Forecasts that exceed the incremental are almost always one of two things: wrong or simply lucky.
What happens next year is largely dependent on many macro factors – politics, the economy, credit, commodity prices, climate, demographics – that few experts are qualified to predict. And even experts can get things spectacularly wrong. Just ask Karl Rove and Dick Morris.
Still, we have a ready source of information to ensure that a forecast for franchising in 2013 is reasonably reliable: 2012. Mark Twain once quipped that "History doesn’t repeat itself, but it does rhyme." So, in that spirit, here are my cheers and tears for the new year.
More Earnings Disclosure
More disclosure is not always better: a lot of unnecessary information can distract or overwhelm the reader. But not all disclosure is equally important. And the earnings information permitted (but not required) in Item 19 (Financial Performance Representations) of the franchise disclosure document (FDD) arguably trumps all other FDD disclosure in importance. Rob Bond, a leading national authority on the franchise industry, recently wrote in a Blue MauMau article that Item 19 disclosure is becoming the norm. Four to five years ago, only 20 to 25 percent of franchisors provided Item 19 disclosures but that number now tops 56 percent, according to Bond. There are probably a couple of factors at work here, including franchisors’ attempts to distinguish their concepts in the face of rising competition and still anemic demand. But irrespective of the underlying reasons, more and more prospective franchisees and lenders are coming to expect and, at least as to the latter, demand more clarity on earnings. So, look for more franchisors to jump on the Item 19 bandwagon in the new year.
I’m not entirely sure whether this is a cheer or tear. Dennis Monroe, a lawyer who specializes in multi-unit franchise finance, makes a pretty compelling case against refranchising in the September 2012 issue of Franchise Times. But refranchising nevertheless can be a real positive for the franchise industry, particularly if it’s a democratizing force for smaller operators. Whatever the merits, the refueled refranchising train has long ago left the station and I don’t see anything blocking its tracks or slowing it down except for a couple of big players, like DineEquity (Applebee’s and IHOP), who already have reached their destination.
Much of the groundwork has been laid in 21012: Quiznos narrowly avoided bankruptcy, changed ownership and replaced its CEO. Their product is competitive and may in many cases be even better than their chief rival’s, SUBWAY. But the new owners and management have inherited a dysfunctional franchise system, may be stumbling out of the blocks with a yawn-inspiring ad campaign (somehow "Qrave Quiznos," Quiznos’ new tag line launched in May, doesn’t resonate with me and even sounds a little creepy) and face surging competition like Jimmy John’s. Nevertheless, with new, experienced leadership, a solid product and few places to go but up, Quiznos may surprise us all in 2013. (I have no referral or other business relationship with Quiznos).
Frozen Yogurt Melts
One of my colleagues in the franchise industry, recently repeated the commonly accepted wisdom among restaurateurs that what America does not need is another new restaurant concept. That may or may not be true, but it’s almost certain that America does not need another frozen yogurt concept. The frozen yogurt market has been simmering for some time now and everyone wants to dive head first into a hot market. Until, of course, it melts. Like the mid-2000s housing market. Frozen Yogurt will not thaw before it completely melts down in 2013-14. Strong brands like Menchie’s will survive and even prosper, but the lesser-known concepts face a very uncertain new year.
Single-Unit Operators Become an Endangered Species
I’m not really going out on a limb here because the trend toward multi-unit ownership is already pretty well set. But I predict that the trend will continue – and in a big way. While I said at the outset that macro trends are generally unpredictable, there’s not a whole lot of guesswork about the near-term future of small business credit. Signs that point to a Spring thaw and summer melt are encouraging, but credit access-turnarounds take time. The hard reality is a variant of the secular Golden Rule: He who has the credit rules. And, for now anyway, large, multi-unit operators will rule. Moreover, franchisors increasingly are finding that they would much rather deal with one or two operators than one or two hundred. This may not have been such an obvious benefit to some franchisors before the credit crisis but I think it’s pretty clear to most now. So, would-be single- or low-multi-unit franchisees will remain as bystanders and the crowd will disperse even more in 2013.
The wreckage of the Great Recession will take some time to sweep away and wherever there’s a wreck you are sure to find a lawyer. Many franchise concepts saw units whither or die in 2012 and lawyers generally are wont to exploit (or redress, depending upon your view) financial setbacks. In addition, a number of cases decided in 2012 muddied the distinction between franchisees and employees, adding a new set of arrows to the plaintiff bar’s quiver.
More Part-Time Franchise Staff and Fewer Franchise Employees
Although the Patient Protection and Affordable Care Act’s (a.k.a. Obamacare) employer mandate does not kick in until 2014, the determination whether an employer is a covered "applicable large employer" (generally, 50 or more full-time equivalent (FTE) employees) looks back at the previous calendar year. So, expect certain franchise operators that are near the 50-FTE cutoff to game the 2013 numbers to ensure that they don’t fall off the FTE Cliff in 2014.
Mike Sheehan is a franchise consultant and attorney. He is the president of Focus Ventures and formerly served as a securities attorney and as general counsel for a Fortune 100 financial services company. His Franchise Focus Blog focuses on helpful information, tips and current news for prospective franchisees.
Office: 703.372.6241 (703.FRANCH1)
This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult your own franchise attorney concerning your own situation and any specific legal questions you may have.