Franchising: The Right Recipe for your Restaurant? by iFranchise Group

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Preparing to Franchise ◦ ◦ ◦ ◦

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How Franchising Works Alternatives Franchisability Process

Franchising and the Law ◦ Federal Regulations ◦ State Regulations ◦ Penalties

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Implementing Your Franchise Strategy ◦ Preparing to Sell ◦ Franchisee Support ◦ Organizational Development

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Questions and Discussions We are happy to send you a copy of this PowerPoint Deck if you want to avoid taking extensive notes.

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More hands-on experience than any other firm ◦ ◦ ◦ ◦

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27 consultants with over 500 years of franchise experience Our consultants have worked with 98 out of the top 200 franchise companies worldwide Offices: Chicago, Los Angeles, Dallas, Atlanta, Toronto, Dubai, Jeddah Independent Study – Named Best Franchise Consulting Firm by 500+ Franchisors

More “senior level” experience ◦

Former CEOs, CFOs, EVPs of two dozen major franchise companies and a dozen restaurant franchises 

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Adia (now Adecco), Armstrong Tile, Auntie Anne’s, Dunkin’ Donuts, LINE-X, Pearle Vision, McDonald’s, PIP Printing, Schlotzsky’s, Snap-on Tools, Snelling & Snelling, and other national brands

Experience with start-up and established franchise programs Our team has worked with Subway, Buffalo Wild Wings, El Pollo Loco, Denny’s, Potbelly, Which Wich, Checkers, Newk’s, Mooyah, Tilted Kilt, Culver’s, Hard Rock Café, Wing Stop, Benihana, Fuzzy’s Tacos, Nothing Bundt Cakes, Honeybaked Ham, Popeye’s, Togo’s, and many, many others.

Breadth across four functional areas ◦ ◦ ◦ ◦

Strategic Planning Quality Control Marketing Implementation and Organizational Development

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More Data = Better Data (track 200,000+ leads)

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TopFire Media ◦ ◦ ◦ ◦

Nation’s first fully integrated media firm -- SEO, PPC, Social, Blogging, PR, and Mobile Both brand/consumer focused and franchise lead generation Google Partner Recent honors and awards:   

Best new agency (Ragan & PR Daily Ace Awards) Best Website Finalist (PR News) Best Media Relations Campaign Finalist (PR News)

Preparing For Franchising

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FTC rule 436 cites three elements that legally define a franchise: ◦ The use of a common trademark ◦ The provision of assistance to (or exercise of control over) the franchisee ◦ The collection of fees, royalties, mark-ups or other monies from the franchisees

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If you have all three elements, you are a franchise, regardless of what you call it

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Some state definitions vary, but are similar

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Do not have to use the “f-word”

Name Fee

Name =

Franchise

System

Name Fee

Fee

Trademark License

Distributor

Name =

Business Opportunity or License

Fee System

Dealership

Agency Sales Rep Joint Venture

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Franchisee typically pays ◦ ◦ ◦ ◦ ◦

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Franchise fee average about $25,000 to $45,000 Royalty range between 4% and 10% Advertising range between 1% and 2% Franchisor will often sell product to the franchisee Franchisee makes the entire investment in operations

Franchisor typically provides ◦ ◦ ◦ ◦ ◦

Initial training Operations manual and systems Ongoing supervision and support Other support services Trademark & Trademark Maintenance

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Leverage Capital

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Speed of Growth

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Motivated management

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Reduced risk

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Few operational concerns

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Higher quality

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Organizational leverage

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◦ Franchise unit will usually generate less profit than a profitable unit ◦ But far more profit than an unprofitable company-owned operation

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Must “share profits”

Less Control Good relations with franchisees take work MYTH: Litigation

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Successful prototype

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Credibility

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Differentiation

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“Sizzle”

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Buyer appeal

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Value Proposition

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Affordability

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Profitability

Sell?   

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Teachability Adaptability Systemization

R.O.I.?

Market trends Capital Management

Succeed?

Clone?

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Perfecting your Restaurant

◦ If you have perfected your restaurant, SELL IT! ◦ If you are standing still, someone is gaining ◦ McDonald’s in 1955

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Quick vs. Slick

◦ If you are going head-to-head with more established competition and your business model is not highly differentiated – be sure to refine first ◦ More unique, the sooner you should franchise  Risk: Someone with a camera and a notepad  First mover advantage  Who was the first . . .?

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Business plan/strategic direction

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Legal documents required by law

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Operations manuals

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Training program

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Quality control mechanisms

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Effective marketing plan

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Develop a web page and web-based marketing

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Franchise collateral materials

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Design a sales strategy

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Advertise

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Staff an organization to implement the plan

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Management Team

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Capital

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You are entering a new business. Goals drive your business. Start with support and cost structure. What do you need to do to help your franchisees succeed?

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Don’t rely on guesswork: The

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Financial analysis is essential.

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Reverse engineer your success.

future of your business is at stake.

Goal

Sell for $10M in 5 Years

Average Selling

6.7 times EBIT

Year Five Earnings

$10M/6.7 or about $1.3M

Average Royalties

$30,000 per franchise

Average Net Royalties

$10,000 per franchise

Need to sell

$1.3M/$10,000 = 130 Franchises

Sales

5 18

Hire Franchise Salespeople 50

Sales

5 19

Hire Field Reps

Sales

5 20

Hire Support Staff

Sales

5 21

Sales

Personnel Marketing Office Space Brochures

Cost to get into franchising can range from $50,000 to $200,000+

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The FTC rule ◦ ◦ ◦ ◦ ◦

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Disclosure document with 23 items Disclosure fourteen days prior to sale Final Franchise Agreement seven days prior Financial Performance Representations Consistency with Franchise Disclosure Document

State regulations ◦ ◦ ◦ ◦ ◦

14 registration states Regulate advertising Business opportunity states Determining applicability (even definitions vary – NY) Some remnants of the “Old FTC Rule” remain

Franchise Legislation Within the US 2020 Legend:

ME NY

IL IN OH

UT CA

KY OK TX

VA NC

CT MD

States having no franchise or business opportunity laws States having franchise registration laws only States having business opportunity laws States having both franchise registration and business opportunity laws

FL Alaska

Hawaii

Notes: •

Within Indiana, Michigan and Wisconsin, registration is effective immediately upon the application being filed. Oregon regulates franchises but no filing is required there.

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Florida, Nebraska, Kentucky, Utah and Texas require a simple exemption filing. Once that is filed, a franchisor can begin to offer franchises.

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Georgia and South Carolina provide an exemption if the franchisor has filed a State trademark registration.

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Connecticut, Maine, South Carolina and North Carolina provide an exemption if the franchisor has obtained a Federal registration of its trademark

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Six States require registration of advertising prior to use. (CA, MD, MN, NY, ND, WA)

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New York, Oklahoma and Rhode Island require the FDD be provided to a prospective franchisee at the earlier of (i) the 1st personal meeting held to discuss the franchise or (ii) 10 business days before any agreements are signed or any monies paid (including fully refundable deposits).

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Michigan and Oregon require the FDD be provided to a prospective franchisee 10 business days before any agreements are signed or any monies paid (including fully refundable deposits).

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Many states also have State Relationship Laws that impact issues such as franchise termination or non-renewal. Your franchise legal counsel can advise you on relevant issues involving these states.

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Check with your franchise legal counsel for additional details and updates which are available.

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Franchisee Selection Documentation & Training – the Tools

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Support

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Legal Documents and Compliance

Quality Control Comes at a Cost

Discussions with Key Stakeholders

Review existing material, forms, & documentation

Develop preliminary outline

Determine gaps in current documentation

Assign responsibility for content creation

Identify Subject Matter Experts for gaps

Interview Subject Matter Experts

Onsite observation of units & documentation

Resolve Best Practices Conflicts

Draft material to cover all identified gaps

Edit all material into common style & “voice”

Revise first draft of Operations Manual based on client input

I told you not to panic! Everything will be just fine.

"Some people seem to think there's no trouble just because it hasn’t happened yet. If you jump out the window at the 42nd floor and you’re still doing fine as you pass the 27th floor, that doesn’t mean you don’t have a serious problem." – Charles Munger, Vice Chairman, Berkshire Hathaway – 27

Implementing Your Franchise Program

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Start locally, then regionally ◦ Cluster support ◦ More effective franchise advertising ◦ Consumer advertising economies ◦ Brand building ◦ Buying economies

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Don’t expand faster than your support capability ◦ Quality control is key ◦ Nothing sells franchises as well as happy and successful franchisees ◦ Three hour drive time

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Important concept to understand when measuring hiring decisions, advertising and marketing related expenditures – Present Value of a Franchise (PVOF) Should use this principle in decision-making PVOF = Net Present Value of franchise fees, royalties, product/equipment sales, advertising fees, and other revenue, less any direct expenses, discounted to today’s dollars The sale of a single franchisee paying 6% royalties on AUVs of $500,000 can result in $600,000 in revenues, plus advertising, product purchases, increased buying power, etc.

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Franchise marketing is very different from consumer marketing

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Franchise marketing is highly regulated

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Tools:

◦ Your web page should be your first concern ◦ Develop a mini-brochure for the sake of economy ◦ A full-sized brochure is essential for credibility ◦ E-brochures and other recent tools

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Be sure to have your attorney and registration states review all materials

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Unique process unlike any sale ◦ ◦ ◦ ◦ ◦ ◦

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Quit your job No more benefits, paid vacations, 401ks Put your trust in someone you have never before met To invest your life’s savings In a business in which you have no experience And to which they are making a “lifetime” commitment

And, oh, by the way, I can’t tell you how much you may make

The Franchise Sales Cycle Concept & Value Proposition Offer/Structure

Validation

Pre-Sale Communication

Marketing Plan

Support Message & Materials Opening Assistance

Post-Sale

Advertising Expenditures Training

Sales Process

Franchise Program for Aggressive Growth Approximate Development Activity Schedule MO 1

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MO 3

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MO 5

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Discovery & Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis Franchise Agreement Disclosure Document State Registration Process Operations Manual Training Programs Training Videos & LMS Content Primary Research/Profiling Franchise Marketing Plan Develop/Print Brochure Mini-Brochure Franchise Sales Video Franchise Website Franchise Sales Training & Manual Franchise Implementation Strategy Implementation Consulting

Legal Coordination

Strategy Legal Documents Quality Control Franchise Marketing Organizational Development The iFranchise Group does not provide legal services but instead works through outside legal counsel

Franchise Program for Moderate Growth Approximate Development Activity Schedule MO 1

MO 2

MO 3

MO 4

MO 5

MO 6

MO 7

MO 8

MO 9

MO 10

MO 11

MO 12

Discovery & Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis Franchise Agreement Disclosure Document State Registration Process Operations Manual Primary Research/Profiling Franchise Marketing Plan Develop/Print Brochure Mini-Brochure Franchise Website Franchise Sales Training & Manual Franchise Implementation Strategy Implementation Consulting

Legal Coordination

Strategy Legal Documents Quality Control Franchise Marketing Organizational Development

Franchise Program for Conservative Growth Approximate Development Activity Schedule MO 1

MO 2

MO 3

MO 4

MO 5

MO 6

MO 7

MO 8

MO 9

MO 10

Discovery & Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis

Legal Coordination

Strategy Legal Documents Quality Control

Franchise Agreement Disclosure Document State Registration Process Operations Manual

We can modify our programs to meet the needs of any company getting into franchising. Our fees can range from $20,000 to $200,000+.

MO 11

MO 12

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Consulting and legal costs vary based on franchise company’s situation: ◦ Desired speed of growth influences services needed ◦ Ability to do work internally

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Do not go into franchising undercapitalized ◦ ◦ ◦ ◦ ◦

Legal fees: $15,000 to $35,000+ Consulting and Development: $20,000 to $200,000 Organizational expenses: $10,000 to $25,000 Franchise Marketing: $8k - $10k per sale (six months) Personnel: varies widely  Can bootstrap growth  Can spend hundreds of thousands

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Not every successful restaurant can or should be franchised The key to successful franchising is making sure your franchisee succeeds

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Free book and video

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QUESTIONS?