The Economy

In late July, the National Retail Federation issued a statement from Senior Vice President and General Counsel Mallory Duncan on U.S. District Judge Richard Leon's decision that found that the Federal Reserve misapplied Congress' intent when it implemented required swipe fees reforms. The statement read:

"From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law, also known as the Durbin Amendment.  They failed to heed Congress' call to set fee standards that were 'reasonable' and 'proportional' to the actual cost of a transaction. Instead, the Board manufactured a standard that was two to three times higher than the Fed staff recommended.
"As a result, small ticket transactions, such as those imposed on convenience stores and restaurants, skyrocketed under the misapplied law...

Johnny Collins is a man of faith and endurance. He knows what kind of hard work and dedication it takes to run a marathon, serve as a firefighter, and work as a security officer. He also knows how to be a successful franchisee. He loves to overcome challenges.
Even after he opened his first Wingstop in McAllen, Texas, making the store work seemed like a test of his faith. "Several times, I said, 'Oh my goodness, what did I go do?'" Collins says. "I'd get on my knees and pray."
One problem was that Wingstop was an unknown quantity in his market. In that area, he says, small, mom-and-pop restaurants open up regularly--and shut down just as regularly. Potential customers didn't seem to be giving Wingstop a chance. So Collins hung flyers on every door within a three-mile radius...

Is anybody else as fed up as I am with hearing about how bad things are? Let's get on with it already and start focusing on what we can do to survive--and thrive--in the new reality.
Periods of meltdown and renewal are not at all unusual for the United States. Read John Steele Gordon's book An Empire of Wealth for numerous examples of American ingenuity and stick-to-it-ness pulling us back from the brink of financial meltdown. This is the time when we need to pull ourselves up by the proverbial bootstraps, dust ourselves off, and figure out how we are going to push forward. At the risk of stating what should be painfully obvious, here are my thoughts on some of the things we can try to get "unstuck" and help us move forward:

Entrepreneurial spirit will drive a slow recovery

Long ago, when I was a newly minted junior analyst at a local investment firm, a grizzled veteran noted that it was pointless to be in the investment business if you weren't a long-term optimist. To me, that time-worn piece of advice continues to ring true. Operating from this mantra, I've spent my entire career believing that whatever short-term morass the economy or the market found itself in could be fixed (eventually) by the drive and ingenuity of the American entrepreneurial spirit. I'm hopeful that this time will be no different--although I admittedly find my optimism being severely tested. In nearly 30 years in the business, I've never witnessed such a complex array of issues at play...

Greg Hamer, Sr., worked in the oilfield service industry for two decades before dipping his toe into franchising. He knows about hard work and about managing assets. Today, he is the largest Taco Bell franchisee in the state of Louisiana. Hamer has operated B&G Food Enterprises out of Morgan City, La., since opening that first Taco Bell unit in 1982. In the 1990's, the company added KFC and Pizza Hut units to the portfolio and most recently, Teriyaki Experience.

After nearly three decades in franchising, Hamer oversees an empire of 55 units stretching from Mississippi through Louisiana and into Texas. It's a large operation that generates $64 million annually and keeps a payroll of more than 1,400 employees.
Hamer, who serves as chief executive officer, says that prudent financial management and unit economics oversight plays a pivotal role in how he manages the operation...

Franchising has flourished over the past two decades, adding tens of thousands of units and rising on a compound basis faster than most of the industries it operates in. Much of this growth was achieved by franchisee operators who began when they were in their thirties and forties. Today many of them are in their fifties and sixties and looking toward retirement.

An unprecedented number of franchisees find themselves in this situation, and they are not alone in this desire to cash in and retire. There are more than 25 million U.S. business owners, many of them Baby Boomers, and the coming years will see a growing pool of businesses on the market. It's simply demographics at work. Where will the buyers come from?

As with many trends only beginning to reveal themselves, definitive answers are hard to come by...

Cary Albert is sold on the value in unit economics. The Dallas, Texas-area multi-unit franchisee operates Schlotzsky's and Cinnabon locations and says there's no question his operation benefits from keeping an eye on unit performance numbers.

"Any restaurant concept or quick-serve restaurant, has to have compelling unit economics. Each unit needs to generate significant cash flow (unit-level EBITDA) showing a significant return on investment," explains Albert, who has been in franchising for 16 years and does $3.7 million annual revenue at his three stores. "My rule of thumb is looking at unit-level cash flow in the 15 percent or higher range. A reasonable level of cash flow is critical for a threshold investment. Hence, our company has no interest in owning restaurants that generate less that $1million in annualized revenues...

The other night I told one of my daughters, who is in college, that I was going to the IFA convention and would be gone about a week.

She asked me why even have conferences, and why business people travel anymore, because with all the technology out there people can communicate almost like it was in person (we Skyped with her for the last five months when she was in Argentina).

I explained to her that face-to-face is not the same as screen-to-screen. And even if it were, behavior changes slowly (although I didn't say the latter point with conviction as there are lots of examples of how technology has changed things rather quickly, right, Kodak?).

However, that got me thinking about her point in a franchising context...

The way to a man's heart may be through his stomach, but the way to a banker's heart is through strong unit economics.

Entering 2010, the stars are in alignment for strong multi-unit operators seeking expansion opportunities, specifically:

Dustin Winkle was a victim of the dot-com crash a few years back. While pondering his next career move, he visited with family members who operated some dry cleaning stores. He liked what he heard and purchased his first Martinizing Dry Cleaners stores six hours away in Yakima, Wash. It was a long commute from his home in Boise, Idaho, but he loved the business. Three years later his family was ready to sell its dry cleaning stores and Winkle was more than happy to buy some units closer to home. Today he operates 10 Martinizing Dry Cleaning stores (and one non-Martinizing unit) in the Boise area.

Winkle's company generated $2.3 million in annual revenue last year and he's hoping to see that number rise to $2.5 during 2010. He thinks big and says, "I would like to expand my cleaners' pickup and delivery business to the largest in town...

The most fundamental business strategy calls for black numbers on the bottom line. In simplest terms, it's proof the business is generating more cash than it is spending.

All too often, though, entrepreneurs get involved in businesses without employing a proper system to help them keep a watchful eye on what they're earning and what they're spending. Managing day-to-day operations can be so time-consuming that it leaves little room for financial analysis. Or perhaps key individuals lack a basic understanding of how to read and interpret financial statements. Combine these factors with the down economy, and you'll likely wind up with a troubled business.

Today, more and more multi-unit franchisees are realizing the importance of keeping their eyes focused firmly on the bottom line, and they are putting in the time to understand and continually analyze their financial statements...

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.

Darrell Lamb saw franchising as a sideline business we he first invested in an Express Oil Change franchise back in the mid-90s. "I didn't really think of it as a career," he says. But that's exactly what it became. Then things really took off about five years ago when he began working with Adam Fuller, a fellow entrepreneur and kindred spirit. A year later the two formed LF Management and now operate 24 Express Oil franchises under that umbrella group...

Last issue we began the discussion of how buying assets out of bankruptcy court is time-consuming but usually easy - when done properly. But if you try to pick and choose, it can become more difficult. It's hard to determine a fair value for such assets. If you're not careful you could find yourself back in court fighting angry creditors who think you've cheated them.

Let's turn our attention to a number of factors that, as a buyer, you can examine more deeply to determine what kind of deal you're looking at. The appraisal of such hard assets as plant, equipment, supplies, and inventory can be complicated. To overcome the problem, the valuation and legal due diligence efforts must work in tandem to "drill-down" into a number of factors, among them:

Try to remain rational and calm, despite the storm
I will never forget as we clustered around a single Quotron watching as market prices plunged more than 23 percent on that fateful day back in 1987.

I was a rookie analyst in a trust department and distinctly remember the shock and horror that everyone, from newly minted analysts to gray-haired veterans, felt as we watched the seemingly impossible happen right before our eyes. Honestly, having survived one "500-year flood" event, I never imagined I'd still be in the business when another came along.

While it took four more days this time, history has repeated itself with an even bigger bang--and not just in a single asset class, but in virtually every asset class of every country on the planet...

It was like a gut punch for Charlie Marshall. In less than a year's time, the Spring-Green Lawn Care multi-unit franchisee went from paying $12 per bag for lawn fertilizer to more than $25 per bag.

"That will make you look for ways to streamline and cut costs," says Marshall. To add insult to injury, gasoline prices were skyrocketing, making it even more expensive to fire up his seven trucks and dispatch crews to care for his customers' lawns each day.

Like many quick-thinking multi-unit operators, Marshall hasn't thrown up his hands in despair, he's looked for solutions. He's turned to his franchisor, attended their meetings, and regularly reads posts from his colleagues at the Spring-Green intranet site.

"One of the first things we discovered from some other operators was the availability of special calibrators that fit the spreaders and more efficiently distribute the fertilizer," he says...