Test time!  Is the following non-competition agreement enforceable? “Frank, a Jimmy John’s franchisee, hired his nephew, Nick, to begin working at his Jimmy John’s franchise in Ohio.  Three months after Nick started working, Frank realized that Nick never returned the noncompete agreement he gave Nick during their initial discussions about the job.  The non-compete agreement states that Nick is prohibited from participating in another sub shop within 15 miles while employed and for two years following employment. Frank has trusted Nick with recipes and procedures that are proprietary and trade secrets of Jimmy John’s, so Frank wants to be sure his entrepreneurial minded nephew doesn’t get any funny ideas about starting his own neighborhood sub shop. When Frank approached Nick about signing the non-compete agreement, Nick said he forgot and promptly signed and returned the agreement to Nick.  Two months later, Nick quits to open up Nick’s Original Gourmet Subs a few blocks away.  It’s modern decor and authentic rocker vibe is attracting Frank’s customers away, and Frank’s sales drop 40%.   Frank sues Nick for breaching his non-compete agreement.  Who wins? Hint:  The issue is whether an employee’s continued employment is sufficient consideration (is it enough benefit) for the employee to make the agreement enforceable. The short answer is… it depends what state you are in.  In Ohio, it would be enforceable.  In Washington, South Carolina, Colorado and Minnesota, the non-compete agreement would not be enforceable because continued employment IS NOT sufficient consideration, courts require more benefit such as a pay raise.  In Illinois, the outcome is uncertain.  Illinois courts have held that continued employment for a “substantial period of time” will constitute sufficient consideration.  The length of time that the employee remains on the job, along with the manner in which the employment ends, are relevant factors for Illinois …

Former Petland Inc. franchisees are suing the Chillicothe chain for fraud, alleging the stores are doomed from the start – and the company knows it….Melick estimates the average investment per franchisee totals up to $250,000, and the firms have been in contact with more than 40 franchisees. The lead plaintiffs claim Petland fraudulently induced them to start a pet store when it knew, or should have known, the shops couldn’t succeed. A major allegation from franchisees, Melick said, is that pets supplied to the stores through Petland’s vendors were sick or dying. Melick compared the franchisees’ problem to a restaurateur opening a new business and sending dozens of people to the hospital for food poisoning in its first weekend. “For a large group of these franchisees, sick puppies is a problem when they open,” he said. “You just can never recover.” source

[Post prompted by a comment on this blog] Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO – thus the prior art was obvious. (read the court’s ruling here ) Today, there are two main competitors of Dippin’ Dots – MiniMelts and MolliCoolz .

On Donnie Deutch I just saw an interview with the new CEO of Just Fresh Kitchen Café, Dana Sinkler, who previously was a chef at a four-star NY restaurant and coincidentally founded and sold for $25 million the Terra Vegetable Chip.  Dana was previously a franchisee and has spent the past year revamping the menu launching the Kitchen Cafe concept, characterizing it as an innovator in Fine Casual Dining. The new Kitchen Cafe menu looks ideal for my increasingly healthy-focused palate (South Beach Diet / Body for Life style diet foods – salmon, shrimp filled omelettes, marinated chicken, veggies…you get the point).  And, it takes the focus off the cookie-bread centered menus.  Last I read there were 73 franchises under contract, mostly the Carolinas and Georgia. The restaurant claims to provide a fresh, great-tasting food and the atmosphere of a table service restaurant with the speed and pricing of a quick service restaurant – all in a setting that’s friendly to the senses and the environment. Why would I spend time writing about this place? Because it shows what can be done when the franchisor-owners are willing to take a risk and let a successful entrepreneur and chef take the lead.  This brand was suffering the past 10 years but now the new Kitchen Cafe concept extention seems to have the right menu, management and financial backing to expand at will, raising the bar above Panera Bread on gourmet fresh food and fine dining food in a fast casual atmosphere.  See below for examples of what the brand and food looks like.

Pampered pets This year, Americans will spend an estimated $40.8 billion on pets — almost double what they spent just a decade earlier, according to the American Pet Products Manufacturers Association. With about 7.1 million U.S. pet-owning households, national brands such as Origins, Harley-Davidson and Old Navy have created pet-friendly lines of clothing, accessories and wellness products. Entrepreneurs are following suit with an interest in the rising status of the posh pet. At least a dozen pet-related businesses have opened in the Oklahoma City area within the past few years, including a spa and resort, a home-based pet portrait studio, bakeries, professional poop scoopers and several specialty dog boutiques. We’ve discussed pet franchises before on this blog. All things being equal (which they never are in real life), it’s easier to be grab market share when the customer base is expanding, and the customers are accustomed to spending for posh accessories and convenience.  Unless your products or services is noticeably unique, competition will rise and prices will drop. The poop pickup business is very good business and has been profitable for the aggressive entrepreneurs and franchisees. Pet Butler has been growing very fast and is establishing a professional brand and franchise system, Happy Tails Dog Spa enables its customers to watch their pets on a webcam all day long, and Bark Busters helps you spend more quality time with your dog by training it to behave.

McDonald’s may add smoothies to menu | Crain’s Chicago Business Smoothies, iced coffee and other specialty coffees could be added to the menu at U.S. McDonald’s restaurants, a top executive of the world’s largest restaurant chain said Wednesday. McDonald’s already has scored a hit beverage recently with the addition of premium coffee to its more than 13,700 U.S. restaurants a year ago. Alvarez said coffee unit volume is up 15% as a result. “McDonald’s is so large that they don’t really need to invent anything at this point,” he said. “For McDonald’s, it’s more important to recognize new things that are working well for competitors and finding a way to incorporate it into their system.”

What happens when your franchisor sells in alternative sales channels that chip away at a franchisee’s sales? You’re screwed. For example: A Blockbuster franchisee filed suit in federal court claiming that because Blockbuster now allows customers to buy and rent videos online, the group’s local franchise agreement has been undercut. This was on top of the “no late fee” promo Blockbuster was running. What’s a franchisee to do? Well, there is not much you can do. Most franchisors expressly provide in the Franchise Agreement that they are authorized to sell their products online and in other venues that encroach on your territory. Another example – The Dippin’ Dots franchisors reserve an exclusive rights to sell their goods online, at special events and venues no matter where a franchisee is located.

The Crain’s Chicago publication profiled several pet “waste management” businesses, where the business owner will visit yards and scoop up the pet waste. It’s generally a profitable, flexible services business, and can grow rapidly by word of mouth. The $25,000 franchisee fee and 6-8% in total royalty and fees each year most often do not seem worth the payoff. Spending the $25,000 on smart, targeted advertising is more than enough to build a client base, and spending 10% of sales on advertising ongoing should be more than enough to grow the business each year by twice the investment. If there was a franchise brand that most dog owners recognized, than the franchise fees would be a fair exchange. But that is just not the case. Here is a glimpse from the article: To start, the couple spent $20 on two scoopers and $1,500 on an ad in Save on Everything — a coupon book mailed to 150,000 people in Chicago. Within two weeks, they had their first 25 customers. Now they have 120 weekly clients and are expecting to bring in around $80,000 this year. Another article in the same issues touches on the broader pet services industry.

Camp Bow Wow continues to sell franchises at a fast clip. They have a nice offering and compelling business model for pet lovers. But keep reading… I’ve visited a good number of non-franchised doggie daycare and doggie hotels, and most were extremely well run and popular. In my opinion, it’s not the type of business that requires the burden of franchise relationship. For example, Camp Bow Wow requires a $50k franchise fee, 6% royalty, and $300k-500k in total startup costs. A sensible, business-oriented person would ordinarily do much better spending that $50k on advertising and promotions, keep the 6% spread, and not be burdened by the franchise requirements should you have to scale back or alter your operations. The Competition The margins in this pet-care business are high, and the big boys have noticed. PetsMart have invested heavily to convert part of their stores into PetsHotel, providing services such as day and overnight care, grooming, training, groomed while staying at the “hotel”. Many locations also have The Pet Hospital with Veterinarians on-site. If I’m a franchisee, how do I compete? There are a few ways, such as pick-up and delivery of pets (I don’t think PetsHotel currently does this)…but that’s a time consuming endeavor and another layer of expense. My Conclusion This is a tough decision betweeen I’m Neutral On It or I Wouldn’t Buy It with respect to doggie day/night care franchises. We’ve listed a few pet franchises before, and I can imagine low-competition areas where you can get away with the cost/benefit of a franchise. However, in my own community which even has its own pet service review web site (Chicago), I wouldn’t buy it. There is no evidence here that a franchise give you a leg up on the heavy day/night care competition here. – – …

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being how much you can charge customers (and margins) before customers will just order restaurant takeout? is the change of behavior and lifestyle too much to create a solid base of loyal customers? how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu? A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit. And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year. Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

Do you love animals?  Sometimes the best franchise opportunities are the ones you’ve never thought of and are a labor of love.  Here are some I found unique and interesting: Camp Bow Wow: canine day care center (article) Doody Calls: scheduled yard clean ups of your dog poo The Pet Pantry: scheduled local delivery of pet food Wag My Tail:  pet grooming (free pickup & delivery  ) Interquest Detection Canines:  trains dogs for contraband and drug detection Pets Are Inn:  pet hotel

updated Sept 29, 2016: GameStop’s stock price increased 24% since July 2009, Nasdaq is up 225%, S&P 500 is up 136%. I’m sure the stock performance of GameStop somewhat tracked the performance of retail gaming chains. Recent earnings calls list new and used game sales down a little less than 10%. Downloading games directly and RedBox certainly has weighed on its earnings and risk. The “I wouldn’t buy it” for the industry is still my opinion after 7 years. Originally published July 9, 2009 Amazon.com introduced used game trading in March 2009, and now Best Buy is testing video game trade ins.  Competition isn’t always a bad thing, but in this instance Game Stop and Play N’ Trade’s sales are going to be heavily diluted. Below was Game Stop’s response in the Best Buy article: GameStop spokesman Chris Olivera declined to comment specifically on Best Buy’s test, but he indicated GameStop’s more than 6,000 stores have advantages over self-service ventures.”Trading in used games and consoles is a highly-assisted activity,” Olivera said in an emailed statement. “We are very confident in our model that allows for our expert associates to help consumers trade in product, a fact not addressed with a self-serve process.””Likewise, GameStop has over 12 years of skin in the game and understands the highly-regulated business of pawn and resale laws that vary not only from state-to-state, but municipality to municipality,” he added. Young kids have been self-trained to research and buy online for the best price. I wouldn’t bet on kids paying a premium for simple trade-in transaction. Sorry Play N’ Trade and Game Stop.  One angle these speciality stores could still exploit is providing its customers with in-store use of expensive assets, particularly renting by the hour very high-end immersion and 3-d gaming equipment.

Are you a franchisee thinking about how to best fund college for your children? Your research will quickly lead you to 529 plans, and in my opinion and experience as a purchaser it is probably the best option for college savings. You will also hear about Coverdale Education Savings Accounts but for tax complications and low investment levels it is probably more trouble than it is worth. 529 Plans are sponsored by states and enable USA-citizens to save after-tax money in an investment account that will accumulate earnings tax free and withdrawals are tax free if used to pay defined educational expenses. Some states offer small income tax breaks for investing in a 529 plan. For example, in Illinois: Individuals subject to Illinois state income tax can deduct from their taxable income up to a maximum of $10,000 per year for contributions made toward the purchase of any College Illinois! Prepaid Tuition Program contract.* Married couples filing jointly can deduct up to $20,000 per year.** This state tax deduction reduces the individuals’ adjusted gross income (AGI) by the amount contributed up to $10,000 (or $20,000 for those filing jointly). Contribution Limits Contributions are included in the annual $13,000 exclusion from federal gift taxes for gifts made to any one person. But, unique to 529 plans, a contributor can give up to five times that amount ($65,000) in one year and treat that contribution as if it were made over five years for gift-tax purposes. Fees; NY direct sold @ .17% is lowest in USA You’ll have to do the math to see if the tax savings in the long run outweighs the higher fees of your state’s 529 plan. A benchmark to use is New York’s direct sold 529 plan which imposes a combined annual fee of .17% starting …

GAME, the European and Australian retail gaming giant with over 1,200 outlets similar to USA’s GameStop and Play n Trade, filed for Bankruptcy. GAME has 600 hundred stores in the UK with a £15 million rent bill per quarter and a £10 million wage bill per month. Would their reach be more effective with only a few marquee retail stores and the rest online sales?  While gaming is experiencial and in store demos and marketing can help drive sales, similar to retail book stores the overhead laden higher prices will push customers to online. Competitors, especially in the gamer demographic, will buy from tye cheapest outlet. Further, many games are downloaded bypassing even online retailers like Amazon. I wouldn’t buy a Play n Trade for those reasons, even though the used game disc market is alive and well.

http://www.cbc.ca/news/business/story/2012/02/28/tim-hortons-class-action.html Justice George Strathy of the Ontario Superior Court recently issued a summary judgment in favour of Tim Hortons, dismissing an attempt by some franchisees to argue that the chain was wrongly profiting from a switch in how the company makes its baked goods. Under what’s known as the “Always Fresh Conversion” several years ago, the company stopped making baked goods from scratch in each location every day, and instead started shipping partially baked items that had been flash frozen before final baking in ovens at all Tims locations every morning. The new system has proven very profitable for the parent company, but some franchisees complained it simply downloaded new costs to them while the parent company pocketed the savings. The case also alleged that Tims was requiring franchisees to sell new lunch menu items at break-even prices — or sometimes even at a loss. The plaintiffs allege that’s a breach of their franchise agreements, which states ingredients would be sold to franchisees at commercially reasonable prices. The judge dismissed all aspects of the suit, saying Tims is well within its rights as a franchisor to implement new procedures and technologies to its business model “In order to keep the system healthy and competitive, the franchisor must be permitted to introduce new products, new methods of production or sale, and new techniques,” the ruling reads. “It would not be commercially reasonable to require that the franchisor can only implement system-wide changes … if the proposed change is [demonstrated] to be an improvement that benefits that particular franchisee.” Nearly ever franchise agreement I’ve read allows the franchisor flexibility in specifying what products must be sold, even if this involves a fundamental change in the way the product is produced. I doubt the primary motivation of Tim Horton’s is financial, I’m …

I loved this list. One of the United Kingdom’s most successful entrepreneurs, Luke Johnson, shares 21 lessons he’s learned in business: 1. The world is in love with the romance of start-ups. But all other things being equal, I believe it can sometimes be better to buy a business than start one. 2. Never demand a certainty: if you wait for that, you will be on the sidelines for ever. 3. Leave behind the notion of the big idea and just do what most successful entrepreneurs do: copy and improve. Imitate first, and then devote yourself to constant incremental improvement. 4. Whenever you can, make sure a name has some underlying meaning. Don’t copy the example of Diageo; one of the world’s biggest drinks manufacturers. “Diageo” means nothing. It’s not even easy to spell, or to Google. For everything that’s bad about high-concept names, look no further than Diageo’s own toe-curling explanation: “The word Diageo comes from the Latin for day (dia) and the Greek for world (geo). We take this to mean every day, everywhere, people celebrate with our brands.” I wonder if Diageo’s management realize that having to listen to that sort of rot could well make its staff want to quit and start their own business. 5. Today is a better time to start a business than tomorrow, no matter how today looks. 6. Achievement changes people. Once someone attains status and wealth, their attitude towards sharing the spoils and the glory alters. It slowly dawns on them that actually all the clever moves and breakthroughs were their idea and, in fact, they are the only one who really does any work. 7. When I interview managers, I ask them about their customers and competitors. The high achievers will know them intimately, and can talk for …