Finance

Buying assets out of bankruptcy court is time-consuming but usually easy. But if your target is a franchisee and you get choosy - meaning, for example, that you want to buy only 10 outlets in a bankrupt 20-outlet franchise restaurant chain - things get dicey. Why? Because it's hard to determine a fair value for such assets, and if you fail to do so, you could find yourself back in court fighting angry creditors who think you've cheated them.

That can turn any effort to pluck diamonds out of bankruptcy court into a disaster, and the threat leads many would-be bargain hunters to look elsewhere for their gems. But it needn't do so, because there's a solution to the problem - a thorough-going legal due diligence campaign coupled with an appraisal designed specifically for bankruptcy court that factors out the earnings drag of unprofitable outlets in a franchised chain, not to mention the drag created by, say, a big recession...

Six ways we sabotage our investment success
Did you do your homework? In my last article, I discussed taking a broader look at the concept of "performance measurement."

Rather than allowing a simple percentage change (or even a percentage change relative to a broader index) drive how satisfied you feel with your portfolio's performance, I suggested thinking longer and harder about defining success on your own terms. After all, what good is a "good" performance number if it doesn't leave you with a portfolio that can help you achieve your goals?

I also asked you to pull together some thoughts regarding what you need your assets to do for you ("must haves")--and then spend some time thinking about what you'd like them to do ("nice to haves")...

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals and objectives. It's an important topic and sometimes we get some very candid responses.

Jason Shifflett, 32, owns Shifflett Companies in Olive Branch, Miss. The company operates 30 Domino's Pizza stores and Shifflett hopes to add more soon. He sheds light on his management philosophy, "We want the best manager in every store," and believes in measuring growth by "Order count growth, sales growth, profit growth, and people growth." Shifflett plans to top 100 stores within the next 10 years.


How is this economic cycle affecting you, your employees, your customers? As costs go up, it becomes very challenging to maintain margins...

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals and objectives. It's an important topic and sometimes we get some very candid responses.

Tony Lutfi is the chief operating officer - and franchisee, he says - for MarLu Investment Group, which operates 46 Church's Chickens, 2 Little Caesars, 3 Arby's, and 1 Burger King. The restaurants are spread across several western states, including Nevada, Arizona, and Texas. The company does about $40 million in revenue each year and Lufti says they have goals to reach 100 units over the next 5 years.

MUFR: How is this economic cycle affecting you, your employees, your customers?
Lufti: For us, the economy has been tough more psychologically than it is in dollars...

It seems there really is a silver lining in every cloud. And the recent economic downturn has deposited a little of that silver at the feet of some multi-unit franchisees who can tolerate risk and don't mind a little "remodeling" work.

Today, opportunities abound to buy distressed franchise units from other troubled or bankrupt franchisees--often for pennies on the dollar. If they have the stomach, these "rescuers" can snatch up these units, turn them around, and watch the dollars flow in.

It's a strategy that contains risks, for sure, but done right can offer serious rewards. Multi-unit franchisees like John Metz, David Ostrowe, Don Rottinghaus, and Lyndon Johnson all know firsthand the ins and outs of taking over distressed properties--and they're not always successful...

I know few people who had money-making investments in 2008. On the flip side, I know many whose portfolios technically beat their respective benchmarks.

In a rising market (like that experienced in 1999), beating the benchmark would have been considered a badge of honor--providing ample bragging rights on the golf course and around the dinner table. However, having relatively "less loss" in a down market isn't exactly considered a wonderful experience for most of today's investors.

Why doesn't it feel so wonderful? The answer lies in the prevailing view of what constitutes performance success. While losing 5, 10, or even 25 percent when the market was down 39 percent could be viewed as strong relative performance, the absolute losses--as we've all learned--cause overriding pain...

Business owners often get trapped because they don't heed the messages their business sends and they don't pay attention to basic principles. The following checklist represents a clear set of danger signals - situations and issues - that have a clear and negative effect on cash flow.Take a few minutes under the harsh, cold light of reality to ask yourself how many of the following danger signals exist in your business and then evaluate carefully their implications:

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals. It's an important topic and sometimes we get some very candid responses.

We recently spoke with Chris Haque who is president and CEO of Haque Holdings in Seattle, Wash. He operates Denny's, Church's Chicken, Baja Fresh, Tortilla Flats, and Bennigan's Bar & Grill. Haque's company does more than $20 million in revenue annually.

MUFR: How is this economic cycle affecting you, your employees, your customers?
Haque: Obviously, the economy is affecting us in sales, especially in southern California...

At some level, there's a growing realization that the current economic "decline" is not just a speed bump. The assumption that a return to the "status quo" is sure to come--that it's merely a matter of time--also appears to be quickly fading. The emerging conclusion: Things typically don't come this unhinged only to revert to what existed before.

While exceptionally unsettling, it's important to remember that U.S. economic history is littered with instances of major structural shifts that have been caused or accompanied by significant advances in technology, as well as changes in financial and social systems. (Take a look at John Steele Gordon's Empire of Wealth for numerous examples.) New industries emerge while others die. Bubbles are created as investors rush to profit from new technologies or trends...

"Can I afford to hire (or keep) that new manager - or salesperson?"
"What do I need to do in sales to cover their full cost?"
What do these questions have in common? Each relates to how changes in costs, volume, and pricing affect your bottom line. By the end of this article, we'll have given you a single analysis model to help you answer these questions more accurately than ever before.

And, we'll also dispel one of the biggest "cost" myths around - at least regarding employee costs. It goes like this: "for every dollar you pay me in wages, it only takes one dollar of sales to cover." Baloney. I can immediately think of at least two major contradictions: 1) there are some direct (or variable) costs that have to come out first, and 2) there are a whole raft of "other" costs that attach to that one dollar of salary - FICA, FUPA, FEEPA...

**For every $1 million of lending obtained by franchise small businesses, 34 jobs are created and $3.6 million in annual economic output is realized.

The current recession and credit crunch are putting the hurt on franchise businesses, says a new report by the International Franchise Association (IFA). There's no question that the franchising's economic growth and ability to create jobs has been hamstrung by the lack of available credit.

The study, Small Business Lending Matrix and Analysis, prepared by industry research firm FRANdata, highlights the relationship between lending to the franchising sector and its capacity to develop new businesses and expand existing ones. According to the findings, franchise lending will fall 40 percent in 2009...

Gross sales? Target revenue? Break even? No, this figure is more important than all those.

These days, as we're all looking at ways to cut costs, figuring out where and how to cut is extremely important. Using break-even analysis allows you to go in with a scalpel instead of a hatchet.

If we said there was one number that you (and everyone else in your company) should absolutely know off the top of your head these days to do this analysis, what number would you say? Targeted annual revenue, perhaps? Break-even sales level per month? Total costs?

While all of these are good ones to know, the key number is the amount that's left over from every dollar of sales, after paying your variable costs, to then pay for your fixed costs, and then once those are paid for, to put towards your net profits...

At some level, there's a growing realization that the current economic "decline" is not just a speed bump. The assumption that a return to the "status quo" is sure to come--that it's merely a matter of time--also appears to be quickly fading. The emerging conclusion: Things typically don't come this unhinged only to revert to what existed before.

While exceptionally unsettling, it's important to remember that U.S. economic history is littered with instances of major structural shifts that have been caused or accompanied by significant advances in technology, as well as changes in financial and social systems. (Take a look at John Steele Gordon's Empire of Wealth for numerous examples.) New industries emerge while others die. Bubbles are created as investors rush to profit from new technologies or trends...

At the end of January, following the headlines of optimism and encouragement that came with the presidential inauguration, came the harsh reality of job layoffs and plant closings in one company after another across the country. Home Depot announced 7,000 layoffs, Pfizer trimmed 19,000 jobs, and Caterpillar 20,000. In total, nearly 60,000 wage earners became unemployed, and while many enjoyed reasonable severance packages others were most certainly caught unprepared for the income loss that will follow.

They join nearly 100,000 others furloughed earlier in the month in a year many had hoped would soon show signs of recovery from the doldrums of a sluggish economy. By anyone's measure, it's a tough time that challenges every business--start-ups and small retailers perhaps more than most...