The Dairy Queen Franchisee Revolt

Yeah, I came to the conclusion that a restaurant franchise worked for several different types of people or situations:

1. A mid-career family that had saved up a few hundred thousand dollars and thus had the money necessary to pay for a lot of the franchise costs without a huge (although still substantial) loan. That would give the franchise more room to “breathe” as the debt payments were lower.

2. A married couple that were early in their career and committed to spending 5 to 8 years working 18+ hour days, building up equity, and obliterating a small business loan so they owned the first restaurant outright and could then buy a second, third, and fourth. They would be using “sweat equity” in effect, whereas the first family was using mostly financial capital.

3. An investor who is sitting on a substantial enough pile of capital that he or she can create a franchise development territory, like with Panera Bread or Dairy Queen, and agree to build 5-10 restaurants over a multi-year period. The economies of scale kick in, management is in place, and it becomes a regular cash generator for his or her holding company and/or family depending upon how the deal is structured.

And, by the way, any business owner that says, you are “paid to make sandwiches and clean bathrooms, not to have ideas” is destined for failure. Some of the best ideas in business history come from the ground-up because the people who are on the front lines actually SEE what is going on in the business. They know the problems, the potential solutions, what makes customers happy, and much more. I’m not so sure people can change but I’d like to think so. Either way, competing against people like that makes the job of the serious investor much easier (as Buffett said, what better competition is there to have than people who have been told there is no point in thinking or researching investments?).

Renodottie,

I have written an in-depth response to you so you can understand where I am coming from and why I think the way I do. Before we get to that, however, there are a few things that need to be cleared up:

1. I (not my parents or siblings) was the first member of my family to own shares of Berkshire Hathaway, as well as the first member of my family to graduate from college because i had to pay my own way through school. When I became obsessed with finance and investing in elementary school, I read about a man named Warren Buffett and his company in some of Peter Lynch’s writings. That led me to discover the company and spend years talking about it the same way most kids talk about pro athletes or movie stars. Years later, my parents and siblings finally got their own shares, with their own money. Although my parents are very successful and wealthy now, they became rich after I did. We did it in separate businesses, at separate times, with separate employees, without any assistance from each other.

2. Any time you assume someone “comes from money” you are betting against the odds. According to the Federal Reserve data and other studies, approximately 90% of wealth in the United States is first-generation made by people who were previously middle or lower class with only 10% being inherited. In the late 18th century, those figures were reversed. Saying that those who are successful and have money inherited it is like saying the world is flat. The data just doesn’t bear it out any longer and hasn’t for more than 100 years. Still, the myth persists. You instinctively know this, however. Think of the super-rich that come to mind: Martha Stewart, Warren Buffett, Bill Gates, Murdock, Ruffin, Lampert, Walton, Wexner, etc. All made their fortunes on their own through a business.

3. I know precisely how difficult it is to run a small business because the first real success I had was at a startup Aaron and I created in college. The business was begun with nothing more than $3,500 and an idea. Within a few years, we had taken over the entire industry and never issued a single share to anyone else or taken out a bank loan.

In that line of questioning, you asked how I *would* handle employee theft when the better question is how I *do* handle it. It’s not that difficult. There are systems, and have been for about ten years, where you can install low-cost HD video cameras that record everything from multiple locations and have them stream to a password protected web system. You could be sitting by the pool and watching ten different Dairy Queens on an iPad, iPhone, or notebook computer. With everything recorded, if you come up short at inventory time, you review the tapes, which are all digital and on the net. You find who did it, and you prosecute them. It won’t happen again. Most of these cost less than a few thousand dollars and there are almost no maintenance costs. Some of these systems allow you to electronically lock a store, turn off the lights, and much, much more.

In our businesses, I can literally see every keystroke that has ever been typed into any computer system at our companies and watch anything that has ever been displayed on screen.

This includes our web servers. For example, I can see that you accessed by site from somewhere very specific within Gloversville, New York. In a few seconds, I can view a satellite image of your location, study your past visiting behavior, find out the operating system you are running, screen resolution, and much more. So it isn’t just our employees we monitor, it’s our customers, too. This isn’t new; almost every commercial site on the Internet does it with varying degrees of sophistication.

As such, there is no “trying out” my theories. If anything, I had to start my businesses on my own (you had a head start – your family owned the franchise). It wasn’t because I was some genius who descended from on high … instead, I spent my youth studying people who were far more experienced and successful, reading nearly every biography I could and learning how other people became wealthy. I knew, for example, that Cisco had an accounting system that calculated the financial statements in real-time and that it wasn’t that expensive. Technology made tools like that accessible to a tiny start-up with no money.

4. Still, let’s presume that none of that matters. I’m going to assume that your business is capable of coming up with $10 per week. You probably spend more than that on toilet paper if you have public restrooms. I wrote a two-page parable explaining how your grandparents could have literally left you a $10+ million fortune. I even explain the math. Since it was tailored especially for you, I do hope you read it. Even if someone had been a complete and total idiot, as long as he or she could have put aside a tiny, tiny amount of money, the power of compounding would have created substantial wealth with very little sacrifice. That is why I am so confident that business isn’t that hard – harness compounding and even a failed company should be liquidated several decades later for a few million dollars. Read my full response to you and you’ll see why …

You can click here to read the article, which I published on About.com, a division of The New York Times.