Alternatives to Franchising by iFranchise Group

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More hands-on experience than any other firm

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More “senior level” experience

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Breadth across four functional areas

◦ 27 consultants with over 700 years of franchise experience ◦ Our consultants have worked with 98 out of the top 200 franchise companies worldwide ◦ Offices: Chicago, Dallas, Los Angeles, Miami-Ft. Lauderdale-Boca Raton, Atlanta, Toronto, Dubai, Riyadh

◦ Former CEOs, CFOs, EVPs of over 50 major franchise companies  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 (inter)national brands ◦ Experience with start-up and established franchise programs ◦ Vertical specialties by industry segment ◦ ◦ ◦ ◦

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Strategic Planning Quality Control Marketing Organizational Development and Implementation

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

The iFranchise Group provides a fully integrated approach to the development and refinement of franchise businesses… Franchise Strategy Development

Quality Control, Documentation & Training

Franchise Marketing Assistance

Franchise Implementation Services

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Franchise Feasibility

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Operations Manuals

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Franchise Marketing Plans

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Franchise Sales Training

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Competitive Benchmarking

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Systems and Forms

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Franchise Structure

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Quality Control Procedures

Primary Research on Targeted Franchisee Candidates

Implementation Consulting and Coaching

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Franchise Brochures and other print collateral materials

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Franchise Sales Outsourcing

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PR, SEO, PPC, & Social Media

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Territory Analysis and Determination

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Coordination with outside counsel on the development of legal documents

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Strategic Implementation Plans

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Financial analysis and fee optimization

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Business Plans for Capital Formation

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Training Programs and Training Aids

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Training Videos and other Intranet training applications

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Franchise Promotional Videos

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Company Audits and Best Practices Benchmarking

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Operational audits and best practices

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Franchise Ad Design

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Due Diligence

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Learning Management Systems

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Website development

Expert Witness and Litigation Support

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Website optimization

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Franchise sales and marketing audits

Franchisee Council Development

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Compliance Audits

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International Expansion

But the vast majority of our services are directly applicable to nonfranchised channels of distribution… Quality Control, Documentation & Training

Strategy Development

Marketing Assistance

Implementation Services

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Feasibility Studies

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Operations Manuals

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Channel Partner Marketing Plans

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Biz Op Sales Training

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Competitive Benchmarking

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Systems and Forms

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Financial Structure

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Quality Control Procedures

Primary Research on Targeted Channel Partner Candidates

Implementation Consulting and Coaching

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Business Op Brochures and other print collateral materials

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Biz Op Sales Outsourcing

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PR, SEO, PPC, & Social Media

•

Territory Analysis and Determination

•

Coordination with outside counsel on the development of legal documents

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Strategic Implementation Plans Financial analysis and fee optimization Business Plans for Capital Formation

•

Training Programs and Training Aids

•

Training Videos and other Intranet training applications

•

Business Op Promotional Videos

•

Company Audits and Best Practices Benchmarking

•

Operational audits and best practices

•

Business Op Ad Design

•

Due Diligence

•

Learning Management Systems

•

Website development

Expert Witness and Litigation Support

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Website optimization

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Dealer Council Development

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Business Op sales and marketing audits

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Compliance Audits

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International Expansion

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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”

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Franchisee typically pays ◦ Franchise fee average about $25,000 - $35,000 ◦ Royalty range between 4% - 10% ◦ Advertising range between 1% and 2% ◦ Franchisor will often sell product to the franchisee ◦ Franchisee makes the entire investment in operations

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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

Liability Type Franchise Contract Liability

Well-Executed Franchising

Company-Owned Growth

Employment Liability

Property Lease Liability

Equipment Lease Liability

Workers Comp Liability

Slip and Fall Liability

Vicarious Liability Can require third party to insure you against liability Can insure against internally

Usually not*

You always have liability for your agents

Yes â&#x20AC;&#x201C; franchisee

Yes

* Not responsible for acts of an independent contractor (franchisee) relative to third parties. Exceptions are when a) you create an agency and/or b) if you are negligent.

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What are your goals? BE SPECIFIC! ◦ Certain levels of profits ◦ Sell company for a specific amount

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What is your risk tolerance? ◦ How much are you willing to invest and re-invest? ◦ What other resources do you have to bring to bear?

Conduct Cash Flow Analysis to See if You Can Reach Your Goals ◦ Example:  Goal = Sell company for $10 million at the end of five years  Two units in operation  Total Equity Investment in New Operation = $150,000  Total available capital = $200,000  Existing Free Cash Flow for Reinvestment = $100,000/year  Units Break Even in First Year  After that, Free Cash Flow from New Units = $50,000/year/each

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Year 1 Starting Capital

Year 2

Year 3

Year 4

Year 5

$250,000

$200,000

$250,000

$300,000

($150,000)

($300,000)

$50,000

$100,000

$150,000

$200,000

$100,000

Cash Flow

$100,000

$150,000

$200,000

$250,000

$350,000

Value @ 7x CF

$700,000

$1,050,000

$1,400,000

$1,750,000

$2,450,000

Terminal Value

$450,000 in free cash flow by Year Six = $3,150,000 valuation ONLY IF NO INCREMENTAL OVERHEAD IS NEEDED TO SUPPORT

# Opened Capital invested New Cash Flow Existing Cash Flow Units â&#x20AC;&#x201C; EOY

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This Example ◦ Would need to open 27 company units ◦ That would take about 12 years of reinvesting everything ◦ Total Investment = $4 million over that time frame

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Cannot get there from here

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Alternatives: ◦ Change Goal ◦ Change Time Frame ◦ Change Assumptions (structure, capital devoted, leverage, etc.) ◦ Raise equity to grow faster

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If you are raising equity, factor in dilution ◦ If you will give up 50% of the company, you need to grow twice as big ◦ Run the numbers again

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Year 1 Starting Capital # Opened Capital invested New Cash Flow Existing Cash Flow Units â&#x20AC;&#x201C; EOY Cash Flow Terminal Value

Year 2

Year 3

Year 4

Year 5

$3,250,000

$1,100,000

$850,000

$1,250,000

$1,500,000

($2,250,000)

($1,050,000)

($750,000)

($1,200,000)

($1,500,000)

$750,000

$1,100,000

$1,350,000

$1,750,000

$100,000

$850,000

$1,200,000

$1,450,000

$1,850,000

$2,750,000 in free cash flow by Year Six = $19,250,000 valuation. Divide by two to account for 50% ownership = $9.6 million selling price. AGAIN, ONLY IF NO INCREMENTAL OVERHEAD IS NEEDED TO SUPPORT 14

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With an influx of a little over $3 million ◦ Can jump-start growth and leverage off of that growth ◦ Will need to get to about 50 – 54 units ◦ Total investment $7.5 - $8 million ◦ But you are using investor money

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Problem: Realistic valuations ◦ Valuing the existing business – (4X – 7X EBITDA) ◦ Year One Business Value = $700,000 ◦ Business Value after Equity = $3.7 million ◦ Sophisticated investor would want 81% ($3M/$3.7M) ◦ Would need to find an investor who would invest $3M for 50% ◦ Might try numbers again at $5 million and a 20% stake??? ◦ At some point, just not realistic

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Capital availability even with realistic valuations ◦ Limited in today’s marketplace ◦ Control an issue

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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

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Sales

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Hire Franchise Salespeople 50

Sales

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Hire Field Reps

Sales

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Hire Support Staff

Sales

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Sales

Personnel Marketing Office Space Brochures

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

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Name Fee

Name =

Franchise

System

Fee

Trademark License

System Distributor

Name =

Business Opportunity or License

Fee System

Dealership

Agency Sales Rep Joint Venture

Name Fee System

Franchise

+ Joint Venture

Equity

Name

Trademark License

Product

System

Distributor/ Dealer

Name Fee

= Trademark

License

Advantages

Disadvantages

Less Regulation - Still a Franchise in NY

•Lower fees •Do you have strong name? •No control over brand

Often, this alternative is eliminated because the company does not have adequate brand strength, and, even if they did, they would risk losing their trademark if they did not exercise control. Moreover, it is important to note that the “control” element of the franchise definition is very easy to trigger. © 2013-2020 iFranchise Group. All Rights Reserved.

Fee System

Business = Opportunity or License

Advantages

Disadvantages

•Less Regulation? - More at the state level

•Lower fees •Do you have strong name? •No control •Create competition •Poor image

This can be a viable option for some, but the loss of the branding element is an issue that should be carefully considered. For example, what would happen to your licensed channel if a branded channel were to be introduced by your competitors? Will you have national accounts? Or a desire to create consumer brand loyalty?

Name System

Dealership or = Distributorship

Advantages

Disadvantages

•Less Regulation •Easier to sell

•ABSOLUTELY NO FEES •Support provided for “free” •Must have product to sell •No revenues from service •Products can be “stepchild” •Dealer defections to: - better products - cheaper alternatives

Dedicated dealerships can have many of the same advantages as franchising. The biggest disadvantages are the need to pay for services out of the wholesale margins. CAUTION: Can create an inadvertent franchise after the fact, as happened with Mitsubishi v. To-Am. © 2013-2020 iFranchise Group. All Rights Reserved.

Name System

Agency or = Sales Rep

Advantages •Less Regulation •Easier to sell

Disadvantages •ABSOLUTELY NO FEES •Support provided for “free” •Must have product /service •Turnover is high •Increased training costs

A “top-down” flow of revenues will avoid franchise laws. Again, be aware of the creation of an inadvertent franchise.

Name System

Joint Venture

• • • •

General Partnerships Limited Partnerships Corporations L.L.C.s

Advantages

Disadvantages

•Less Regulation •Easier to sell •May make more $

•ABSOLUTELY NO FEES •Negotiated each agreement •Marriage vs. Parent •Majority end in “Divorce” •Fiduciary Duty •Accounting difficulties •Underreporting •No profit = no distributions •Exit barriers •Liability •LOSS

Franchise & Business Opportunity Legislation within the U.S. ND

MN SD

OH KY

CT MD

OK SC TX

FL Alaska

Legend: States having no franchise or business opportunity laws States having franchise registration laws only

Hawaii

States having business opportunity laws States having both franchise registration and business opportunity laws

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TM License Business Opportunity

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Dealer / Distributor

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Sales Rep / Agent Joint Venture

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NY Franchise Law

Securities Laws

Sales Rep. Laws

Fair Dealership Laws

Relationship Laws

Business Opp. Laws

Franchise Laws Franchise

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Federal & 26 States

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New York Only

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26 States State / Industry Specific

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35 States

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State and Federal

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Fractional Franchises (Two years and 20%)

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Large Investment (Over $1M excluding R/E)

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Sophisticated Franchisee (Five Yrs. + $5M Net Worth)

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Minimal Payment (pays/commits less than $500/first 6 mos.)

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Leased Departments

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Single Trademark License Exclusion

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Fall under other regulations (PMPA)

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Officers and directors of the franchisee (very specific def.)

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CAUTION: The FTC Exemptions are NOT honored by all states ◦ Patchwork Quilt ◦ Need an attorney to decipher

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The decision should be goal driven ◦ Distance ◦ Speed ◦ Obstacles ◦ Risk tolerance

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Don’t have to choose only one vehicle

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Don’t decide to franchise (or whatever) ◦ Instead, decide:  Do I want to build a third party distribution channel?  Do I want that channel to be branded?  If it is branded, do I want to control quality?  How do I want to be paid?

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The law (or your lawyer) should never dictate your good business decisions

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Perfecting the business

◦ If you think you have perfected your business, SELL IT! ◦ McDonald’s in 1955

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Quick vs. Slick

◦ More unique, the sooner you should expand  Risk: Someone with a camera and a notepad  First mover advantage  Who was the first . . . ?

◦ If you are going head to head with more established competition and your business model is not highly differentiated – be sure to refine first

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What is right for YOU? ◦ What are your goals?

◦ What are your constraints?

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Determine if your business is, in fact, franchisable (or if it can be expanded through any third party distribution) Determine if third-party distribution channels are the best means of expanding your business Gain an understanding of what is involved in franchising, licensing, etc. Understand various cost options (and combinations of options) and how they can be adjusted to meet your growth goals Please consider our Analysts to be resources to you

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