Franchising White Paper

Wealth 3.0 The Magic of Compound Businesses A Franchise Consulting White Paper By Robert A. Needham, JD © December 2008

Contents Summary ...................................................................................................................................... 3 The Entrepreneurial Tsunami ........................................................................................... 4 About This Analysis............................................................................................................ 4 Choosing A New Strategy......................................................................................................... 6 Background ........................................................................................................................... 6 Approaches............................................................................................................................ 9 Compounding For Growth............................................................................................... 10 Okay, It Sounds To Good To Be True............................................................................ 11 MCOC Owner Rational........................................................................................................... 12 No Guarantees – This Is A Business .............................................................................. 12 A Hypothetical MCOC Model......................................................................................... 12 Inquirers Welcome ................................................................................................................... 14 Thoughts & Conclusions......................................................................................................... 14 About the Author—Robert A. Needham, JD Robert A. Needham, JD is President of FranchiseInc!, LLC an international franchise consulting firm based in Pelham, Alabama (Near Birmingham). FranchiseInc! offers a wide variety of services to the franchise community including: 1) franchise development of new business concepts, 2) strategic planning and business coaching, and 3) as a Franchise Consultant Network (our franchisees), we assist consumers match their goals to a variety of franchise concepts. After completing a highly decorated military career that included being a member of the National Aeronautics and Space Administration (NASA) National Space Transportation System (Space Shuttle) Powered Flight and Assent Design Team, Dr. Needham has spent over 20 years assisting hundreds of small to large business owners develop their strategic business plans, product and service offerings, home office operations concepts, technology, as well as sales and marketing strategies. With a BS in Mathematics and Computer Science and a Juris Doctor, Dr. Needham has authored several books on franchising, business, financial, personal and life planning; numerous manuals, white papers, seminars, training materials and texts and is often sought as a public speaker, university guest lecturer, and concept advocate. Dr. Needham’s most recent book, Solving The Puzzle Of Owning A Franchise has met with tremendous consumer interest. Dr. Needham has presented his ideas and concepts on television, more than 400 talk radio stations in the United States, and numerous business publication articles. Often seen as an industry innovator he has assisted in the development other brands such as FranTools.com, NewMediaLeads.com, CollectRoyalty.com, FranTrends.com and others for client companies. December 2008 Page 2 ©FranchiseInc!, LLC

1 Section Summary “Things are as good or as bad as you think they are!” Moral of the Hot Dog Story1 HEADLINE NEWS: AMERICA IN FINANCIAL CRISIS… In October of 2008, Americans watched in shock as the meltdown of the global financial markets combined with the U.S. mortgage and credit markets collapsed resulting in the worst financial conditions in this country since the Great Depression. The U.S. Senate, in a hasty response, appropriated $700 Billion in “bail‐out” funds in an attempt to stop the bleeding as financial institution after financial institution filed for bankruptcy, closed their doors, or was gobbled up by other industry leaders. In December 2008, record unemployment began to set in as more than 500,000 American workers lost their jobs. As we witness the collapse of our nation’s corporate infrastructure, companies like General Motors (GM), Ford and Chrysler are also seeking funds from the government in order to survive too. Despite the holiday season crowds, the retail sector is suffering with predictions of even more store closures in 2009. Those earning above $75,000 a year are finding even harder to find jobs in their communities without significant pay cuts. Housing prices are tumbling as much as 30% in some markets; the prospect of selling the family home to take a new job could mean financial suicide. Either families must split up until the house is sold or find a new direction. Baby‐boomers continue to age. The 401(k) and IRA were the trusted solutions for retirement, but recent record reductions in equity (some in excess of 35%) has left Baby‐boomers seeking post‐ retirement jobs or better yields. Where will the funds come from to replace these loses? An estimated $1‐Trillion of this retirement December 2008 Page 3 ©FranchiseInc!, LLC

capital is seeking diversification away from more traditional investments such as mutual funds, stocks and bonds. Where should it go? A number of new programs have been reviewed by the IRS and today non‐traditional alternatives such as ERSOP exist. The Entrepreneurial Tsunami Looking back to just before the industrial revolution (Circa 1750), over 90% of our citizens owned a family business and 10% worked for someone else. By the 20th Century, big business had perfected the employment model with salaries and benefits and only about 10% now own their own business. Our schools are teaching us how to “get a good job”, rarely how to benefit from owing a business. Who would have ever thought that now, just eight years into the 21st Century, that owning your own business in America might be a better investment than saving at a bank, owning stocks, bonds and even real estate? The truth is: it has always been a better choice! We call this current return to owning a business: “The Entrepreneurial Tsunami”. Hundreds of thousands have left their jobs or their jobs left them. The depressed real estate market is making selling a home today almost impossible – if you can get it financed. Americans are in debt at alarming rates. It is projected that thousands of new small businesses will spring up to fill the void of jobs. This will lead to economic recovery faster than bailouts. In this white paper, I will present the facts as why “The Magic Of Compounding Businesses” may be superior to “The Magic Of Compound Interest” and how strategies like Wealth 3.0 may lead to economic recovery in a way not expected by those who think the sky is falling! Bottom‐line, there is HOPE! About This Analysis I have chosen to study the impact of the current economic conditions by using data from the past 5 years of performance of bank interest rates, the Dow Jones Average Index performance, growth in real estate median housing market and owning select franchise concepts. This analysis should be viewed as general trends and not for any specific bank, stock, real estate market or December 2008 Page 4 ©FranchiseInc!, LLC

franchise concept. Certainly, depending on whose data you trust going forward, performance could be worse. There are exceptions to my trend analysis, but I believe that the numbers I present will give a conservative, fair, and balanced view of each investment in these economic times. In writing this White Paper, I am not attempting to render any legal, accounting or investment advice; rather, to present strategies the reader might use when making future choices. The reader is instructed to seek the advice of a professional when making such decisions. There is no perfect investment, so do your due diligence. For my research, I considered data readily obtainable through a Google® or Yahoo!® Internet search. I considered data for the period of December 2003 through December 2008, where possible, allowing for a 5‐year‐look‐back. If we have learned anything in the last few months economic changes, past performance is not a guarantee of future performance and the reader is cautioned – Buyer Beware! I began by looking at the average 5‐yr Bank CD rate2 for my interest rate assumptions. These rates represent the likely highest yield in each year during the analysis period. For my indicator of stock performance, I used the Dow Jones Industrial Average Index3 over the same period of time. For real estate I used the Average Median Price of Existing Homes Sold4, again over a similar 5 year period. Lastly, in considering businesses, I used my own composite of select franchise concepts fitting my own criteria that is further detailed in this Wealth 3.0 White Paper. http://quotes.wordpress.com/2008/04/06/the‐man‐who‐sold‐hot‐dogs/ 1 Chart of Estimated 5‐Yr CD rates from www.bankrate.com December 2008. 2 3 Yahoo!® Finance website DJI 5‐year history chart December 2003 – December 2008 dated 12/13/2008 @ 11:19 am ET. http://www.scribd.com/doc/3675699/US‐National‐Association‐of‐Realtor‐Statistics‐19682008‐ 4 Median‐Price‐on‐Home‐Sales‐62508 December 2008 Page 5 ©FranchiseInc!, LLC

2 Section Choosing A New Strategy Background The coming Entrepreneur Tsunami will require a new strategy. Old ways may not work in the new economy. Before I show you what I believe is the answer, I would like to give you some background knowledge. First let’s agree on some assumptions: 1. That you have or can raise $100,000 to invest. 2. That we are going to look back 5 years to compare strategies. 3. That the strategy that makes the most money, makes the most sense going forward. Model 1: Bank CDs. For this analysis, I considered annual renewing Certificates of Deposit (CDs) based on 5‐Yr CD Rates.2 BankRate.com 5 Yr CD Est. Interest Rate Difference % Growth Dollar Value Investment Value Week of December 8, 2003 3.90% $ 100,000.00 Week of December 6, 2004 4.10% 0.20% 3.90% $ 3,900.00 $ 103,900.00 Week of December 5, 2005 4.80% 0.70% 8.16% $ 4,259.90 $ 108,159.90 Week of December 4, 2006 5.00% 0.20% 13.35% $ 5,191.68 $ 113,351.58 Week of December 3, 2007 4.80% -0.20% 19.02% $ 5,667.58 $ 119,019.15 Week of December 8, 2008 4.10% -0.70% 24.73% $ 5,712.92 $ 124,732.07 As you can see in the table, over the past five years the rate varied from 5.00% to 3.90%. So the investment of $100,000 grew over 5 years to $124,732.07. The advantage is that the funds are backed by the Federal Deposit Insurance Corporation (FDIC), the disadvantages are that your funds are tied up and subject to penalties for early withdrawal and have inflation risk. Model 2: Stock Market. For this analysis, I considered the Dow Jones Industrial Average Index.3 Beginning with $100,000, I took the appreciation of the index and applied that growth to the funds. December 2008 Page 6 ©FranchiseInc!, LLC

Dow Jone Average Index Index Value Difference % Growth Dollar Value Investment Value Week of December 8, 2003 10,042 $ 100,000.00 Week of December 6, 2004 10,543 501 4.99% $ 4,989.05 $ 104,989.05 Week of December 5, 2005 10,778 235 2.23% $ 2,340.17 $ 107,329.22 Week of December 4, 2006 12,307 1529 14.19% $ 15,226.05 $ 122,555.27 Week of December 3, 2007 13,339 1032 8.39% $ 10,276.84 $ 132,832.11 Week of December 8, 2008 8,629 -4710 -35.31% $ (46,903.01) $ 85,929.10 As you can see in the table, over the past five years the rate varied from 14.19% to ‐35.31%. So the investment of $100,000 over 5 years lost principal down to $85,929.10. The advantage is that your funds are liquid. The disadvantages are market and inflation risks. Model 3: Real Estate. For this analysis, I considered the average median price of an existing home sold4 (from all markets) during the period in the U.S. During this period, the markets in Florida, California, Arizona and Nevada each enjoyed significant rise in their home prices, but now with current economic and credit conditions they have all but lost any profits if these properties were held the entire period. Beginning with $100,000, I took advantage of the fact that I could place 20% down and leverage my growth on $500,000 not $100,000. Real Estate Est Growth Med Price Gr Difference Equity Growth Dollar Value Investment Value 2003 $180,200 7.51% $ 500,000.00 2004 $195,200 8.32% 0.81% $ 41,600.00 $ 41,600.00 $ 541,600.00 2005 $218,000 11.68% 3.36% $ 104,858.88 $ 63,258.88 $ 604,858.88 2006 $221,900 1.78% -9.90% $ 115,625.37 $ 10,766.49 $ 615,625.37 2007 $217,900 -1.80% -3.58% $ 104,544.11 $ (11,081.26) $ 604,544.11 2008 est $213,880 -1.80% 0.00% $ 93,662.32 $ (10,881.79) $ 593,662.32 As you can see in the table, over the past five years the rate varied from 11.68% to ‐1.80%. So the investment of $100,000 over 5 years grew in equity to $93,662.32 plus my $100,000 for a total of $193,662.32. The advantage is the leverage. The disadvantages are market and inflation risks. Model 4: Wealth 3.0 – The Magic Of Compounding Businesses At FranchiseInc!, we specialize in franchises. There are several ways to buy a business depending on where you stand between Employee, Franchisee, and Entrepreneur. December 2008 Page 7 ©FranchiseInc!, LLC

If you are more like an Employee, you will want a business with very little risk where you “work in the business” and have someone tell you what to do. In a sense, “you are buying a job!” If you are a typical Franchisee, you want a business where you can use the goodwill of the Franchisor’s Brand, the proven business system, and the benefits of quality training. Depending if you are more on the side toward the Employee, you will want a business you can “work in” as we discuss before. If you are more on the side toward Entrepreneur, then you will want a strategy to “work on” the business. “Here you desire to be the CEO!” If you are more like an Entrepreneur, you may want to start your own business from scratch or buy a business opportunity and don’t want any input. “You usually don’t buy franchises.” For my analysis, I assumed you were a Franchisee on the side toward Entrepreneur wanting a strategy were you could “work on” the business and be your own CEO. In the Approach section that follows, I will show you how with the same $100,000 in the same five years you could have up to $3.2 Million is assets and potentially $1,600,000 in income per year! That’s right, let’s compare Models: Model Type Invest Est. Value in 5 Years 1 Bank CDs $100,000 $ 124,732.07 2 Stocks (DJI) $100,000 $ 85,929.10 3 Real Estate $100,000 $ 193,662.32 4 Wealth 3.0 $100,000 $3,200,000.00* * With this Wealth 3.0 Strategy you could earn $1,600,000.00 per year! Businesses often sell for 2 times earnings before tax. Hard to believe? It is really all about choices. You can “rent your life to your employer” and save the traditional way, or you can “own you life and start a business”. This Wealth 3.0 Strategy does not work for every business! You must choose wisely, in the next section, I will show you how. December 2008 Page 8 ©FranchiseInc!, LLC

Approaches Let’s begin with a strategy we call the Multi‐Concept Operating Company (MCOC). The MCOC is a Wealth 3.0 Strategy that selects certain franchise concepts based on a very specific criteria that allows the investor/owner to manage the business “Pactively”. Pactive means that you must “work on” your business about 15‐20 hours per week, but not “work in” your business(es). You will hire managers to run the businesses. Let’s examine the specific criteria for the MCOC: 1. Must own simple businesses without many moving parts. In particular, you must be able to find employees from the available work force in your area. You do not want a business where the skills of your employees would hold you hostage (i.e. certified mechanic). 2. Must have a low cost of entry for each, preferably $50,000 to $100,000, simple real estate solution or home based, and very little build‐out costs, if any. 3. Must have products and services that are in high demand and recession resistant. 4. Must allow Pactive Ownership by the Franchisee. 5. Must generate a high net margin such that the Return on Investment (ROI) occurs within 6‐18 months, desired within 12 months. There are two approaches to the MCOC: The Simple MCOC. This approach operates franchise concepts from the same type of business (i.e. B2C Services). Typically in the form of a limited liability company (LLC) holding each franchise concept. Almost always a single investor/owner acting as president/CEO with Concept Managers (CM) as LLC employees providing daily operations of each concept – meaning the Franchisor will have to approve this form of layered ownership/operation in lieu of the more common owner/operator format. Each CM falls under the direct supervision of the CEO. This can be likened to development of chain stores where there is a December 2008 Page 9 ©FranchiseInc!, LLC

common owner and local store managers operating each store. This approach is often referred to as a “multi‐unit operator”. The Complex MCOC. This approach operates franchise concepts from diversified types of businesses (i.e. B2C Services + B2B Services +Retail). It is advantageous that the diversified businesses to service similar client bases to achieve cross marketing and synergy, although not required. This approach is often referred to as a “multi‐concept operator”. Note that this operator may also operate multi‐units of one franchise while only having single units of another. This is a very flexible and diversified strategy. Compounding For Growth For this study, I used the same $100,000 to start and then reinvested each net profit per year over the 5 years. Basically, keeping the principal and earnings working the same as with the CD, stock and real estate models we discussed earlier. Starting with two companies each costing $50,000 each to open and initially operate. This strategy seeks to be able to remove $50,000 from each business of net earnings before tax and reinvest into two more business and so on as follows: Year 1: Buy two businesses and generate at least $100,000 in net profit. Year 2: Buy two more businesses – 4 total and generate $200,000 in net profit. Year 3: Buy four more businesses – 8 total and generate $400,000 in net profit. Year 4: Buy eight more businesses – 16 total and generate $800,000 in net profit. Year 5: Buy sixteen more business – 32 total and generate $1.6 Million in net profit. You invest the same $100,000 as with the bank, stock, and real estate, but you build a business worth up to $3.2 Million in assets that could earn you $1.6 Million in income every year. Now you hire a CEO to replace you for a nice salary and keep you over $1 Million a year in income and enjoy your life. December 2008 Page 10 ©FranchiseInc!, LLC

You choose – a job for the next 5 years or own a business and capture this potential wealth for you and your family! 6 Okay, It Sounds To Good To Be True What are the risks? This strategy does not work with all franchise concepts or all business forms. You must choose your operating units carefully. You must hire your Concept Managers and pay them well so they don’t quit. You must be involved with the business at least a couple days a week. You must follow your plan. Consider if you did nothing but start the first two businesses and earned $100,000 before tax each year years 2 – 5; you could have earned $400,000 and it would be better than either of the other models! 6 This is a business strategy; there are risks as with any investment. This is not an offer to sell a particular franchise; it is for education purposes only. No representations or implied or expressed warranties that you will earn any guaranteed amount of money in any particular timeframe. Before investing in a business you should seek the advice of professionals, do your due diligence, assess your risks, market conditions, and your commitment. If buying a franchise or franchises always obtain a copy of the FDD at least 14 days prior to making any purchase. Always validate your assumptions with exiting franchisees. December 2008 Page 11 ©FranchiseInc!, LLC

3 Section MCOC Owner Rational No Guarantees – This Is A Business While there are no guarantees in business, suitable owners/investors are encouraged to evaluate if the potential cash flow and diversification of the MCOC concept meets their risk‐ reword objectives as a potential franchise owner. 6 Franchising has historically been recognized as a safer choice than new business start‐up. Widely quoted statistics indicate that about 80 to 90% of all franchises are still in business after the first 5 years as compared to about 20 ‐ 40% for new start‐ups. Franchises require individual attention and the MCOC strategy is no exception. While the MCOC proposes that the individual operating units will be managed on a daily basis by the Concept Managers, the MCOC owner, acting as president, will need to oversee these managers to ensure budgets, sales and compliance requirements are maintained. A Hypothetical MCOC Model As a franchise consultant I cannot hypothecate earnings from a particular franchise concept per FTC regulation.6 The concepts that follow do not represent any particular company, rather the combined elements from several companies that we know meet the five (5) basic criteria mention in Section 2. According to most industry sources, there are more than 3,000 franchise concepts sold in the United States today with a total of 750,000 operating units. You are not the first person to consider franchising as a wealth building strategy. In fact, it is expected over 30,000 new franchise units will be sold in 2009 alone. December 2008 Page 12 ©FranchiseInc!, LLC

Let’s consider 3 business scenarios that would work for this strategy: Expense Company Company Company Type A B C Franchise Fee $30,000 $25,000 $29,500 Start Up Expenses $20,000 $25,000 $20,500 All In Costs (Item 7 FDD) $50,000 $50,000 $50,000 Est. of Daily Sales $487 $1037 $386 Est. of Monthly Sales $14,620 $31,095 $11,574 Est. of Annual Sales $175,439 $373,134 $138,889 Cost of Goods/Year $8,772 $123,134 $20,883 Operating Cost/Year $116,667 $200,000 $68,006 Net Earning Pre Tax $50,000 $50,000 $50,000 As you can see, all three companies are quite different, they each cost $50,000 to open and each could earn $50,000 in net earnings before tax. All 3 would meet the criteria; all 3 would work in one MCOC. Choosing the right company (ies) for you is a process. In my book, Solving the Puzzle of Owning a Franchise, I discuss the process fully and we would be happy to provide you an e‐Book for free if you call us at 800‐961‐0420. Also one of our experienced Franchise Consultants can work with you through your purchase process at no charge to you either. In all cases, you must obtain a Franchise Disclosure Document (FDD) and a copy of the Franchise Agreement at least 14 days before making a purchase. If you do not receive the FDD, then do not buy the business. You are encouraged to speak with existing franchisees to validate representations made by the franchisor to you. 6 If you are using my book, sample questions for contacting franchisees are located on pages 97‐99. December 2008 Page 13 ©FranchiseInc!, LLC

4 Section Inquirers Welcome We welcome you inquire into this Wealth 3.0 Strategy – The MCOC. If it is right for you, you can contact us as follows: Web: www.franchiseinc.com Phone: 800‐961‐0420 Email: support@franchiseinc.com Thoughts & Conclusions The MCOC is not theory; we have active owners and franchisors participating in these well thought‐out business strategies. If you believe you have the vision to develop such concepts as a franchisor or franchisee, we welcome a confidential dialog exchange. THIS WHITE PAPER IS FOR INFORMATIONAL PURPOSES ONLY, AND MAY CONTAIN TYPOGRAPHICAL ERRORS AND TECHNICAL INACCURACIES. THE CONTENT IS PROVIDED AS IS, WITHOUT EXPRESS OR IMPLIED WARRANTIES OF ANY KIND. INDPENDENT USE OF ANY OF THESE CONCEPTS IS DONE SO AT YOUR OWN RISK. NO PURCHASE OF A FRANCHISE SHOULD BE MADE WITHOUT A FRANCHISE DISCLOSURE DOCUMENT (FDD). ALWAYS SEEK THE ADVICE OF YOUR LAWYER AND CPA WHEN BUYING A BUISNESS. NOTHING CONTAINED HEREIN IS INTENDED TO OFFER LEGAL OR ACCOUNTING ADVICE. FranchiseInc!SM is the service mark of FranchiseInc!, LLC. No names of sources or data are disclosed. Any trademarks used belong to their respective owners and are provided for reference only and do not imply endorsement by their owners. This document does not contemplate the sales of any particular franchise or business opportunity but is a discussion of one strategy in the franchise industry. Not all franchise concepts will work with this strategy, due diligence is required. ©Copyright 2007‐2009 FranchiseInc!, LLC All rights reserved. Reproduction in any manner whatsoever without the express written permission of FranchiseInc! is strictly forbidden. For more information, contact FranchiseInc!, LLC at 800‐961‐0420 or you may write us at FranchiseInc!, 2148 Pelham Parkway, Building 300, Pelham, Alabama 35124. Information in this document is subject to change or may be withdrawn without notice. December 2008 Page 14 ©FranchiseInc!, LLC

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