Q&A with Franchise Pundit Founders

In this Q&A, FBLA talks with Robert Boulter and Ryan Knoll, the founders of FranchisePundit.com, a blog and discussion forum that covers business and legal issues in franchising. Since its inception in April 2005, visitor traffic to Franchise Pundit (www.franchisepundit.com) has grown exponentially, as franchisees, prospective franchisees, and franchisors read and respond to its no-nonsense, practical advice and observations.

FBLA: Why did you start this blog? What is its purpose? Who is your target audience?

Boulter and Knoll: The blog and discussion forum were started in April 2005 as an informal project to record observations and research in the franchise industry and to start a dialogue with those interested in the same topics. The majority of the audience seems to be existing or aspiring franchisees, with the remainder being franchisors and franchise-related professionals. We welcome the participation of anyone interested in franchising issues.

FBLA: How many readers do you have? What's the growth rate?

Boulter and Knoll: The site received well over 100,000 visits last month, and it's been doubling every few months.

FBLA: Your content is different from blogs we've seen created by the franchisees of a big franchisor, who might use that site to air their grievances with that particular company. Can you comment on your place in the industry, as compared to theirs?

Boulter and Knoll: The scope of topics covered by the blog and discussion forum mostly involve some aspect of franchising, but occasionally focuses on general business or legal issues. In contrast to sites focused on single franchisor or on only grievances, Franchise Pundit has evolved to an even balance of positive and negative reviews and opinions.

While some readers come looking for insight or gossip on certain franchises, most come to be educated on universal franchising issues.

The purpose of the site is to educate readers on both the positive and negative aspects of franchising in the hopes that they can make more informed business decisions related to their own particular franchising endeavors. For example, blog posts often touch on common misconceptions about the franchisees' likely return on invested capital, or the impact of certain provisions in a franchise agreement. The blog and forum are not designed to generate income or even business referrals for their authors. Like other blogs, the content reflects the interests and experiences of the blog's authors.

FBLA: What are the most common problems that readers raise in their questions?

Boulter and Knoll: The most common disputes seem to involve the entangled site selection process, protected territories, and profitability. Franchisees seem to grossly underestimate the various legal and financial risks involved in owning a franchise. Often, when expectations are misaligned, it's easy to blame the naivety of franchisees. Franchisees often blame the franchisors' commissioned sales agents for misrepresenting the site selection process and return on the franchisees' time commitments and capital. Unfortunately, instances of 'under promise and over deliver' (or over disclose) by franchisors rarely seems to be the case.

Franchisees usually are familiar with the stock market where financial disclosures and metrics are prevalent. Franchisees experience a bit of culture shock when they encounter the secretive nature of franchisors, where refusal to share the financial results of existing local franchisees is the norm. Part of the reason franchisors do not share information is regulatory requirements. Specifically, if franchisors make claims about earnings or profit levels, they must disclose the basis for those claims. Rather than make formal disclosures that must be substantiated, many franchisors choose not to disclose such information in the offering circular. However, franchisees always want to know how much they can make. And as a consequence, franchisors may provide 'off the record' information even though it is unlawful to do so. This dynamic unnecessarily creates and promotes the franchisees' misaligned expectations. Moreover, it forces attention to alternative sources of information not controlled by the franchisor.

FBLA: Your commentaries range widely from legal issues, to franchise concept, to dollars-and-cents analysis. Which of these do you believe is the most important for a prospective (or operating) franchisee to focus on?

Boulter and Knoll: The most important focus for franchisees is reflecting upon the financial and legal realities of operating the licensed business model before paying the franchise fee and signing agreements. With respect to financial realities, franchisees tend to underestimate the importance of researching and fully understanding the competing interests and the financial motives of everyone involved in the franchise industry. This leads to gullibility and susceptibility to be blinded by the passion to own their own business.

Many franchisees believe oral assurances made by the franchisor prior to signing the franchise agreement and paying the franchise fee. As a consequence, franchisees often do not assess the economics of the transaction. It is not unusual for a franchisee to invest $100,000 or more in a franchise but to neglect hiring an accountant or lawyer to help with the pre-purchase investigation.

Accountants can help with pro forma projections and ensure various factors are considered when evaluating economic viability. Franchisees should not go into business without detailed pro formas. All expenses, from the franchisee's own salary to lease payments to workers' compensation, need to be projected and accounted for. This is Business 101.

Lawyers can help explain the legal ramifications of the franchise agreement and advise on negotiating points. Franchise agreements are technical documents written by lawyers to favor the franchisor. It is not within the experience of most people considering a franchise to understand the legal implications of the agreement. For example, when a dispute arises, many franchisees can be forced into arbitration in the franchisor's home state. The reality is that they often cannot afford to do so and will be without a remedy. Similarly, commercial leases are long-term commitments that cannot be evaded even if the franchise fails. Landlords and franchisors demand personal guarantees, meaning that a franchisee's personal assets are on the line for payment even if the franchise is no longer operating. Such terms and conditions can have devastating long-term impacts on a franchisee's life.

With adequate due diligence, most disputes should not be a surprise to the well-informed franchisee, particularly how the restrictions in the franchise agreement will impact operations and profitability.

FBLA: You don't seem to pull punches in your comments. They are polite, but they are clear ' especially your columns titled, 'I'd Buy It,' 'I Wouldn't Buy It,' 'I'm Neutral on It.' What's been the reaction from franchisors about your comments? Have you been threatened with any legal action or legal-sounding document?

Boulter and Knoll: Franchisees are thirsty for unbiased perspectives, and that is the niche this site fills. A fun way to deliver that perspective is to step into the shoes of a potential franchisee and discuss the reasons why I would or would not buy a particular franchise or a franchise serving a particular segment.

Another part of this analysis involves breaking down the business strategy ' How is the business fulfilling an otherwise unmet customer need and targeting and dominating increasing market segments? How does it innovate its offerings and respond to forces of change? Does the franchisor plan, execute, brand, and deliver offerings effectively? These are some of the considerations that go into our evaluations.

We have never been threatened with legal action. Even though franchisors occasionally voice their
disagreement with our opinions, we go out of our way to be fair and
reasonable, and always outline the considerations, facts, and reasoning used to formulate an opinion. Franchisors are encouraged to engage in a dialogue with us or our readers directly on the blog or discussion forum.

FBLA: Some companies seem to be mentioned more than others ' Subway and Quiznos, to name a pair. Are they 'bad actors,' or are they just high profile? Or are they simply franchisors with which you are more familiar?

Boulter and Knoll: Whether
sub-sandwich franchises are disproportionately aggrieved isn't something that [we've] really looked at. However, [we] can say as a group those companies have produced some very vocal and disgruntled franchisees, based upon the feedback the Web site has received. Part of the problem in this industry is the franchisees' expectations related to operational costs, time obligations, site selection approval, exclusive territories, and managing employees.

FBLA: Do you think that you are changing the balance of power between the prospective franchisee and a franchisor? Is that your goal?

Boulter and Knoll: No. The goal is to create a more informed and prudent franchisee, which, in turn, should help elevate the ethical standards in the franchising industry. As more prominent outlets for franchisee grievances develop, the burden [will inccrease] on franchisors for not fully apprising franchisees of the negatives, such as possible cash drain. Providing underperforming franchisees with an inexpensive means to end the franchise relationship instead of forcing them into bankruptcy can make a monumental difference in the franchisor's reputation.

The balance of power shifts to potential franchisees that are skeptical and diligent. What has changed in the past decade is the ability for disgruntled franchisees to widely inform active Internet users of their poor experiences. Franchisors can lessen this risk by painting a more accurate, realistic picture of the 'worst case' scenario, both in terms of the site selection process and cash flow
from operations.

FBLA: What are your ambitions for the blog and for how you provide information about franchising to prospective and active members of the franchising community?

Boulter and Knoll: In the future, we plan to add more bloggers and increase the frequencies of posts. Beyond that, the blog and forum will stay active as long as we are still having fun!

In this Q&A, FBLA talks with Robert Boulter and Ryan Knoll, the founders of FranchisePundit.com, a blog and discussion forum that covers business and legal issues in franchising. Since its inception in April 2005, visitor traffic to Franchise Pundit (www.franchisepundit.com) has grown exponentially, as franchisees, prospective franchisees, and franchisors read and respond to its no-nonsense, practical advice and observations.

FBLA: Why did you start this blog? What is its purpose? Who is your target audience?

Boulter and Knoll: The blog and discussion forum were started in April 2005 as an informal project to record observations and research in the franchise industry and to start a dialogue with those interested in the same topics. The majority of the audience seems to be existing or aspiring franchisees, with the remainder being franchisors and franchise-related professionals. We welcome the participation of anyone interested in franchising issues.

FBLA: How many readers do you have? What's the growth rate?

Boulter and Knoll: The site received well over 100,000 visits last month, and it's been doubling every few months.

FBLA: Your content is different from blogs we've seen created by the franchisees of a big franchisor, who might use that site to air their grievances with that particular company. Can you comment on your place in the industry, as compared to theirs?

Boulter and Knoll: The scope of topics covered by the blog and discussion forum mostly involve some aspect of franchising, but occasionally focuses on general business or legal issues. In contrast to sites focused on single franchisor or on only grievances, Franchise Pundit has evolved to an even balance of positive and negative reviews and opinions.

While some readers come looking for insight or gossip on certain franchises, most come to be educated on universal franchising issues.

The purpose of the site is to educate readers on both the positive and negative aspects of franchising in the hopes that they can make more informed business decisions related to their own particular franchising endeavors. For example, blog posts often touch on common misconceptions about the franchisees' likely return on invested capital, or the impact of certain provisions in a franchise agreement. The blog and forum are not designed to generate income or even business referrals for their authors. Like other blogs, the content reflects the interests and experiences of the blog's authors.

FBLA: What are the most common problems that readers raise in their questions?

Boulter and Knoll: The most common disputes seem to involve the entangled site selection process, protected territories, and profitability. Franchisees seem to grossly underestimate the various legal and financial risks involved in owning a franchise. Often, when expectations are misaligned, it's easy to blame the naivety of franchisees. Franchisees often blame the franchisors' commissioned sales agents for misrepresenting the site selection process and return on the franchisees' time commitments and capital. Unfortunately, instances of 'under promise and over deliver' (or over disclose) by franchisors rarely seems to be the case.

Franchisees usually are familiar with the stock market where financial disclosures and metrics are prevalent. Franchisees experience a bit of culture shock when they encounter the secretive nature of franchisors, where refusal to share the financial results of existing local franchisees is the norm. Part of the reason franchisors do not share information is regulatory requirements. Specifically, if franchisors make claims about earnings or profit levels, they must disclose the basis for those claims. Rather than make formal disclosures that must be substantiated, many franchisors choose not to disclose such information in the offering circular. However, franchisees always want to know how much they can make. And as a consequence, franchisors may provide 'off the record' information even though it is unlawful to do so. This dynamic unnecessarily creates and promotes the franchisees' misaligned expectations. Moreover, it forces attention to alternative sources of information not controlled by the franchisor.

FBLA: Your commentaries range widely from legal issues, to franchise concept, to dollars-and-cents analysis. Which of these do you believe is the most important for a prospective (or operating) franchisee to focus on?

Boulter and Knoll: The most important focus for franchisees is reflecting upon the financial and legal realities of operating the licensed business model before paying the franchise fee and signing agreements. With respect to financial realities, franchisees tend to underestimate the importance of researching and fully understanding the competing interests and the financial motives of everyone involved in the franchise industry. This leads to gullibility and susceptibility to be blinded by the passion to own their own business.

Many franchisees believe oral assurances made by the franchisor prior to signing the franchise agreement and paying the franchise fee. As a consequence, franchisees often do not assess the economics of the transaction. It is not unusual for a franchisee to invest $100,000 or more in a franchise but to neglect hiring an accountant or lawyer to help with the pre-purchase investigation.

Accountants can help with pro forma projections and ensure various factors are considered when evaluating economic viability. Franchisees should not go into business without detailed pro formas. All expenses, from the franchisee's own salary to lease payments to workers' compensation, need to be projected and accounted for. This is Business 101.

Lawyers can help explain the legal ramifications of the franchise agreement and advise on negotiating points. Franchise agreements are technical documents written by lawyers to favor the franchisor. It is not within the experience of most people considering a franchise to understand the legal implications of the agreement. For example, when a dispute arises, many franchisees can be forced into arbitration in the franchisor's home state. The reality is that they often cannot afford to do so and will be without a remedy. Similarly, commercial leases are long-term commitments that cannot be evaded even if the franchise fails. Landlords and franchisors demand personal guarantees, meaning that a franchisee's personal assets are on the line for payment even if the franchise is no longer operating. Such terms and conditions can have devastating long-term impacts on a franchisee's life.

With adequate due diligence, most disputes should not be a surprise to the well-informed franchisee, particularly how the restrictions in the franchise agreement will impact operations and profitability.

FBLA: You don't seem to pull punches in your comments. They are polite, but they are clear ' especially your columns titled, 'I'd Buy It,' 'I Wouldn't Buy It,' 'I'm Neutral on It.' What's been the reaction from franchisors about your comments? Have you been threatened with any legal action or legal-sounding document?

Boulter and Knoll: Franchisees are thirsty for unbiased perspectives, and that is the niche this site fills. A fun way to deliver that perspective is to step into the shoes of a potential franchisee and discuss the reasons why I would or would not buy a particular franchise or a franchise serving a particular segment.

Another part of this analysis involves breaking down the business strategy ' How is the business fulfilling an otherwise unmet customer need and targeting and dominating increasing market segments? How does it innovate its offerings and respond to forces of change? Does the franchisor plan, execute, brand, and deliver offerings effectively? These are some of the considerations that go into our evaluations.

We have never been threatened with legal action. Even though franchisors occasionally voice their
disagreement with our opinions, we go out of our way to be fair and
reasonable, and always outline the considerations, facts, and reasoning used to formulate an opinion. Franchisors are encouraged to engage in a dialogue with us or our readers directly on the blog or discussion forum.

FBLA: Some companies seem to be mentioned more than others ' Subway and Quiznos, to name a pair. Are they 'bad actors,' or are they just high profile? Or are they simply franchisors with which you are more familiar?

Boulter and Knoll: Whether
sub-sandwich franchises are disproportionately aggrieved isn't something that [we've] really looked at. However, [we] can say as a group those companies have produced some very vocal and disgruntled franchisees, based upon the feedback the Web site has received. Part of the problem in this industry is the franchisees' expectations related to operational costs, time obligations, site selection approval, exclusive territories, and managing employees.

FBLA: Do you think that you are changing the balance of power between the prospective franchisee and a franchisor? Is that your goal?

Boulter and Knoll: No. The goal is to create a more informed and prudent franchisee, which, in turn, should help elevate the ethical standards in the franchising industry. As more prominent outlets for franchisee grievances develop, the burden [will inccrease] on franchisors for not fully apprising franchisees of the negatives, such as possible cash drain. Providing underperforming franchisees with an inexpensive means to end the franchise relationship instead of forcing them into bankruptcy can make a monumental difference in the franchisor's reputation.

The balance of power shifts to potential franchisees that are skeptical and diligent. What has changed in the past decade is the ability for disgruntled franchisees to widely inform active Internet users of their poor experiences. Franchisors can lessen this risk by painting a more accurate, realistic picture of the 'worst case' scenario, both in terms of the site selection process and cash flow
from operations.

FBLA: What are your ambitions for the blog and for how you provide information about franchising to prospective and active members of the franchising community?

Boulter and Knoll: In the future, we plan to add more bloggers and increase the frequencies of posts. Beyond that, the blog and forum will stay active as long as we are still having fun!