton with permission

The last twelve months have been unprecedented, not only from a business/health standpoint, but from a fiscal/monetary standpoint. There has been more governmental stimulus as well as monetary accommodation than ever before, which has floated all kinds of boats. The Dow Industrial Average hit an all time high just this morning, and, though the NASDAQ index has retreated the last month or so, stocks from Apple to Tesla to Gamestop have written a new book in terms of valuation.

Based upon the new $1.9 trillion Covid bill, the likelihood of a new multi-trillion dollar infrastructure bill, as well as the Federal Reserve’s ongoing willingness to buy at least $120B of Treasury securities every month, there is every indication that the above trends will continue.

From a broad brush, it is shocking to see how large the moves have been from March 8, 2020 until now. It is interesting that several of the best performing “pandemic plays”, namely Domino’s, Wingstop and Papa John’s, which made very big moves over six to nine months, have retraced and are up more modestly now (zero, 56% and 47%, espectively).

This industry, by no stretch of anybody’s imagination is generally in a place that makes these companies “worth” from 50% to 90% more today than they were before the pandemic. There is somewhat less independent competition, and some companies may have learned how to serve off-premise diners better than before, but there are also a great many uncertainties. These include (1) the cost of labor with a new mix of in-store vs. off-premise (2) commodity inflation (3) other expenses to meet health requirements (4) unpredictable consumer spending (5) still substantial competition (6) ongoing high occupancy expenses, especially for new sites. There is also, in many cases, new debt to service.

Fundamentals aside: the stocks have done the following, ranked by today’s short interest ratio.

What do we see? The average gain among the fourteen stocks with the highest short interest ratio is 90%. The bottom fourteen stocks went up by 57%. Without our focus on individual company fundamentals, readers can scan the list and conclude for themselves which stock performance is most removed from the fundamental outlook.

Where do we go from here?

Before considering the above noted $1.9 trillion Covid bill and trillions more for infrastructure, the Treasury is sitting on $1.44 trillion (to be reduced to $500B by June 30th) that was returned from the Fed last year and the Fed is currently creating $120 billion per month. This means that almost $1.5 trillion of accommodation will be provided to the economy and the markets by June 30th, before the effect of the new $1.9 trillion. This also means that equities, including restaurant stocks, may well go a lot higher in the short term. There is just too much liquidity in the capital markets.

THE BOTTOM LINE

For investors: Other things equal, we would focus on the top portion of the table above. 90% is better than 57%

For companies: In almost all cases, we would sell company stock. Pay down debt and/or build your cash balance. It may be a long time before you see these valuations again.

For management: Lighten up. You can always grant yourselves some more stock options.

Roger Lipton

Click here to visit Roger’s website: https://www.liptonfinancialservices.com/2021/03/the-restaurant-industry-at-the-pandemics-one-year-anniversary-what-now/

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About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

Workplace Reopening? 5 Ways To Put Employee Safety First

Posted on March 9, 2021 by Franchise Strategist

Even with shared workstations, having dedicated sets of sanitizing tools is highly effective. Post or share clear instructions on how to sanitize and the necessary frequency. Particularly for shared workstations, it’s advisable for employees to sanitize before and after every shift.

Workplace reopening? 5 ways to put employee safety first

By (BPT) with permission.

Of all the milestones in our nation’s COVID-19 recovery, workplaces reopening is one of the biggest. As millions of people start returning to offices, classrooms and more, the hope of progress is tempered by concerns for safety. Everyone deserves to feel safe at work. How can employers help make that happen?

The key is planning ahead, says Christopher Gill, vice president of EnviroPro Solutions. “Having enough supplies, the right equipment and clear information — all of these are important. They do more than just keep the workplace safe and sanitized. They help employees feel confident about returning.”

Here are 5 easy steps employers can take to help build trust and stay safe.

Pick up plenty of PPE. The bare minimum should include disposable masks and hand sanitizer. Depending on the sanitizing steps your business is taking, gloves and goggles may also be necessary. Designate a clear responsible party who will be in charge of tracking supplies and re-ordering.

Post or share information on the supplies available, where employees can access them and who to report any shortages or concerns to.

Re-assess restrooms. Restrooms should always be well-stocked with soap, hot water and paper towels. Increase the frequency at which restrooms are checked for supplies and sanitized. This is even more important if your facility’s restrooms are open to the public.

For large restrooms, consider closing off some stalls and sinks to limit the areas that require frequent sanitizing. Placing out-of-order signs can help deter use. Post clear instructions for handwashing — it should be done for at least 30 seconds with hot water and soap.

Scale back shared spaces. Shared spaces may mean break rooms, employee kitchens, copy rooms, lobbies, supply closets or more. If any of these spaces aren’t strictly necessary, consider closing them off. This will discourage congregating and limit the areas that need frequent sanitization. For shared spaces that stay open, limit furniture and supplies to the absolute essentials. This may mean reducing seating and tables, or removing communal dishware.

It’s also vital to establish clear expectations for sanitizing shared spaces before and after every use. Prominently post and share sanitizing guidelines with all staff. Include information on where sanitizing equipment will be stored and how it can be accessed and used. To help ensure everyone follows guidelines, look for a sanitizing solution that’s fast and easy-to-use, like electrostatic sprayers from enviroprosolutions.com, made by Victory or Graco.

Sick? Stay home. Wherever possible, encourage employees to stay home or work from home if:

They are experiencing any symptoms of illness.
They suspect they may have been exposed to someone with COVID-19.
They have just returned from traveling.
There have been any changes to their household, such as a child returning from college.

The Centers for Disease Control (CDC) provides guidelines for length of self-quarantines and more in their Guidance for Businesses & Employees page.

Provide proper equipment. Empowering employees is the best strategy for building trust. When it comes to sanitization, providing individual sanitizing tools is a terrific way to empower. Some companies offer kits to keep multiple employees in-stock at once, such as the Millennium Q Viral Disinfecting Kit. When every employee has their own set of supplies, they can take full responsibility for the safety of their workspace.

After more than a year at home for some workers, returning to the workplace is an enormous step. Emotions may be running high, and it’s up to employers to set a positive example and tone. Making your dedication to safety clear and tangible will boost employee confidence, all while keeping your workforce healthy.

If you own a business, you’ve only got days left to apply for a Paycheck Protection loan

Posted on March 5, 2021March 5, 2021 by Franchise Strategist

If you own a business, you’ve only got days left to apply for a Paycheck Protection loan

(BPT) – by Jennifer Roberts, CEO, Chase Business Banking and Sean ‘Diddy’ Combs, Founder, Our Fair Share, entrepreneur and media mogul

In just four months last year, more than 5 million U.S. businesses received a Paycheck Protection Program (PPP) loan. That helped them pay their workers, their mortgage or rent, and their utility bills. Unfortunately, many small businesses owned by minorities, women and veterans didn’t get PPP loans last year. We want to make sure you know how to apply for the funding your business really needs.

But you need to act quickly. PPP ends March 31, but many lenders may stop accepting applications sooner so they have time to process. That means you need to get started on an application quickly for PPP funds to help with your payroll costs and other bills, to get your fair share. The Small Business Administration (SBA) and participating lenders are working hard to make these loans available to more businesses in low- and moderate-income communities. And to smaller businesses, like barbershops, restaurants, nail salons, clothing brands, bars, bodegas and independent contractors.

Here are eight facts you should know about PPP that may encourage you to apply:

1) Congress funded it with $284 billion for 2021. That’s enough for millions of more loans.

2) It’s for first-time borrowers. The SBA has already approved more than 704,000 loans for borrowers who didn’t get one last year. The SBA also has approved loans for second-time borrowers.

3) A PPP loan may be forgiven. Up to 100% of your loan could be forgiven if you qualify and meet the SBA’s requirements. That means you wouldn’t have to pay back the forgiven amount.

4) Businesses with few employees get special attention. Through March 9, the SBA is accepting applications only from businesses with fewer than 20 employees.

5) Most loans are relatively small. The average loan to first-time PPP borrowers this year is $22,000, the SBA says.

6) Smaller businesses are getting approved. 90% of Chase’s approved PPP loans in 2021 are to businesses with fewer than 20 employees.

7) Help is available to understand PPP. chase.com/ppp has a webinar, checklists and FAQs to walk you through the application process. You can also check out sba.gov/ppp.

8) It’s easy to find participating lenders. The SBA’s website — sba.gov/funding-programs/loans/lender-match — has a “Lender Match” link to help you connect to a lender near you.

The 2021 PPP is scheduled to expire March 31, but to get your application to the SBA by then, you need to act now. If you believe you are eligible, we urge you to find a lender, prepare your information and apply.

Get started now. Don’t miss out!

To learn more, or to access helpful tools and resources, please visit chase.com/ppp or ourfairshare.com.

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FRANCHISE YOUR BUSINESS – COLLECT ROYALTIES – CREATE LEGACY

Good News for Franchisors: New Favorable Accounting Rules Go Live!

Posted on February 20, 2021March 10, 2021 by Franchise Strategist

Good news for franchisors: New favorable accounting rules go live!
By Michael Iannuzzi
Posted with Permission from Franchise News Wire

Who said accounting was boring? For the past two-and-a-half years the International Franchise Association’s Financial Accounting Standards Board (FASB) Task Force has been working with the FASB to issue guidance to help reduce some of the cost and complexity in applying Topic 606 — revenue recognition rules over initial franchise fees. On January 28, 2021, the FASB released Accounting Standards Board Update 2021-02 to Topic 606, an “expedient” that can be adopted by non-public franchisors on their December 31, 2020 financial statements. What does this mean for non-public franchisors?

During the year-end December 31, 2019, non-public franchisors that issued their financial statements prior to the FASB issuing an election to defer Topic 606 during June 2020, were tasked with the challenge of implementing Topic 606 for the very first time by following these steps:

Step 1 – Identify the contract with a customer (in our case, a franchise agreement)
Step 2 – Identify the performance obligations in the contract (training and the right to use the license, as examples)
Step 3 – Determine the transaction price (the franchise fee paid)
Step 4 – Allocate the transaction price to the performance obligations (determine the value to be received, more on this later)
Step 5 – Satisfaction of performance obligations (delivering the service)

The current method (prior to issuance of the expedient)
The struggle for franchisors was how to identify the performance obligations in Step 2 and how to value the transaction price to be recognized as revenue in Step 4. Using pre-opening training as an example, many franchisors offer training that is specific to their brand as well as generic training, such as how to use QuickBooks. The challenge was to separate the training into brand specific vs. non-brand specific trainings (Step 2), then to come up with a value to allocate (Step 4), and ultimately recognize a portion of the initial franchise fee as revenue and record the remaining initial franchise fee as deferred revenue to be recognized over the life of the franchise agreement. This proved to be very difficult and costly for franchisors of all shapes and sizes. There were assumptions made that the entire amount of the initial franchise fee should be deferred and bypass the steps above. That’s not to say that isn’t the case; however, you would have had to do the analysis to conclude that the entire fee should be deferred and not just default to that position.

In applying the practical expedient, “pre-opening services that are consistent with those included in a predefined list within the guidance may be accounted for as distinct from the franchise license.” What does this mean? The intent was to simplify Step 2. In Step 2, non-public franchisors can now look at most of their pre-opening activities and count them as one performance obligation, meaning they are delivering an upfront service to a franchisee. This would potentially allow them to recognize more of the initial franchise fee as revenue, creating an income pickup for franchisors compared to the amount being recognized based on prior rules, as they are now allocating more of the transaction price identified in Step 4 to these costs.

Even though we are in the middle of audit and registration renewal season, these rules could prove to be beneficial for franchisors. The expedient will allow for more representative income recognition and allow franchisors to adjust their opening equity for prior franchise agreements. Careful consideration needs to be given when adopting the expedient. Most importantly, this is meant to be general advice, and franchisors should always consult with knowledgeable franchise and accounting professionals before forming any conclusions.

Michael Iannuzzi is a partner and co-leader of Citrin Cooperman’s franchise accounting and consulting practice. The company provides audit and accounting, business consulting and advisory, and tax planning services to a wide spectrum of clients within the franchise community. Iannuzzi works with franchisors and multi-unit franchisees in a variety of industries, including, but not limited to, fitness and athletic centers, children’s entertainment services such as recreational youth programs and party providers, junk removal companies, mobile concepts, pet hotels, quick service restaurants (QSRs), and grocery stores. For more information, call 212.697.1000 x 1250 or email [email protected]

10 Tips To Support Small Businesses

Posted on February 18, 2021February 18, 2021 by Franchise Strategist

“Small businesses are the heart of our country and Ball® home canning products business,” says Kris Malkoski, CEO of the Food Business Unit at Newell Brands. “We have been moved by the love our small business customers have shown their communities this past year. Still many small businesses are facing hardships and they need our support now more than ever.”

10 tips to support small businesses

By BrandPoint

(BPT) – The COVID-19 pandemic has been difficult on small businesses. Whether it’s a local eatery, service provider, retail store or another type of business, when you shop small, you’re supporting a real person who is striving to keep his or her entrepreneurial dream alive.

“Small businesses are the heart of our country and Ball^® home canning products business,” says Kris Malkoski, CEO of the Food Business Unit at Newell Brands. “We have been moved by the love our small business customers have shown their communities this past year. Still many small businesses are facing hardships and they need our support now more than ever.”

You can personally help make a difference by considering 10 simple ways to support small businesses:

Shop now: No need to wait for a sale or special event. By shopping now you’re putting much-needed funds into a small business that is depending on income each month to make ends meet and keep doors open.

Reverse shopping: Rather than thinking of the recipient and then where to shop for a gift, think of the shop first and then the recipients that would most like items from that particular business.

Go online: For small businesses that offer e-commerce options, be sure to consider online orders that ship directly to your home. This is a safe and convenient way to support your favorite businesses.

Shop in person: For businesses with physical locations, visit shops in person if you can use proper safety measures. If you know what you want, many businesses let you order ahead and opt for curbside or doorway pickup as well.

Consider gift cards: Not sure what to buy? Gift cards are always one of the most desired gifts, so if you need to send a little love to a loved one, wrap up a gift certificate in a beautiful card and feel good about your present choice.

Leave reviews: Online reviews can make a big difference for small businesses in expanding clientele. Go online and leave rave reviews for your favorite stores and why others should support them as well to help spread the word.

Be vocal: In addition to online reviews, talk up your favorite small businesses among friends. From independent restaurants to local service providers, use your voice as a powerful tool to build their reputation and support growth.

Partnerships: Look for small businesses who partner together to offer products or services that complement each other in packages, such as a gift basket bundle featuring your favorite local treats. You’ll support multiple businesses at once and often get a discount compared to buying separately.

Double up: For businesses like independent coffee shops or bakeries, consider a larger order. For example, go with that grande latte and order two dozen cookies to share with your neighbors.

Be patient: Small businesses are dealing with a multitude of challenges these days, from supply chain holdups to sluggish shipping and beyond. Your kindness is valued and your patience is crucial during these times.

“Actions big and small will help make a difference,” says Malkoski. “This is our time to give back to the businesses that help build our culture and communities, and we at Newell Brands want to give back too.”