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Have you ever eaten Refritos -- refried beans? Do you know what they are and how they are made? No Latino cookbook will tell you what the dish really is all about -- too rough -- you wouldn't eat 'em. They are (especially for Mexican cuisine) beans that have been cooked the normal way, then mashed and fried in lard. They go with rice, pico de gallo and whatever else may be on the plate at a meal -- cabrito (goat) et cetera. What they really represent is frugality. Beans in inventory that have not gone out on peoples' plates, and that are beginning to go south, are mashed, doused with mucho black pepper, and fried in lard or oil, which disguises the fact that you are going to have a gastric attack soon after you eat em.
What? You would never serve anything like that to your customer? Let me put this concept a different way. Would you attempt to resell company owned stores that have been losers or barely marginal to your existing franchisees or to new franchisees without disclosing their financial operating history and on a sales pitch that a franchise owner is sure to have better results than the company because the franchisee is an on site owner/operator, not just some employee manager with no equity stake in the outcome?
Would you be amazed if I told you that that is exactly what many companies do -- frequently to their subsequent regret when the stores fail and the company officers who cooked up this deal are on the witness stand being cross examined before a jury of ordinary folks who may be offended that such a tactic would even be considered by an honest group of businesspeople.
What is the driving force that produces this phenomenon? It is the prospect that these stores can be sold for much more than they are worth in an open market transaction with full disclosure. That's it -- pure and simple! What? You think that is an act of desperation that only a company in deep trouble would consider? What about a company that is doing well, but that is contemplating an IPO and wants to hype its financials for the offering by disposing of the stores and getting an above normal price for them? It happens all the time today.
If a company truly believes itself to be ethical, it is OK to resell company operated stores, but with disclosure of their financial history. How that is done poses some challenges, but they are not insurmountable.
The principal challenges are that a reality based appraisal of the value of the stores, not an 'I need money' based appraisal, is in order. The other issue is that there will be differences in the accounting between the store as owned by the company and the store as owned by the franchisee. If the company accounts for occupancy costs differently than the franchisee will after the sale, the financials should have a note explaining all that so that the purchaser's accountant can make a competent adjustment in advising the purchaser. Many companies do not assign SG&A (corporate overhead charges) in their store level accounting. The company assesses that charge at some point in consolidating company owned store accounting as a group, and that charge represents a certain percentage of gross sales. Another note regarding SG&A is in order. That note states that the financial statements provided do/do not include SG&A. If they do include SG&A, the note should go on to say that the company's SG&A is probably not typical of the franchisee owner's likely experience and that the company does not represent that the purchaser will have overhead expenses at or lower than that level. The purchaser may have higher overhead and higher occupancy expenses. (Now we're talking fair disclosure.) The company's accounting department should review the financial statements for other items that may be atypical for a franchisee owner. For instance, does the company include the cost of employee benefits in cost of goods sold, or are those part of SG&A? As the franchisee either may not be able to provide a similar benefit package, or may do so and account for it differently, there should be another note explaining what the company does in its treatment of that item and cautioning that the purchaser should consider adjusting that category of expense to reflect the reality of how the purchaser will operate the store(s). This is just one example to show how it may be handled. There may well be other categories of expense that are treated differently by the franchisor than they will be treated or incurred by a franchisee owner.
Unless you have real, hard financial data to support a claim that franchisee owner stores do better than company stores, such a claim should not be made. Unless you have real, hard data that company owned stores experienced improved financial operating results after their sale to franchisee owners, that claim should not be made either. In the absence of that quality of data to substantiate financial claims, most juries will treat you as a scoundrel in any litigation arising out of store post sale failure.
Now, you want Refritos with that Cabrito lunch special?
Copyright 1997 - 2008 || Richard A. Solomon
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