Profitability of a Coffee Shop Franchise

There has been a spike recently in the number of people asking the VCSFA whether they can make money with a Blenz or a Waves coffee shop franchise, or any other coffee shop franchise.  The former two brand names have the largest presence in the ‘speciality coffee’ market in Vancouver – hence more people asking about them.   This article will apply to any coffee shop franchise, not just the big ones.  This topic has always been the elephant in the room but it’s time to drag that beast into the spotlight and talk about it.

The short answer to the question is: ask the franchisee’s accountant

First, let’s clear up the business basics.  This article about the profitability of a Quiznos franchise is very similar to a coffee shop franchise in regards to the breakdown of numbers  – so much so that we don’t have much to add or alter. Take a minute to read the shocking truth

So we’ve established that it’s tough on a good day to make money as a coffee shop franchisee.  Just to be balanced we will present this interesting article about how a franchisor is not necessarily making money, even though they may have over 50 locations.  There is one Vancouver coffee shop franchise with well over 50 locations and it’s next competitor approaching 30.  Many of their franchisees just assume head office is making money while they are suffering, but that may not be the case.  The big problem is that no matter what, the franchisor in their precarious position cannot be expected to open their books to anyone. If the books show heavy profit, the suffering franchisees will revolt.  If they open the books and show bad numbers, the confidence level in the brand will be eroded inside but especially outside the chain.  Perfect secrecy seems to be the name of the game for all non-public coffee shop companies – especially when discussing the allocation of the marketing/advertising pool.  Although we will soon dedicate an entire article to properly assessing the health of a franchise, let’s just say that some warning signs of non-health to look out for are as follows:

  • the head office moves from a high rent but convenient location to a far more inconvenient low rent location,
  • the sudden disappearance of head office employees (especially the talented ones),
  • abnormally high use of part time and intern (free) staff with an increasing trend,
  • the reduction of money towards the support of the franchisees,
  • marketing that involves almost exclusively contra (ie. you find the newspaper rack in all the locations and an advertisement in the same newspaper) or sponsorship relationships with media – in essence very little actual money spent promoting the brand.

One coffee shop franchisor told its franchisees ‘bus ads don’t work for our brand’ yet just a few months later they proudly announced to the same franchisees how they had received bus stop ads for free in a co-branding initiative with Visa.

Profitability should be properly examined – independently of what the franchisor claims to the potential buyer – before purchasing a franchise of any kind.  Poor Quiznos (they have some tasty stuff) has been the poster child of some bad deals, so for convenience we’ll continue using them.  This article clearly shows that profitability is not the primary concern of the franchisor. Sometimes they just want to open locations (or keep unprofitable ones going) just for the sake of showcasing their many logos around town and collecting some beefy fees when they start and turn over locations.  We are gathering conclusive evidence that Vancouver is not exempt from such practices in the coffee shop franchise world, unfortunately.

It’s important for the potential buyer to understand that the Franchisor is a salesperson – and they are very good at their job. They sell cookie cutter ‘turn-key’ businesses.  In sales, it is rare that a big focus will be put on the incredible risk involved with such a purchase – that is unless the Franchisor doesn’t want that person to buy that store for some reason.  Many franchises are far more than $100,000 to start and many of those buyers will lose most or all of that investment.  We have never heard of those stories told to any potential buyers.  This article involving our poster child shows that Franchisors can be downright abusive with their hand-crafted franchisee agreements.  Does this affect your profitability?  Yes.  If you lose your initial investment because of a crafty legal document, what did that just do to any profits you may have eked out?

Profitability is directly related to something called ‘capture rates’.  If you don’t know what that is, take a moment to read this article.  The last paragraph doesn’t use the term ‘capture rate’ but very well explains the concept.  One of our members asked their Franchisor repeatedly for the capture rates of their chain and his prospective location and these numbers were never provided him.  Unfortunately, he learned the hard way why. Thankfully, he has contributed that loss towards learning why it happened and helping educate others so they don’t make the same mistake he did.

Another practice by some Franchisors is ‘churning’.  We wrote a dedicated article a while back.  This topic should be of high importance to the potential buyer when considering profitability.  If you simply follow the history of ownership of certain locations and you find this happening, you will have to consider what kind of people you will be partnering with and whether you are alright with that.  Here is a story about churning and it happens all around the world, unfortunately.

We hope this article helped address many of the questions related to profitability in a general way.  We hope to publish more articles in the near future that focus on very targeted areas of profitability of a coffee shop business model.

As always, we look forward to your comments by emailing info@vcsfa.ca

Do You Take This Franchise to Be Your Lawfully Wedded Spouse?

I was sitting there at 4:30am drinking a large drip coffee and thinking about my life’s direction – that’s what coffee shop franchisees do, by the way.  I started thinking to myself about how this Franchisor-Franchisee thing is way more like a marriage than any other kind of business relationship on the planet.  I thought surely someone else has written an article with this analogy so I went to a search engine and found a real gem that I wanted to share by Marilyn Sinclair of BMO in her article entitled ‘A good business partnership resembles a good marriage’.  Please take three minutes (that’s how long it took me) to read this article because it’s awesome in every way when considering any kind of business partnership.  A three minutes of your time that will save you years of possible suffering is what we like to call a good investment.

What I will do here is take Marilyn’s points of the article, use them as a structure and then angle them specifically on the Franchisor-Franchisee ‘union’ as it is a unique relationship.

The Dangers of Passion

Almost every franchisee I have spoken to our in coffee shop franchise had the same story to report – they put all logic aside during the hopeful and exciting discussions with the franchisor about ‘how good things should go when you take over your store’.  We signed franchise agreements that no sober person would ever sign because of the ‘surely-these-50-other-franchisees-can’t-possibly-be-wrong’ delusion.  Now, we are all facing the fact that we may have rushed into a ‘bad marriage’.  Make sure you have a balance of wisdom with your passion.

Pros of Taking on a Partner

1. Complimentary Skills

Do not assume that the franchisor has world class talent working at head office. Every organization will showcase their top talent but crucial areas such as marketing, accounting, vendor relations, etc, may be run by unqualified or even unethical people.  Do your homework.  Never assume just because there is a nice shiny logo on many stores than everything is kosher.

2. Sharing the Risk

It is true that the franchisor shares some risk.  If the Franchisee goes bankrupt and locks and walks, they are liable to the landlord for the lease and trying to keep the store open to look good to the public.  If the whole chain goes badly, I suppose they might suffer the risk of not being able to fund their head office operations, but that’s really about it.  The rest of the risk is yours, newlywed.  Suck it up, buttercup because you signed the marriage certificate and it’s highly weighted in favour of your new Mr. Wonderful.  Hopefully he’ll be kind after the honeymoon.

3. Shared Responsibility

We’ve learned a lot about this one over the years.  Most folks buy a franchise because they assume that their hefty royalty fee includes some kind of guarantee.  Thanks to the recent Dunkin’ Donuts case in Quebec there may now actually be some hope of providing some kind of value to the franchisee for the hard-earned royalty fee they pay.  However, at the end of the day, your franchisee agreement (the legal stuff) can probably be summed up as “We’ll give you a logo and tell you what to do, but if things don’t work out, don’t come crying to me because we didn’t promise you anything.” In this marriage most people are signing in hopes of benefiting without truly knowing with whom you will be united.  Just understand that the Franchisor may not be taking much responsibility for the success of the relationship.

Cons of Taking on a Partner

1. Accountability

Let’s keep this simple: When you enter into a Franchisor-Franchisee marriage, your spouse will be watching your every step. If you don’t like that, run the other way.

2. Compatibility

Do you even know the directors and the people with whom you’ll be dealing on a daily basis?  Likely not and it’s admittedly hard to expect to wine and dine with your Franchisor before signing.  However, you have a bunch of currently-marriage spouses (and divorced ones) all over the city.  Find them, treat them well, get to know them and milk them for every detail they have.  You will be very surprised what you will learn about your future spouse.  You may postpone the vows.

3. Sharing the Wealth

It’s true that if you are becoming wealthy with as a franchisee so is your franchisor.  What they don’t tell you in marriage counselling is that if you are losing money at your job every month your Franchisor will still be there asking for 10% of your line of credit to keep his car running.  Will he give you a break next month because of your hard times?  We haven’t seen it yet in Vancouver but we wouldn’t expect them to publish it if it has happened. What we have seen repeatedly, though, is the Franchisor roughly blaming/accusing the Franchisee for not working long enough hours or working hard enough or spending enough of their own money on local marketing initiatives –  all the while not offering any of their own resources to help.  This can create a rough marriage environment, by the way. You would also expect the Franchisor to share the wealth by means of marketing but we have also seen this offering to be quite lacking.

4. The right ‘fit’

I think we’ve beat this dead horse.  Be careful who you marry.

Have the difficult conversations before you tie the knot

We concur.  Open the franchisee agreement and take the notes and discuss them with Franchisor.  If you need a good lawyer in Vancouver with expertise in Franchises, by all means let us know and we’ll send you some contacts.

Go Slow – Don’t Rush

I’m admittedly a little envious of you, reader.  There was no VCSFA when I bought my coffee shop franchise.  There was no one to turn to except the active franchisees, lawyers and a few franchise websites.  I’m not blaming anyone and it has been a great learning experience and now you can benefit greatly.  Don’t rush is right.  Ask the right questions before you sign because once you are married, you don’t want to know how hard it is to get divorced.  In some cases, stores that have been for sale for years are not selling or their buyers have not been approved.   At least with a marriage you can move to another city and get another job while you await your divorce papers but with a coffee shop franchise, you better make sure that store stays open!  Be wise.  Seek wise counsel.

We are here to help and don’t hesitate to contact us.

Blenz the Canadian Coffee Company LTD Welcomes Mark West as Returning Chief?

Blenz the Canadian Coffee Company LTD announced at their National Sales Seminar on October 4th, 2012 Mark West as their new General Manager to replace previous CEO George Moen.

Mark West, who is also the current owner of My Cup Coffee and Tea franchise with several locations around Vancouver that compete directly with several Blenz locations, gave his first speech to the franchisees. In this speech he informed them that he ‘is not actively involved’ in his My Cup operation and that he is dedicated to helping grow the sales of Blenz franchisees.

Mark West was the CEO of Blenz until 2007, just prior to the announcement of George Moen as CEO who has since gone on to start a pay-for-referral business called RapidTimes Networks.

 

 

How Does a Franchisor Make Money – Approved Vendors and Rebates

Franchising is a business model developed by entrepreneurs for entrepreneurs.  To be successful in the long run, the model must offer both the franchisor and franchisee the ability to make more money than if the franchisee was to go it alone.

For a franchisor, the sources of income are typically derived through a franchise fee, management fee, royalties, rebates and advertising fees.  For this article, we will be discussing the question of confidential rebates and cost of goods sold to a franchisee.

“Approved Vendors.”  Consistent quality goods, volume purchasing power, adherence to contractual agreements and conformance to industry standards and regulations.  All good reasons to have approved vendors.

Suppliers will offer franchisors financial incentives (rebates) based on franchisee purchases.  And often, franchisors include a clause that states a ”franchisee may only purchase supplies from the approved vendor list” and that “the franchisee agrees to give up any benefits of the volume buying power of the chain to the franchisor”.

A good franchisor understands their responsibility to their franchisees with respect to approved vendors.  A good franchisor will disclose confidential rebates received and explain how they intend to apply them.  A good franchisor also would not compel a franchisee to deal with approved vendors if they cannot show that this is absolutely necessary to protect the brand or delivers other benefits.

But what happens in real life? Here is a true story. Bill (not his real name) buys an existing coffee shop franchise.  In the second month, he realizes he needs a new coffee brewer, so he gets a quote from the approved vendor.  He is amazed at the very high price and decides to comparison shop, but there is no competition, since the approved vendor is also the sole distributor.  So, he informs his franchisor that he would like to buy a different less expensive and superior machine.  The franchisor flatly rejects his request and points him back to the approved vendor; no explanations. The sad franchisee accepts his fate and buys the approved machine.  A few months go by, and the valves need to be changed and the other equipment needs to be checked.  A service technician does ‘some work’ on the machines resulting in a fried circuit board. The angry franchisee asks the technician to fix it, but the technician blames the franchisee’s staff.  To make things worse, the technician not only forced the owner to sign to authorize the work and make payment immediately.  A few months later, the franchisee he needs basic maintenance on his expensive espresso machine so he calls Vendor B to fix it.  Vendor B sadly informs him that they are not able to help him because the part they need can only be obtained from Vendor A, the approved vendor of the franchise! The moral of the story – don’t deal with a poor franchisor?  Why does a franchisor approve and force upon the franchisees a vendor that provides poor service and overcharges?  Why couldn’t the franchisor provide any justification for using that supplier?  What financial arrangements were in place that caused the prices to be inflated?  Did the franchisor receive rebates, or free servicing, or free machines?

A great franchisor would share the confidential rebates with their franchisees or allocate those payments received to mutually agreed projects. Sadly, in B.C., we have no such legislation that compels franchisors to do the right thing for their franchisees.  It is no wonder so many coffee shop franchisees have pained looks on their faces when you mention “approved vendors”.

The VCSFA recommends all potential buyers steer clear from a franchisor that promotes business practices that force the franchisees to accept approved vendors that do not supply clear demonstrated benefits: better/faster service for the same price as the competition, lower pricing, superior products, etc.  Ask what existing franchisees pay for their core supplies (milk, coffee, bottled drinks, sandwiches, etc) against an independent cafe.  If the franchisor avoids talking about this, or even acknowledging that they receive rebates, then run away. The franchisor is receiving a financial benefit, and they don’t want you to know.  And if you cannot trust the franchisor on the most basic questions, how can you trust them with the more complicated questions?

And a last thought: what happens when a franchisor decides to make money on approved vendors that do not relate to supplies?  What if a franchisor wants to be the SOLE supplier of EVERYTHING related to the franchisee operation: renovations, equipment, supplies.  And naturally, make money on each of those aspects?

As always, do not hesitate to email us with any questions or comments.

Business in Vancouver’s Biggest BC Franchise List – A Coffee Perspective

This list was published by Business in Vancouver not that long ago and deserves some attention.  First of all, we commend Business in Vancouver for putting together lists like these and for gathering data as it’s very useful for the public, especially the potential buyer of a coffee shop franchise.

Here are some pieces of information that we pulled out of this related to coffee, but first, please familiarize yourself with the VCSFA’s exhaustive Francouver. (Franchises in Vancouver) page.

1. Out of 80 franchises, only 6 are coffee.  That’s only 7.5% of all franchises in the list – pretty low numbers, I thought, actually.  And is Tim Horton’s really a ‘coffee franchise’ or is it a ‘food franchise’?  That discussion is up for debate.  We will give them the benefit of the doubt as well as add McDonalds to our Francouver list since it’s not there at the time of writing this article.

Here is the list with our running commentary:

#2 Tim Horton’s: Not much to say here except I’d be carefully watching the golden arches if I were them

#3 McDonalds: They are definitely into coffee now and much better in fact, than many of their competitors – they are in a new game now and I would not be surprised to see them start to seriously eat away at #2’s coffee share.

#13 Blenz: Sheer numbers.  They were cranking out new locations until about two years ago when everything seemed to come to a grinding halt.  Economy?  Other?

#39 Waves Coffee: Very similar situation to Blenz the way they were cranking out new stores. In fact, they may have out-cranked Blenz this year… I’d like to see those stats. Waves may be heading into other provinces to crank further whereas Blenz doesn’t seem to be doing much with North America.  Let’s see where these numbers sit between Blenz and Waves next year.  They are, if you didn’t know, rivals to say the least.  We will hopefully publish that story one day but feel free to dig in yourself. It’s very interesting!  We’ll leave that for a rainy day which will likely be soon. And, apparently another Vancouver coffee franchise will be joining this story in based on some new announcements from one of these chains.

#62 Esquires: They are huge elsewhere but I was actually impressed with their footprint here (respectable numbers!)

#65 Second Cup: Still hanging in there with their Ontario fanclub.  Not much expansion in BC but apparently heading quickly into the states.

Notes for Potential Buyers

From our experience in the coffee shop franchise arena, there is a small guage that is worth looking at on this list that would likely go unnoticed. You’ll note that there is a column for ‘number of locations’ and then ‘number of franchises’.  Typically speaking you would be looking for the number to be the same and that would indicate a better health.  You should not see the gap between the number growing and if you do, you would want to ask why.  Typcially what is happening is the owner of the store is going bankrupt, or, they have been forced out by the head office and they are running it.  We would very much welcome our readers to email us your comments as I think this would make a good discussion.  For now, however, we would recommend considering a fluctuating number here to be an indication that you should ask more questions about the health of the chain. Here is how those numbers look:

#2 Tim Horton’s: 289/289

#3 McDonalds: 166/207

#13 Blenz: 62/64

#39 Waves Coffee: 24/24

#62 Esquires: NP (Not Provided!)/12

#65 Second Cup: NP (Not Provided!) / 9

We would be concerned about a ‘not provided’ answer.

We would recommend monitoring the number of locations from one year the next and especially keep an eye on that gap mentioned above from one year to the next.  If you see an increase in the gap you know that head office has taken over another store and you would want to investigate why from both sides.

We hope this coffee shop franchise perspective on this famous list was useful and don’t forget that we always welcome you to email us with your feedback.

Before you Sell a Coffee Shop Franchise in Vancouver – Commercial Agents

Sellers Beware

“COFFEE SHOP FRANCHISE OWNER HELD HOSTAGE FOR ONE YEAR BY HIS AGENT

Imagine reading that headline in your local paper.  You’d probably want to read every word in the article to see how something like this could happen in a free country! Well, it does.  Right here in Vancouver.  However, it’s not the kind of hostage situation with guns and bombs,  but no less psychologically damaging and abusive.

What we’re talking about here is the fact that an agent can, by law, hold you hostage to the listing agreement you sign for a year (or whatever you happened to sign for).

Let us first state that this legal commitment is not necessarily a bad thing – in fact, it’s a good thing because sometimes sellers will abuse and use their agents and make them lose their justly deserved commission.  In that case, of course, the contract is a good thing to have enforceable.

Let’s allow one of our members tell you a true story of what happened to him this week when working with an agent that his head office strongly encouraged him to work with.  For anonymity, let’s call the head office company B and let’s call the agent M and the store owner A:

“I was approached by the leasing guy at B.  He said that M has a buyer.  B strongly recommended that I work with M because this buyer will help me get out of the business sooner. Also, B said they would drop the 7.5% transfer fee [that’s the money the owner has to pay to the franchise when he/she sells his/her store] AND M would not charge me a sales commission because he said this ‘was a favour to B’.  Since B has more experience in the sale of franchises, I took their advice and decided to work with M even though I had my own agent. Another owner had even warned me that this guy held him hostage before but I didn’t believe it.

Next, M shows up at my shop with what looked to be a basically blank document that I’ve never seen [see image above].  I’ve never listed a business for sale before.  He didn’t even explain it but just said “Sign here and this will be enough and then I’ll bring the offer.”  There was no explanation of what was on the document, what the document meant, nor what an ‘exclusive listing’ meant to the person signing.  I was about to learn the hard way.

A few days later , M shows up with an ‘offer’.  I couldn’t believe my eyes.  The ‘offer’ was for 25% of (or 75% less than) my asking price!!  What?  Are you joking, man?  So I threw the offer back at him and told him I don’t want to sell it.

During this time, my friend was selling his coffee shop franchisee, too, in almost the same situation.  In his situation, M brought an offer for 30% of what he wanted.  He contacted M and said “I’d like to end this relationship” and to him, like to me, M said ‘we don’t have a relationship because there is no commission.”  My friend still demanded the unconditional release documents and M replied “I’m a man of my word so I’ll send them if you want them.”  My friend told me that he thought it was strange that he is sending release documents for a relationship that M said didn’t exist.  When I called and ask for the documents he told me the same thing – there is no relationship.

I was happy now.  I immediately approached my agent (M2) and asked him to list my store for sale.  M2 happens to work in the same brokerage as M.  As soon as M2 listed the store for sale, M approached his broker and asked him to pull the listing because he had a one year exclusive listing with me! What?  No way.  Is this happening?  Yes.  Apparently it was something I signed for that I didn’t read.  M then called and left a voice mail for me saying “You have an exclusive listing agreement with me for one year and if you have any problems with that you can contact my broker.”  At this point it got very interesting.  I contacted M’s broker to complain.  He replied “M has the only rights to sell B franchises in Vancouver.”  I was shocked.  What was he talking about?  Did M convince his broker that he was the only one who could sell B franchises?

Immediately I contacted B and told them what was happening by email.  I asked if they would prefer to deal with my lawyer or with this agent.  They replied back shortly later that “We do not have any such exclusive relationship with M”.  At that point M’s broker was contacted and educated about the truth and asked M to send the release documents. Finally!  I’m free to list with whom I want.

That night I decided that I was going to work with M2 and started again to list with him.  This time M’s broker asked him not to list through their brokerage.  Now he’s trying to tell me which brokerage I can and cannot list with even though I do not have a valid listing agreement with anyone! Crazy.  To this day I am still arguing back and forth about this.  My friend had listed with six or seven different agents over the years and only one agent would not send the release documents – the B agent of choice: M

An exclusive listing is a cause of concern for the following reasons, we learned the hard way:

  1. You cannot reach out to the real estate board to get help so the agent operates to some extent ‘outside of the law’
  2. Your store does not get posted on the ICX.com (MLS for commercial) therefore loses lots of exposure
  3. You can’t work with another agent until this agent releases you

Here are some red flag comments that you should be aware of. They may be true but consider them a red flag until you see action:

  • “I have buyers looking to buy a coffee shop franchise right now.  Just sign.”
  • “I market the store privately.”  If you ask for details on this you may find out what that really means is “I only put your store on my personal web page and pray to the stars that a buyer finds it.”
  • They do not go over in detail with you the initial listing agreement or give you sufficient time to read the details

Here are some red flag comments that may indicate you are about to get sucked into some kind of secret game:

  • I’m not getting paid.  I’m doing this as a favour
  • The buyer that I had got sick, but don’t worry, we’ll find another one
  • I’m a man of my word

Why would someone volunteer to put themselves at risk as an agent for free?  Why did your ‘sure thing’ buyer disappear?  Why are you telling me you are a man of your word? By doing a transaction together with integrity I will see that.

We hope this article will save many people many hassles.

As usual, don’t hesitate to contact the VCSFA as we are always ready and willing to help anyone.

Before you Buy a Coffee Shop Franchise in Vancouver – Commercial Agents

Buyers Beware

A lot of people will start looking for a business to purchase on their own.  They might search the net for ‘coffee shop franchise Vancouver’ and up comes a bunch of ‘stuff’ – mainly private websites of commercial agents who are listing coffee shop franchises for sale.  So, you look around their sites and you see that they have lots of listings so they must be good!  They must be great.  How could all those listings be there if they weren’t great? Don’t be too sure.  Also, be super cautious if an agent seems to only work with just a couple of chains (ie. Blenz only, Wave’s only, etc.)  This would indicate there ‘may’ be a back room relationship with head office and the agent and this may not be to your advantage.  You will learn why this is the case when we publish Part 2 “Before you Sell a Coffee Shop Franchise in Vancouver”.  We just ask that you, for now, not consider this an advantage until you learn more about the possible implications.

Let’s say you decide to move forward with such an agent.  Typically they are ‘double ending’ the deal so you should be extra careful that the agent is looking out for your interests. What ‘double-ending’ means is that they find the buyer themselves and get paid by the seller and since there isn’t another agent involved, they keep all the money themselves. $$Cha-CHING!$$

By law, this agent has a duty to protect both the buyer and the seller, but let’s be realistic – the agent gets paid when the store sells and usually the more it sells for the more money the agent makes.  Use caution. The agent may have very high integrity, but if that person doesn’t… yikes.  The VCSFA strongly, strongly recommends bringing in another commercial agent with whom you have trust to help you close the deal to make sure you are not buying a bad deal, especially if this is your first business purchase.  This is for YOUR protection and it’s worth it.  If the agent suddenly disappears when they find out you are bringing in another agent, you might want to question ‘why’.  A better strategy would be to not contact the agent first from his/her personal webpage or advertisement if you happen to find it on your own. Instead, find yourself a good commercial agent and then have that agent contact the seller’s agent on your behalf.  If that agent refuses to work with another agent, quietly contact the owner of the store and tell them what’s going on – they deserve to know that their agent is not looking out for their interests and turning away perfectly good buyers.  Yes, we are writing this because it really happens out there.

If you are looking for a professional agent to represent you during a purchase, please see our VCSFA Approved Agents listing who have proven to be professional and hold the interest of their clients at the top of their priority list.

If the agent is NOT listed here, and they are based in Vancouver you could contact us and we will research the agent and give our opinion.

Here are some questions you should have answered by a listing agent who is listing a coffee shop franchise in Vancouver before you decide to work with him/her regardless of how much you think you want the business that’s listed:

  1.  Is this agent on the VCSFA approved agent list?
  2.  If not, ask the agent why and have that agent contact us at info@vcsfa.ca for consideration of inclusion.
  3. Ask the agent to produce some reference from some buyers who bought a business through him and ask those buyers if they were satisfied with their experience.
  4. Check to see if the properties are listed on the ICX website as well as the place you found it.  If not, why? They could be avoiding other buyers with agents for the purpose of selfish gain, not the interest of their client, which would indicate this person may not be an agent you want to deal with.  NOTE: many agents do ‘exclusive listings’ but this is usually agreed upon with the listing story.
  5. Ask if they have any problem working with your agent (if you decide to contact them on your own).

 

Five Things you should know Before you Buy a Coffee Shop Franchise

Well here is the $200,000 + article that I wish I read.  Part of our goal here at the VCSFA is to educate the public about some of what goes on behind the scenes in Vancouver because we do not have government legislation to help.  If you are reading this before you buy a coffee shop franchise, make sure that you go over each one of these points and make sure you understand their implications.  If you don’t understand, always feel free to email us and we’ll offer our help.  If you already own one, you should immediately become a member of VCSFA and work with us to help fix some of these issues that bring such a dark cloud over the franchise business model – we believe at the VCSFA that it could and should be a very win-win industry.  We hope that someone will benefit from this and please feel free to send us donations. This advice has come at a price tag of literally millions of lost dollars. Give generously to the VCSFA and it will always come back to benefit society.

1.  The Franchisor can and does mark up the product before it reaches the store

The franchisor is always very quick to teach the following basic business concept to its new franchisees (you have probably heard it already yourselves):

It’s easier to get more money out of your existing customers than finding a new one.

How true!

But… Who would expect that the Franchisor would perform the very same thing on its Franchisees (partners) the whole time?

Most people think that the franchise owner enjoys the benefit of group buying power from all those stores out there and thus receives better prices so they can make more money.  Wrong.  Written in many Franchisee agreements is a clause that looks somewhat like this

“The Franchisor has the right to take that group buying discount and keep it for themselves and you agree that this is ok.”

Of course it looks much more ‘legal’ in the real contract but that’s what it says so fool after fool signs it and while doing so signs away the lion’s share of their profit.  This is a severely punishing situation.  It has been reported to us that one large coffee chain in Vancouver marks up their coffee up to FORTY PERCENT before it reaches the store!  On the poor Franchisees’ largest expense outside of rent and labour the Franchisor enjoys a nice income while the Franchisee pays the same as the independent shop across the road.  You probably think to yourself, ‘That’s ok.  In a chain like that they probably don’t charge a royalty or they charge less.’  Not so quick, Sherlock.  The same aforementioned chain charges the weighty 8% royalty with another 2% marketing pool and even has the right to raise those rates over time.

It has been reported to us that some chains in Vancouver even own their own supply chain and therefore it would be even more difficult to find out what they really pay for their product. Very smart.  I’m sure none of the Franchisees would complain if those prices at least felt like wholesale prices but that is rarely the case.

2.  The Franchisor does not have to reveal to it’s Franchisees what they are planning to do with the lease

Imagine you buy a store with a supposed ten year lease.  They call it a ‘ten year lease’ when in reality it’s usually a five year lease with a five year renewal option.  And that still sounds reasonable except… the renewal option is exercised by the Franchisor, not the Franchisee!  Read that last part again if it didn’t sink in.  Imagine, you are on year number two.  Your wife has a baby so you decide you don’t want the headaches associated with running a coffee shop franchise (and if you didn’t know there would be headaches you definitely need to get out and do some serious research!).  So you call up the head office and say “I’ve decided to sell.  It was so much fun working with you but my wife had a baby and I need to move on.  Can you please put in writing that I have three years plus five years left on my lease so they can move forward with the purchase?”  To your surprise they reply back “We’re not sure what we’re doing with your store so we can’t put that in writing.”  That’s right.  They completely deny your request to put in writing that they will exercise that option – and they don’t have to contractually do anything until about six months before the lease ends.  So, your store now has three years left on the lease that you can guarantee to your buyer.  Good luck selling that one.  In some cases, we have heard rumours that a Franchisee will just walk out one day because they can’t sell their store and then magically the store is reopened a few days later by a new owner or is being run by head office complete with a nicely extended lease.  Hmm…..

3.  The Franchisor Can Deny Your Buyer

So, let’s say you finally got a buyer to agree to buy your store.  They pull out their money from the bank and flash it in front of you to prove it.  Nice.  Everything’s ready to go.  You sign the offer, the deposit is transferred into the trust account and all we’re waiting for is one subject to be removed from the contract: “Subject to Approval by Franchisor’

Of course, these folks always reassure you that the basis that they would deny a buyer would be on ‘reasonable’ grounds… like English level, for example.  It seems reasonable that they should be able to deny on the grounds of English level because they have to communicate with their Franchisees effectively, right?  Except…in one coffee shop franchise chain it is rumoured that one of the executives struggles immensely with his ability to communicate effectively in English!  In fact, much of this chain’s head office staff are new immigrants and their free help (interns) as well.  Not only that, but if you go around town and sample the English level of recent Franchisees, you’ll note quickly that there is some ill communication out there – some Bad English if you will.  This ‘English level’ card is pulled regularly to deny legitimate buyers and much research should be done in this area to bring this to light.  So, then, you might ask yourself “Who is the best kind of buyer? Who will they approve quickly?” Our answer: Your guess is as good as ours – kind of like pin-the-tail-on-the-donkey.

4. The Franchisor Profits When you Sell Your Store

How would you like to pay your Franchisor 40% more than you should for your bag of coffee, then pay them another 10% when the customer pays you for their coffee, and then, when you sell your store, pay them another 7.5% on the total sale price?  Now THAT’S how you get more money out of your customers!  Why bother expanding when you can keep introducing new ways to suck more out of your existing ‘Franchisee Base”?  I guess that’s ‘free enterprise’, right?

5. The Franchisor May Force a Renovation Upon You

Imagine this: the economy crashes because of, say, a housing bubble.  The whole economy falters and customers stop buying lattes because their local newspapers tell them to do that.  Sales drop.  Business is bad.  Your lease is coming to an end in a few months.  You go to your mailbox and what do you find?  A letter from your Franchisor informing you that you will be renovating your store on your tab if you wish to continue to have the right to run this money-losing business.  Golly, Beaver.  I don’t have any money!  That’s ok.  You’ll find the money.  You’ll borrow it from your family, or, if they can’t find it in their bank, you may have to take out a loan against your house.  If you were a member of the VCSFA you could rally financial support to get you through it as one member did. In one case in the lower mainland, a store was reported to have done a partial renovation and then magically shut down about a year later.  The owners lost their house.

Or, you could do what those other people did and just lock the door and walk away only to see your store appear open again under new management.   What’s really funny to us over at the VCSFA is that the corporate owned store of one of the biggest chains in Vancouver has not been renovated since before Noah’s ark came to dry land.  It would be good for all reader’s of this article to ask where the corporate store is and make sure they are staying on the cutting edge of their ‘new look’.

In conclusion, the VCSFA is here to help.  Don’t hesitate to contact us.

 

Wikid Franchise dot Org – A Possible Ouch for Franchisors

I suppose the VCSFA has become to many coffee shop franchisors in Vancouver the proverbial thorn in their side.  Word is getting out that we exist and that our purpose is to educate the public about franchising – coffee shop franchising to be specific – and that the relationship between the franchisor  and franchisee must be one of both give and take.  It must be one of both speaking and listening.  It must be one of democracy and fairness.

This video is painful to watch because its creator was obviously part of a franchise where such necessary components of the relationships were absent.  During the video the characters gave reference to a website that we had not yet stumbled upon – WikidFranchise.org – the ‘wikileaks of franchising‘ it seems.

We have not verified yet the quality or accuracy of the posts found within, but it is certainly a goldmine of ‘internet information’ that may contain truthful information posted anonymously – a franchisor’s worst nightmare and a great blessing for the purchaser of a franchise.

Call us old fashioned, but we still really believe that the franchise model could be a very profitable and amicable one.  There are surely such franchises out there.  Until they are all superb in their business dealings, it is necessary for organizations like ours to make sure that the public is aware of what’s out there.

Corporate vs Franchise vs Independent Business Model

I just thought it would be interesting to share this video by a proactive and clearly unhappy barista. Running a coffee shop in today’s market can be particularly difficult and being able to control labour costs while keeping happy employees whilst providing a quality and reasonably ethical drink is far from easy.

Like many people, I was under the impression that only a company of this size of these ‘green guys’ would be able to succeed in all categories.  To my surprise, though, it appears that in all categories even they are struggling – apparently even worse than I thought.

So then, what is the best business model for a coffee shop?  There are really only three options – independent, franchise and corporate.

An independent is a ‘mom & pop’ operation where the value of the brand is typically built around the owners (the people themselves) and the fact that they are not either a frachise or corporate chain.

A franchise is an independent store that has decided to ‘partner’ with other owners to run their brand under their rulebook.

A corporate model is an independent that has decided to open multiple stores but with managers employed to run the stores under their rulebook.

With the corporate model, you gain complete control over the whole operation.  If one store does poorly, you can just shut it down and share the loss across the other hopefully better performing stores.  You can introduce large benefit programs because insurers will typically give you a better rate with more people in the system.  You can compete with yourself because the more stores the merrier.  In Vancouver there used to be two locations of a major coffee shop chain right across from each other at Robson and Seymour.  That just changed, by the way, but it often confused the customers because many people thought the green guys was a franchise model.  With a corporate model you have the flexibility of simply replacing a manager if things aren’t looking good.  In a franchise, all of the above is slightly more difficult or complicated.  Plus, all of these advantages above are not necessarily taking place as we could see from this employees video.

With a franchise model you have an ‘owner’ who is responsible for the four walls of that location.  As long as the franchisee believes that their franchisor is truly a partner who cares about them and their family and truly has their success in mind, the franchise model has the potential of being a great one. In theory, as long as the hand-crafted franchisee agreement doesn’t remove the right – the franchisees should participate in the savings that the chain wide volume provides.  They should also, in theory be able to enjoy most of the other benefits of the corporate model like group benefit plans. All things fall apart, though, when the trust of one or more franchisees is breached.  At this point, they can’t just remove the unruly manager, because that manager is also the owner of that location and has certain rights according to the franchisee agreement. In order to get rid of this jaded rebel, the store must be sold as any other independent business would be – not necessarily fast or smooth.

The independent store has the pain of having to source all his or her low volume products which may not provide the volume discounts that franchise or corporate models may enjoy.  They must also be more hands-on because they cannot enjoy the windfall of customers just walking into their stores because of a brand name.  They must earn each customer one at a time and then find a way to get them back – a task much more difficult as an independent.  That said, they have the advantage of being able to own and operate their business the way they like – for good or for worse.  They are truly ‘owners’ where franchisees are, in effect, glorified managers with a lot of skin in the game.

This discussion barely scrapes the surface of this topic but hopefully gives a nice birds eye view of the three major categories of coffee shop business models.