How to franchise your business 2015 by iFranchise Group

How To Franchise Your Business

Agenda • The Decision to Franchise – – – –

How Franchising Works Alternatives Quality Control Legal Aspects of Franchising

• Marketing Your Franchise • Selling Your Franchise • Creating a Successful Franchise Strategy – Structural Decisions – Financial – Organizational Development

• Questions and Discussion We are going to try to cover a great deal of information, so we are asking that you hold your questions until the end of the session unless they are on a particular slide. Copyright, The iFranchise Group, 2015 All rights reserved

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About the iFranchise Group •

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

•

27 consultants with over 500 years of franchise experience 98 out of the top 200 franchise companies Offices in Chicago, Dallas, Toronto, Los Angeles, Dubai, Jeddah

More “senior level” experience – –

Hands-on experience at start-up and established franchisors Former CEOs, CFOs, EVPs of two dozen major franchise companies •

•

The ability to bring more resources – –

•

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

Faster completion Ability to provide assistance in several areas simultaneously

Breadth across four functional areas – – – –

Strategic planning Quality control Marketing Organizational development

•

Franchise experience in 50+ countries

•

Numerous awards and publications

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About Franchise Dynamics •

Top Sales Performers – – –

•

25 sales and marketing professionals Collectively sold over 7,000+ franchises Former Senior Executives at Cendant, Chem-Dry, The Dwyer Group, LINE-X, Management Recruiters International, Ponderosa, TCBY, Ziebart, and other national brands.

Performance –

Sold 2,000+ franchises since 2010

–

Equivalent” to sales generated by the top five fastest selling franchisors on Entrepreneur’s Franchise 500 list

–

Recently included in Inc. 500/5000

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Chicago Innovation Awards, Illinois Excellence Award, Crain’s 100 Growing Businesses

•

Over 400 years of franchise experience

•

Real world data on sales and marketing –

Over 200,000 leads tracked

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About TopFire Media •

A Premier fully-integrated digital media firm specializing in franchised businesses – – – – – – – –

Public Relations Social Media Publishing Search Engine Marketing Pay-Per-Click Advertising Website Development Search Engine Optimization Mobile Websites and Mobile Marketing Video Production

•

Both franchise development and consumer branding

•

Team with Top Agency Experience – – – – – –

•

Edelman Burston-Marsteller Golin-Harris Porter-Novelli MWW Group Fox News

Recent honors and awards: – – –

Best New Agency (Ragan & PR Daily Ace Awards) Best Website Finalist (PR News) Best Media Relations Campaign Finalist (PR News)

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A Fully Integrated Approach to Franchise Marketing & Sales

• • • • •

Primary Research Marketing Plans Brochures Videos Collateral

• • • • •

Websites Public Relations SEO Services Social Media Pay-Per-Click

• • • •

Media Placement Trade Shows Direct Contact Performance Monitoring • Reporting

Note: TopFire Media Does Consumer Marketing for Franchisees Too

About the Panel •

Mark Siebert – CEO, the iFranchise Group – 30+ years of experience in franchising and franchise consulting – Has consulted with 30+ Fortune 2000 companies – Franchise Columnist for Franchise Times and Entrepreneur.com – Twice named to “20 To Watch” in franchising – Author of over 200 articles and frequent speaker

•

Dave Hood – President, the iFranchise Group – 25+ years of experience in franchising, much “hand’s-on” – Former President of Auntie Anne’s Soft Pretzels – Over 10 years, grew that company from a start up to over 650 domestic and 150 international operations – In that time, Auntie Anne’s received numerous awards and managed that growth without a single franchisee lawsuit, and has doubled in size again without a lawsuit

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About the Panel •

Robert Stidham – President, Franchise Dynamics – – – – – –

Largest ‘Franchise Sales Outsourcing’ firm in the world 25+ years of experience in franchise development and franchising Built two of 25 largest ‘service’ franchises in the world Former franchise company President of Dunhill Staffing Has personally sold over 2,000 franchise units Works with both emerging (start-up) franchise companies, as well as some of the largest franchise companies in the industry – 2014 Ernst & Young Entrepreneur of the Year semifinalist •

Matthew Jonas – President, TopFire Media – Nearly 20 years of experience in Digital Media – – – –

Former Executive with Baseline21 (top digital media agency) Former Executive at One Social Media Former Executive at Zallas Technologies Handyman Online – grew company from 15 to 750 employees

– Top 1% of page views on LinkedIn

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Who is here today?

• Considering franchising your business? • Franchising less than one year? • Franchising more than one year?

We are happy to send you a copy of this presentation, so you can limit your note taking if you so desire.

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What Is Franchising? • FTC rule 436 cites three elements that legally define a franchise: – The use of a common trademark – The exercise of control or provision of assistance – The collection of fees, royalties, mark-ups or other monies from the franchisees

• If you have all three elements, you are a franchise, regardless of what you call it • Some state definitions vary, but are similar • Do not have to use the “f-word”

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How Franchising Works • 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

• Franchisor typically provides – – – –

Initial training Operations manual and systems Ongoing supervision and support Other support services

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Diversity of Franchising • • • •

Restaurants only 25% Retailers Direct sales organizations B-to-B Service – – – –

Consulting Advertising Placement firms Internet related

• B-to-C Service – – – – –

Law firms Medical practices and Spas Hotels Home Meal Preparation Senior Care

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Is Franchising Right For My Business?

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Franchise Vs. Company-owned Pros -- Cons

• • • • • • •

Leverage Capital Speed of Growth Motivated management Reduced risk Few operational concerns Higher quality Organizational leverage

• Must “share profits” – Franchise unit will usually generate less profit than a profitable unit – But far more profit than an unprofitable company-owned operation

• Less Control • Good relations with franchisees take work • MYTH: Litigation

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The Litigation Myth • Survey by independent industry source indicated that only 27% of franchisors had any litigation – This includes large companies like McDonald’s and others who are targeted for frivolous lawsuits and lawsuits unrelated to franchising – McDonald’s, with 30,000+ contracts had (2008) only six pending lawsuits. Big Target. Litigation rate of 0.02% – Recent example: • • • • • •

A group claiming that the way they make chicken is unhealthy Group suing them for making their children obese Group suing them for beef tallow in cooking oil A Group suing them for collection of tax on bottled water One suit by a JV partner One pending franchisee lawsuit from a franchisee who owes $3 million in unpaid royalties

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The Litigation Trade Off: Franchising Versus Company-Owned Growth 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. Copyright the iFranchise Group 2015. All rights reserved.

Analyzing the Company Growth Option • What are your goals? BE SPECIFIC! – Certain levels of profits – Sell company for a specific amount

• 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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Analyzing the Company-Owned Alternative 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

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

Terminal Value

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

Raising Equity as an Alternative •

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

•

Cannot get there from here

•

Alternatives: – – – –

•

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

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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Analyzing the Equity Alternative 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

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Equity Raise Considerations • 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

• 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

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

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Alternatives to Franchising Name Fee

Name =

Franchise

System

Fee

Trademark License

System Distributor

Name Fee System

Name =

Business Opportunity or License

Fee System

Dealership

Agency Sales Rep Joint Venture

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Can Combine Options Too Name Fee System

Franchise

+ Joint Venture

Equity Name

Trademark License

Product

System

Distributor/ Dealer

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Advantages and Disadvantages of Alternatives

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.

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Advantages and Disadvantages of Alternatives

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?

Advantages and Disadvantages of Alternatives

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.

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Advantages and Disadvantages of Alternatives

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.

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Advantages and Disadvantages of Alternatives

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

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Franchise & Business Opportunity Legislation Within the US ND

OH RI KY

CT MD

SC TX

Hawaii

Legend: States having no franchise or business opportunity laws States having franchise registration laws States having business opportunity laws States having both franchise registration and business opportunity laws

Franchise TM License Business Opportunity Dealer/Distributor Sales Rep/Agent Joint Venture

√

√ √ √

√ √ √ √

aw chi se L NY Fr an

aws Secur

it ies L

aws R ep. L Sales

p Law eal ers hi Fair D

Laws Relat ionsh ip

. La w s ss Op p Busin e

Fra nc hise L

aws

Laws Governing Third Party Relationships

√ √ √ √

Federal & 26 States New York Only 26 States State/Industry Specific

√

35 States

√

State and Federal

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Choosing the Right Growth “Vehicle” • The decision should be goal driven – – – –

Distance Speed Obstacles Risk tolerance

• A Volvo or a Rocket Ship? • Don’t have to choose only one vehicle • 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?

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

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Franchisability • • • • • • • •

Successful prototype Credibility Differentiation “Sizzle” Buyer appeal Teachability Adaptability Systemization

• Affordability • Profitability

R.O.I.?

Sell? • Market trends Succeed? • Capital • Management

Clone?

The Key is Creating a “Win-Win-Win” Scenario

R.O.I. “Hurdle Rates” • The franchisee should make a return on the time they invest – No different than if they were to go out and get a job – Salary should be “market rate”

• The franchisee should make a return on their investment – No different than if they invested in a stock – Return should be commensurate with what they would make if they were to make an investment of similar risk – Ability to sell back their investment at the end of the term

• Franchisees expect that they will need to build their business – Will expect these returns in three years or less

• Annual Cash-on-Cash ROI at the unit level – our criteria – 15% for Owner Operators – 20% for Area Developers (who will support additional overhead) Copyright, The iFranchise Group, 2015 All rights reserved • Occasional exceptions

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Determining R.O.I. – Simplified Analysis Cost to Open a New Unit = Add a Franchise Fee = Add Working Capital Franchisee Estimated Investment =

$ 150,000 $ 25,000 $ 25,000 $ 200,000

Estimated Franchisee Sales Year Three =

$ 500,000

Current Profit after Owner’s Compensation = Adjust Owner’s Compensation One-Time Only/Capital Investment Tax Minimization Strategies Shared Overhead Interest and Debt Service Depreciation and Amortization Subtract Royalties, Fees & Price Adjustments

$ 70,000 + $ 15,000 + $ 5,000 + $ 5,000 + $ 5,000 + $ 5,000 + $ 5,000 ($ 30,000)

Estimated Franchisee Profit (adjusted)

Divide Estimated Profit by Estimated Investment Estimated Franchisee Return =

80,000

$80,000 / $200,000 40%

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When To Franchise

The iFranchise Group37

Shouldn’t You Perfect Your Business First? • Perfecting the business – If you have perfected your business, SELL IT! – If you are standing still, someone is gaining – McDonald’s in 1955

• 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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Quick vs. Slick - You Are Not the Only One in the Game Risk of Failure Business Model Risk

Competitive threat

Speed To Market 39

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First Mover Advantage â&#x20AC;&#x201C; Who Was First? Founded

Franchised

Units

1932

1990

420+

1953

1961

12,200+

1955

30,000+

How to Succeed as a Franchisor

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What Is Needed to Franchise? • • • • • • • • • • • •

Business plan/strategic direction Legal documents and registrations Operations manuals Training program Quality control mechanisms and systems Effective marketing plan Franchise collateral materials Web site and web-based marketing Advertise Design and implement a sales strategy Staff an organization to implement the plan Capital

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The iFranchise Group49

If you donâ&#x20AC;&#x2122;t know where you are going, then any road will take you there. The Adventures of Alice in Wonderland

Strategic Planning The Key to Success

• 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? • Don’t rely on guesswork:

The future of your business is at stake

• Financial analysis is essential • Reverse engineer your success.

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Goal Driven Modeling Goal

Sell for $10M in 5 Years

Average Selling Price

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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Goal Driven Planning

Sales

30 25 15 10 Year

5 The iFranchise Group

Goal Driven Planning Hire Franchise Salespeople 50

Sales

30 25 15 10 Year

5 The iFranchise Group

Goal Driven Planning Hire Field Reps Sales

30 25 15 10 Year

5 The iFranchise Group

Goal Driven Planning Hire Support Staff Sales

30 25 15 10 Year

5 The iFranchise Group

Goal Driven Planning Sales

Personnel Marketing Office Space

Brochures

25 15 10 Year

5 The iFranchise Group

The Flaw in Many Strategies •

•

There are certainly a large number of neophyte franchisors who take a “Ready-Fire-Aim” approach –

Often rely on guesswork

–

Or analysis of what comparable franchisors are offering to make major decisions

“Me-Too” is not a strategy – it is a recipe for disaster! –

Uniqueness is important to success, whether achieved through the business model, marketing, support, structure, fees, or marketing.

–

Me-Too assumes that business economics are the same, support is the same, and that a new franchisor will simply differentiate themselves based on great franchise marketing

–

But established franchisors often have many advantages not shared by newer franchisors

–

So the Me-Too strategy that is taken by many new franchisors can actually be responsible for their failure

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The Impact of the Right Royalty as an Example • The impact of a 1% royalty mistake – If a single franchisee generates $500,000 in revenue – 1% = $5,000 off the bottom line – But franchisees will never tell you that they are paying too little and often inertia will keep the royalty where it is at for years Lost revenue from a single franchise Times 100 franchises opened Times 20 years Lost enterprise value at 10x earnings Total Loss

$5,000 $500,000 $10,000,000 $5,000,000 $15,000,000

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Other Major Business Decisions Demand Similar Scrutiny • Structure – Structure dictates support requirements and responsibilities – Will (should) impact fees, royalties, targeted franchisee

• Targeted franchisee – Will dictate support requirements as well

• Territory – 10% mistake is huge • Franchisor whose franchisees generate $500,000 sells 10 territories • At a 6% royalty, that franchisor is losing $300,000 a year …forever • Plus enterprise value of $3 million lost • Total Loss from 10 territories with a 10% error: $9 million+

The iFranchise Group • Other fees and margins on product sales

Cash Flow Modeling for Growth Aggressive Growth $ Fixed Costs = Salary + Advertising Hire Staff in Anticipation of Need and Advertise Aggressively

Loss Must rely on one of the following to fund payroll: 1. Adequate initial capitalization 2. Revenues from existing operations 3. Franchise sales (a worst practice)

Royalty & Gross Margin Revenues

Time

Cash Flow Modeling for Growth Conservative Growth $ Only incremental cost is franchise marketing and that can be a variable cost after a start-up allocation

The Golden Rule: Grow No Faster Than Your Ability To Support Your Franchisees

Second Hire

Royalty & Gross Margin Revenues Leverage Existing Staff and Minimal Advertising

First Hire

Loss

Time

The Four Pillars Of Quality Control 63

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The Quality Control Trade-Off • Many people think franchises have lower level of quality – just the opposite is true • The Quality Trade-Off – – – –

More difficult to control Higher Caliber More highly motivated Longer term

• Studies show franchisees outperform • Anecdotal evidence

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Quality Control

The Four Pillars of Quality

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Five Critical Points of Qualification 

Intelligence



Capitalization 

Biggest reason for failure



Can cause franchisees to cut corners



Work Ethic



Personality 

Experience in leading a team



Tendency toward being an entrepreneur



Honesty and ethics



Philosophy and cultural fit



Nature (Confrontational or adaptive)



Compatibility (you are “married” for the next 20 years)

 “Job Specific” requirements 66

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Franchisee Versus the Entrepreneur

Franchisee       

Straight A Student Long tenure with job Corporate job Drives family car Few tickets Married Looking for security

Entrepreneur       

B or C Student Moved from job to job Owned businesses Sports car Lots of tickets Divorced “Never saw a rule he didn’t want to break.”

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The Roles of Your Operations Manual

• Role as a sales tool • Role as a training tool • Role as a reference tool • Role as in reducing liability • Extension of the legal documents

The Table of Contents is a Required Disclosure Item

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Operations Documentation

Limiting your liability:  A good Operations Manual can help you avoid vicarious liability  A bad Operations Manual can be a franchisor’s worst nightmare  Operations Manuals must provide you with adequate brand control but should not be too prescriptive – a fine line  Must avoid creating an inadvertent “agency” relationship  Must avoid potential areas of negligence or take great care when prescribing actions  Should cross-reference regulations and not cite them  Should be updated annually and reviewed by professionals and attorney.

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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 –

Development of Best Practices Operations Manual

Discussions with Key Stakeholders

Review existing material, forms, & documentation

Develop preliminary outline

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 & â&#x20AC;&#x153;voiceâ&#x20AC;?

Revise first draft of Operations Manual based on client input

Determine gaps in current documentation

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Beyond the Operations Manual • Faster growth requires formal training programs – For your staff – For franchisees • Train-the-Trainer too – Franchisee will train their staff – Should have tools to do so • Video pushes QC to lowest level of organization • On-line training decreases costs, increases quality, and can decrease liability – Customized by employee – Document what is reviewed and test scores – Lowers on-site training time and costs for both the franchisor and the franchisee

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LEARNING MANAGEMENT SYSTEMS

Legal Documents

The Federal Rule – FTC 436

• The FTC rule – – – – –

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

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Legal Documents State Laws

• State regulations – – – – –

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

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What Events Can Trigger State Laws?  Laws vary from state to state – Franchisor’s state of incorporation – Franchisor’s domicile – Franchisee’s residence – Territory covered – Where discussions take place

 Track these variables closely  Check with your attorney when in doubt

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State-Specific Legal Issues  States having franchise registration or business opportunity laws  Must be registered prior to soliciting franchise leads  Submission of advertising materials • CA, MD, MN, NY, ND, RI, SD, WA  Submit all advertising to your attorney in any event  Relationship and state specific laws • Termination • Non-compete • Escrow • Other

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Franchise Legislation Within the US 2015 Legend:

MN SD

WI IA

KY CA

IL IN OH

VA NC

OK LA

States having franchise registration laws only

RI CT MD

SC TX

States having no franchise or business opportunity laws

AL GA

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.

•

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

•

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

•

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

•

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

•

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.

•

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

Financial Performance Representations aka “Earnings Claims”

• Cannot provide Earnings Claims unless in Item 19 – No information on sales – No information on earnings – Limited information on expenses (costs as a percentage of total costs are ok) – Start-up costs are included in Item 7 and must be disclosed • Advantages and disadvantages – Must be appropriate – Sell faster? – More or less litigation? • 50% choose not to do Earnings Claims – For good reasons, bad reasons, or bad information – Selling franchises in the face of no FPR Copyright, The iFranchise Group, 2015 All rights reserved The iFranchise Group

Significant Fines & Penalties • Rescission

– Return fees paid – Make good on franchisee’s investment

• Fines – both civil and criminal • • • • • • • • •

– Up to $11,000 per violation for the FTC Rule – State fines of up to $100,000

Attorney’s Fees Damages Litigation costs and distraction Barred from selling franchises Disclose violations for 10 years Private rights of action at the state level Government enforcement Personal liability In some states, constitutes Class 4 felony (jail time!)

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Marketing Your Franchise

Marketing Planning

A Requisite for Rapid Growth

• Start locally, then regionally – – – – –

Cluster support More effective franchise advertising Consumer advertising economies Brand building Buying economies

• 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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Marketing Effectiveness Different franchises requires us to target different types of franchisees – affecting the media and message used for effective marketing.  Identify your prospect as narrowly as possible  Survey Competitors  Background  Hot Buttons  Media  Survey Top Franchisees  Characteristics of top performers  Are we selecting the right lead generation strategies?  Is the advertising message appropriate for our targeted franchisee profile?  Are we targeting the right prospects and using the right media based on our development strategy? Copyright, The iFranchise Group, 2015 All rights reserved

The Average Franchise Candidate  Name Recognition – 40% say joining a “known brand” is not vital – 40% would prefer a known brand, but are open to newer concepts

 70% or more will visit the corporate office… 100% should visit yours  Only 10% are looking because of job loss in a normal economy  In today’s world, however, that number may be 30% to 40% depending on the nature of your franchisee

 80% will talk to your franchisees…100% should talk to your franchisees

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Average Franchisee Recruitment Budget (In Thousands)

$225 $200 $175 $150 $125 $100 $75 $50 $25 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Franchise Update

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Franchisor Marketing Dollars by Media Percentage of Total Expenditures: 2010 - 2015

60%

Almost 60% of Franchise Lead Spend is Focused on Digital Media

50% 40% 30% 20% 10% 0% Internet

2010

2011

Trade Show

2012

2013

Public Relations

2014

Other

2015 Source: Franchise Update

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Source of Franchise Leads by Media Percentage of Total Leads Received: 2009 - 2014 80%

And Over 70% Franchise Lead Generation Comes from Digital Media & PR

70% 60% 50% 40% 30% 20% 10% 0% Internet

Referrals

2009

2010

Other

2011

Trade Shows

2012

P.R.

2013

2014

Source: Franchise Update

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Breakdown of Expenditures on the Internet (2010 - 2014)

70%

Unfortunately, many franchisors are spending their money in the wrong places where it is least effective

60% 50% 40%

Note emergence of remarketing

30% 20% 10% 0% Online Portals

SEO

2010

PPC

2011

2012

Social Media Remarketing

2013

2014 Source: Franchise Update

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Average Closing Costs (Media Dollars Per Sale)

$14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 2008

2009

2010

2011

2012

2013

Source: Franchise Update

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The Franchise Sales Pipeline Public Relations CPL = $250

Print Advertising CPL = $150

Trade Shows CPL = $100

Direct Mail CPL = $75

Internet Leads CPL = $25 - $75

Brokers Cost Per Sale = $15K - $24K

Referrals/ Unsolicited CPL = $0

Lead Generation Time Varies by Media

Median CPL: $62

Send Marketing Materials, Prequalify, Schedule Meetings

Meet With 3 â&#x20AC;&#x201C; 10% of Leads

Convert 15% - 20% of Completed CIRFs to Sales

Initial Meetings with Candidates Further Qualify

Follow-up meetings, assist with business plan & secure financing

Close 65% - 75% of Discovery Days

Source: Franchise Update, iFranchise Group - 2015.

Award Franchise

Average 45 â&#x20AC;&#x201C; 90 Days Lead to Meeting Time to close can range from 30-90 days or more following the initial faceto-face meeting Total time to close: often 12-20 weeks Average Marketing Cost = $9,142 per sale Overall Expected Close Rate = 2%* *Disclaimer: Most recent close rates Annual Franchise Development Report from Franchise Update, Dec. 2014, differ from those shown here. We are using the more conservative number, from 2013, until this is determined to be a longer term trend.

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Marketing Materials Essential for Speed

• Franchise marketing is very different from consumer marketing • Franchise marketing is highly regulated • 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

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

The iFranchise Group

The i Franchise Group

Franchise Sales are Predictable A good concept + The Right Message + Marketing Plan +Adequate marketing budget + Good sales technique = leads

= meetings = franchise sales

Some studies have indicated the average new franchisor will sell: ď&#x192;ź An average of 9, 11, and 13 franchises in their first three years ď&#x192;ź Median sales of 4, 5, and 6 sales in their first three years 94

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The Franchise Sales Cycle Concept & Value Proposition Offer/Structure

Validation

Pre-Sale Communication Marketing Plan

Support Message & Materials Opening Assistance Advertising Expenditures

Post-Sale Training

Selectivity

Sales Process

Present Value of a Single Franchise • 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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The Sales Process • Be selective • Hire the best you can afford • Maintain personal involvement • Let brand maintenance and the potential for franchisee success be your guideposts • Train your sales staff • Measure everything • And, most of all, be sure a standard process is in place for handling each prospect

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Done Right, It’s A Numbers Game • If the concept does not work, do not franchise • Use franchisee success as your capacitor of growth • With those caveats, franchise sales are a natural result of a well executed sales and marketing strategy • The number of franchises you sell will not be a result of “averages” but instead a result of marketing expenditures.

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Franchise Program for Aggressive 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

Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis Franchise Agreement

Legal Coordination Legal to sell in 36 non-registration states

Strategy Legal Documents Quality Control Franchise Marketing Sales & Implementation

Disclosure Document Legal to sell in all states

State Registration Process Operations Manual Training Program Training Videos & LMS Content Primary Research/Profiling Franchise Marketing Plan Develop/Print Brochure Mini-Brochure Franchise Sales Video Web Site Optimization Franchise Sales Training & Sales Franchise Implementation Training Implementation Consulting

101

Taking the Leap A little fear is normal.

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The Transition Is Usually Gradual The iFranchise Group

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

• Do not go into franchising undercapitalized – – – – –

Legal fees: $15,000 to $35,000+ Consulting and Development: $40,000 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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Franchise Lead Generation 708-249-1090

facebook/topfiremedia

â&#x2013;Ş

twitter/topfiremedia

The Problem • Everyone believes they have the solution to lead generation • • • • • •

PR practitioners – credibility Ad agencies – predictability Social media firms – engagement Search engine optimizers – visibility Mobile web designers – an untapped market Video houses – compelling storytelling

The Reality • Most franchise companies do not have an unlimited budget • Circumstances will be very different • • • • • • •

Goals Budgetary restrictions Geographic focus Profile of your franchisee and your customer Quality of existing websites and materials In-house resources and their capabilities Competitors

Evolution of a Sales Lead

Using a Webcentric Approach

Your Message Is No Longer Centered On Print Media Focus Should Integrate All Media Around The Website

Your Website Needs a Plan! • A focus on visual appeal alone can be a disaster • Too many websites • Provide non-optimized content • Provide too much content • Flash over substance

• Develop a plan • • • • • •

Plan must do more than increase unique visitors Responsive design with mobile in mind Create effective calls-to-action Increase the length visitors stay on your site You need a website design that converts traffic Improve franchise lead capture rates

Integrating Public Relations • Public Relations as a next step • • • • •

Builds credibility Generates franchise sales leads Creates brand awareness Amplifies marketing initiatives Focus the quality of key audience engagement with your brand

By creating inbound links, PR also helps with SEO efforts

Public Relations: Objectives • Business Objectives • • • •

Maximize PR for core brand Foster better understanding and appreciation among key audience segments Leverage and connect PR to existing marketing programs Help drive franchise leads

• Communications Objectives • • • • • •

Position brand and key spokespeople as thought leaders and innovators among key audiences and the industry Generate brand awareness Establish credibility Build media relationships at the local, regional and national levels Pull key messages through all digital marketing initiatives to drive SEO Engage with key audiences © 2015 TopFire Media, Inc. All rights reserved.

PR: Strategic Considerations • Focus on proprietary innovations and • Establish core brand values and pull technology through digital • Integrate PR with other marketing initiatives

• Concentrate on trends, events, news and other influential outreach points

• Establish brand with influential trade media

• Focus on life moments

• Deepen relationships with all media

• Identify audience segments (i.e., Veterans, Latinos, women, etc.)

• Engage them with brand • Connect brand with bloggers

News Bureau Create strategic pitches for key audiences in the U.S. Develop online press kits/media materials Focus brand core values Look for ways to leverage key influencers, spokespeople • Position key brands in paid media opportunities • • • •

• • • •

Wire distribution of press releases Mat release Audio news release Radio market tour

News Bureau • Seek out trend stories for inclusion • Develop seasonal or current event pitches •

Hold events to leverage engagement with media, bloggers, consumers • • • • •

•

Grand openings Trade shows Announcements Blogger events Launches

PR: Measuring Success •

Consumer audits – accountable for predetermined increase over base levels

•

Participation in digital activities, social media, web traffic

•

Consistent increase of Likes, Tweets, reposts, shares and Links

•

Event attendance (as scheduled)

•

Analysis of PR spend vs. ROI •

Measure year over year increase in coverage, impressions

•

Inbound leads

•

Impression goals

•

Quantify positive, neutral content vs. negative content

Grand Opening Support Strategy • Build a social media following

• Developing a social advertising campaign prior to the event drives brand awareness and consumer engagement • Unique hash tags specific to events connects your online community

• Conduct community outreach

• Connecting with local chambers of commerce, schools, clergy and governments helps building lasting communal relationships

• Establish relationships with key media

• Building relationships with media – both reporters and bloggers – creates grassroots movement and gains web and foot traffic

• Secure media coverage

Search Engine Optimization:

Your First step to franchise lead generation • “The best place to hide a dead body is on the second page of a Google Search.” • 75% of users never scroll past the first page of search results • There are 17,000,000 Google results for the word “franchise”

• Google is more than 70% of search • Google’s algorithm — a closely held secret • The algorithm changes up to 500 times a year • Google’s goal: Deliver fresh and relevant to the searcher

• Ranking factors fall into four basic categories • • • •

Cracking the Code: Search Engine Ranking Factors • Strong positive SEO correlations • • • • • • • • • •

URL length Organization of keywords in title Existence of description Existence of H1 title tags Existence of H2 title tags Meta description tags Page title tags Alternate tags Keywords in description Overall speed of site

Content is King: Search Engine Ranking Factors • Strong positive SEO correlations • • • • • • • •

Internal links Number of words Number of keywords in body Presence of keywords in external links Presence of keywords in internal links Number of images and videos Blog posts and press room Social media integration

• Negative correlations • Keywords • Advertising (even AdSense)

Links that Bind: Search Engine Ranking Factors • Inbound Links = Links from other site • Strong positive SEO correlations • • • •

High number of backlinks SEO strength of backlink URL Length of anchor text Percentage of backlinks containing keywords

• Searchmetrics study

• 1st returned result = 13,358 backlinks • 2nd returned result = 3,693 backlinks • 30th returned result (bottom of page 3) = 103 backlinks

Social Counts Too: Search Engine Ranking Factors • Social media has had a substantial increase in strong SEO correlation – It is now a primary factor • Strong positive SEO correlations • • • • •

Google + You Tube videos Facebook shares, post totals, comments, and likes LinkedIn Tweets

• Local SEO • Google Places • Foursquare and other Geo-Targeted site • Review sites (Yelp, etc.)

SEO is a PROCESS Not a “one-and-done”

Assessment

Social Media

Develop Links

Coding

•

Google Algorithm changes constantly

•

It searches for “fresh” content

•

It searches for “relevant” content

•

Your competitors are optimizing while you do not – driving them to the top

Content

Social Media Publishing • Social Media is important in its own right – not just for SEO • Why it is so important • • • • • •

Defines the image of your franchise brand • First stop for many prospective franchise investors 72% of all internet users are now active on a social media *60% of the 30-60 year old bracket are now active on social media Google + has over 1billion users Pinterest has more than 70 million users Your customers expect you to have social media

• Conversations

• Average person sees 3,000 ads a day • Only 14% of people trust advertisements • But 78% trust the recommendations of others *http://www.jeffbullas.com/2015/01/17/20-social-media-facts-and-statistics-you-should-know-in-2015/ © 2015 TopFire Media, Inc. All rights reserved.

Social Media

Word of Mouth – Powered by the Internet

• Focus on a specific audience • • • • • • • •

Define your audience Strategy development Visual branding Community development Create engaging content Develop a plan Develop guidelines Execute

• Listen and respond • • • • •

Hootsuite Social Mention Google Alerts Business Wire Wildfire

Social Media

Where to Focus Your Efforts

• Facebook • Over 1 billion users • Average user spends 55 minutes per day • Less effective for franchise lead generation

• Twitter • 424 million users • Average user spends 31 minutes a day

• LinkedIn • 325 million users – more influential and affluent professionals • Better for franchise lead generation

• YouTube • Second largest search engine • Video accounts for a significant portion of Google’s search results

LinkedIn Marketing Why LinkedIn

• Largest network of professionals online • More decision makers are on LinkedIn • LinkedIn use is highest among the 3049 (27%) and 50-64 (24%) age groups, and is also far above-average among those with a college degree (38%) • LinkedIn use trends upwards alongside household income (HHI), reaching 38% among those with HHI of at least $75k, more than triple the rate for those with less that $30k in HHI (12%) © 2015 TopFire Media, Inc. All rights reserved.

Why LinkedIn:

Because not all social media channels are created equal • Professional network of individuals eager to enter into business discussions. • Excellent platform to showcase your company and engage in discussions with like minded individuals and companies • LinkedIn can be used to generate new leads and fill pipelines.

Email Marketing • Email marketing can easily be integrated into your marketing strategy and cause it to be more effective. • Email marketing enhances the relationship of your business with its current or previous customers. •

Encourages customer loyalty and repeat business

•

ROI can easily be tracked with less delay

• Email marketing is not dead! • With the growth of mobile and the future of mobile e-commerce, email marketing is just getting started… •

91% of consumers check their email at least once a day.

•

Email is the most popular activity on smartphones among users ages 18-44.

•

66% of US online consumers, ages 15 and up made a purchase as a result of email marketing messages. Source: expresspigeon.com, email marketing statistics 2015 © 2015 TopFire Media, Inc. All rights reserved.

The hub of Social Media and key component of SEO

Industry Publications

Video Posting and Optimization • Video results are returned in 70% of searches • YouTube now second biggest search engine with more than 1 billion unique visitors per month • At a minimum, all companies need to have their own YouTube page if only for SEO purposes • Videos need to be optimized • Should be .mov or .mp4 • YouTube video sould be 1080p HD • Title, video description, and video tags - are the core elements of optimized YouTube search © 2015 TopFire Media, Inc. All rights reserved.

Pay-Per-Click Management • Why it is so important • • • •

Highly targeted marketing Google fields 1.2 trillion queries per year Top 3 sponsored links account for 41.1% of the clicks Poorly managed accounts drive up costs quickly

• Test-Refine-Test • • • • • • •

Keyword research (including negative keywords) Campaign development, budgeting, and bids Ad design and testing Build custom landing pages Ongoing PPC monitoring and management Google display retargeting advertising Google display advertising

The Pay-Per-Click Advertising Conundrum $

A company with a large PPC budget can still get out-positioned by smaller competitors with lower budgets. Competitorâ&#x20AC;&#x2122;s Budget = $300

Bid of $10.00 per click at 50 clicks per day = $500 per day Budget = $500

Bid of $15.00 per click at 20 clicks per day = $300 per day

And if there were only 30 clicks to be had that day, you might just be out of luck.

Day 133

The Pay-Per-Click Advertising Conundrum $

You Can Increase Your Click Bid to $20 Competitorâ&#x20AC;&#x2122;s Budget = $300

Bid of $15.00 per click at 20 clicks per day = $300 per day

When you run out of ad dollars at the end of the day

But if you do, you need to increase your budget to $1,000 per day or Anticipate that you will get only half as many clicks Allowing the competitor with the lowest budget to gain top positioning for half a day at 1/5 the cost

Budget = $100 134

Day

An Integrated ROI-Focused Approach GOALS Initial Evaluation, Research, USP, & Strategy Creation

Responsive Website Must Capture Leads, Have Call to Action

Website Optimized Around Keywords & Inbound Links

Channels Prioritize & Optimize Appropriate Social Media Channels

Create Blog to Push Content to Social Media Channels

Messaging – Press Releases, Stories, Blog Posts, Ads

Publishing – Post Content, Deliver Releases, Ads

Outreach & Engagement – Writers, Editors, Bloggers, and Social

Tracking and Refinement of Various Campaigns

Enhancement – Mobile Web, Video Posting, Retargeting

ROI Analysis of What Is Delivering Best Results

Reallocation of Resources Based on Results, Trends, Seasonality, Competitors

The Approach Must Be Customized GOALS Initial Evaluation, Research, USP, & Strategy Creation

Responsive Website Must Capture Leads, Have Call to Action

Website Optimized around Keywords & Inbound Links

Prioritize & Optimize Appropriate Social Media Channels

Create Blog to Push Content to Social Media Channels

Messaging – Press Releases, Stories, Blog Posts, Ads

Publishing – Post Content, Deliver Releases, Ads

Outreach & Engagement – Writers, Editors, Bloggers, and Social

Tracking and Refinement of Various Campaigns

Enhancement – Mobile Web, Video Posting, Retargeting

ROI Analysis of What Is Delivering Best Results

Reallocation of Resources Based on Results, Trends, Seasonality, Competitors

One-And-Done Does Not Work GOALS Initial Evaluation, Research, USP, & Strategy Creation

Responsive Website Must Capture Leads, Have Call to Action

Website Optimized around Keywords & Inbound Links

Prioritize & Optimize Appropriate Social Media Channels

Create Blog to Push Content to Social Media Channels

Messaging – Press Releases, Stories, Blog Posts, Ads

Publishing – Post Content, Deliver Releases, Ads

Outreach & Engagement – Writers, Editors, Bloggers, and Social

Tracking and Refinement of Various Campaigns

Enhancement – Mobile Web, Video Posting, Retargeting

ROI Analysis of What Is Delivering Best Results

Reallocation of Resources Based on Results, Trends, Seasonality, Competitors

Conclusion: Integration is Key We create Integrated Strategic Marketing plans tailored around your budget and goals! TopFire Media was created to meet market needs head-on with our fully-integrated approach. • • • • • • • •

Website Development Public Relations Search Engine Optimization Social Media Management Content Marketing (Blogs) LinkedIn Optimization Email Marketing Pay-per-click

First Steps – Know Where You Are Today Get a second set of expert eyes on your online presence • • • • • •

SEO Social Media Channels Website LinkedIn Profile PPC campaign Online Reputation

The Franchise Sales Process

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The Franchise Sale  Unique process unlike any sale – – – – – –

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

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Standardize a Lead Tracking System  Ensures sales efficiency and consistency – – – –

Call-backs automatic Standard letters Sales effectiveness Salesman continuity

 Data collection – Marketing effectiveness (pipeline information)

 Facilitates back marketing to older leads  Programs: Act!, Goldmine, etc. We generally do not recommend Access or other build-to-suit database applications due to the cost of development

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Be Sure You Understand that you “Award” a Franchise  First lesson of franchise sales: Nobody ever “sold” a franchise  Psychology of “the award” – Two way street, you must qualify – If you do qualify, you are special – You must follow our rules

 This psychology must permeate your thinking and your technique -- we are not salesmen, we are facilitating an award  “Buy” vs. “Invest” in a franchise  “Franchise Support Center” vs. Headquarters or “Director of Franchise Development” vs. “Franchise Salesman”

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What Motivates Franchisees? Value Proposition:  Proven systems  Established brand  Advertising economies  Operating economies  Shared knowledge  Support services provided

This assumes that most people looking to buy a franchise are logical in their approach….. ….which is often not the case.

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The Logical Franchise Buyer…  Chooses an industry that best suits their background and lifestyle  Checks overall financial investment and financial return of the franchise concept  Undertakes thorough due diligence…carefully reviews the FDD and Franchise Agreement  Determines if they “fit” with the franchise culture  Compares the franchise offering to competitors  Follows the above steps prior to arriving at the decision to purchase the franchise

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The Emotional Reality…  Some people buy franchises on emotion (spouse, job, home, car, etc.)…do not follow a logical path  A candidate’s research is often imperfect – May not even read the Disclosure Document

 They are motivated: – To be the boss and be independent – Anticipated Financial Return – Fun and excitement

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What Really Motivates Franchise Buyers?

35% 30% 25% 20% 15% 10% 5% 0 Earn More Money

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Be Their Own Boss

General Do Something Independence They Love

Other

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Assume You Are Being Shopped  Looks at your competitors as well as your concept – 30% will look at six or fewer – 30% will look at 6 - 12 – 30% will look at 12 – 20

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Franchise Sales and Lead Generation Strategies Realities of Franchise Sales:  More franchise opportunities in the market than ever before…  Most franchisors initially focus on regional expansion  Franchise sales dynamics are changing… • More lead generation channels than ever before • Internet has changed the “opportunity hunt” for candidates • Diminished candidate pool of prospective franchisees! • Franchise ‘brokers’ have changed the franchise sales dynamic… • 3 options for franchise sales growth • Broker opportunity, greater legal liability & regulatory uncertainty impacting sales force retention

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The Do-It-Yourself Strategy • May be best option for franchisors looking for slower initial growth – Need to honestly assess your internal sales ability – Spend the time and resources to invest in the development of a sales plan and a professional advertising/marketing program

• Good option for less aggressive growth • Good for new franchisors before pipeline is built

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Recruit an Internal Sales Team

• Challenge for “emerging” opportunities • Levels of compensation • Nearly 30% of sales professionals do not last one full year in a new position* • Increased fixed costs • Increased control • Best option for franchisors looking for much faster growth – if they have the budget • Good option for those experienced in franchise recruitment *SOURCE: Salesforce.com

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Franchise Sales Outsourcing • Newer concept • NOT a “broker”, but work with Franchise Brokers • Outsourcing companies are dedicated to a specific franchisor client… – Allows emerging franchisors to obtain the same level of talent previously only available to large franchisors – Greater level of experience; Can be a way to diminish risk – Removes burden of hiring, training, retaining sales force to management – Generally more expensive…Look for a “full cycle – full service” provider

• Best practices: – Franchisor doesn’t give up any royalty or equity – Model should be heavily performance based

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Franchise Sales and Lead Generation Strategies Sales Strategies - Franchise “Brokers”: • This is not a “sales strategy”…many people don’t really understand what this is… • Broker referrals account for up to 20% of franchise sales* • Brokers generally refer candidates to between 3-6 franchisors, simultaneously and want to work with best franchise sales teams and those that pay the best commissions! • Liability for their actions can accrue to the franchisor so be careful in your selection of a franchise broker • Fees are in the $15,000.00 - $20,000.00 range per sale and generally charge a variety of ongoing fees… • Often won’t work with emerging concepts *Franchise UPDATE Magazine

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Sales Process and Expectations

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Franchise Sales and Lead Generation Strategies Building a franchise sales plan: • What is your growth objective? • What resources are you willing to provide? • How much of your time can you dedicate to building the business? • Do you have a process? • How will you measure success? • What are you willing to do?

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Franchise Sales and Lead Generation Strategies Franchise Sales Process and Expectations: Franchise sales is more difficult than it looks… • Prospect is looking at a “life decision”, not just buying a business! • Investing substantially of both themselves and their money… • Giving up “perceived security” of a job to pursue a dream! Average sales cycle runs about 16 weeks from receipt of lead by emerging franchisor to close of franchise sale… Food concepts can and generally will take longer! Average sales cycle runs about 12 weeks from receipt of lead by established franchisor to close of franchise sale…

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Franchise Sales and Lead Generation Strategies The psychology of how & why people acquire a franchise: • • • • • • •

They buy for their reasons, not yours… ‘Want’, ‘need’ or ‘fear’ factors drive behaviors ‘Control’, not money is single biggest motivator Selling “selectivity”… Mutual decision process Sell the ‘negative’—don’t hide it! They want to know what happens next in the process

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Franchise Sales and Lead Generation Strategies The psychology of how & why people acquire a franchise: • • • • • • •

This is a “selection process”…though we use sales ‘tactics’ to drive the process People are making life decisions! (Fear is the dominant behavior motivation – there is no ‘trust’ in the early part of this process) “CONTROL” of their lives is the primary motivator, not money! They believe that they can achieve their goals through the franchise They can see themselves doing the work… They want to belong to a community… They want to be successful!

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Recommended Flow of the Sales Process

Lead Received and Qualified

Full or Mini Brochure Sent to Candidate

Completed CIRF Received

Personal Interview Scheduled

Credit/Criminal Checks Completed

Personal Interview and DISCLOSURE of FDD

Review of Candidate’s CIRF

Reference Checks

Discovery Day Follow-up Discussion with Candidate

Decision is Made on Candidate’s Approval

PRELIMINARY Approval is Granted

Franchise or Site Selection Agreement is Signed

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Franchise Sales and Lead Generation Strategies

‘Quantify’ your prospects: Determination must be made as to whether the lead should be classified as an “A”, “B”, or “C” prospect, as follows: “A” Prospect: The “A” prospect is one who will fully engage in the “Evaluation Process”.

As you have taken them through the initial discussion (FIRST CALL) they have been responsive; and have made a commitment to complete assigned tasks to stay involved. Statistically an “A” prospect will complete his/her Confidential Questionnaire (FRANCHISE APPLICATION) and return promptly after receiving it. We expect 80% of “A” prospects complete the required paperwork 24-48 hours after receiving it.

Prospect:

The “B” prospect is one who is willing to partially engage in the process. They are not communicative and lack energy. The “B” prospect can work their way to an “A” prospect. The “B” prospect will have to be guided through the process. History shows this type of lead will take a longer period of time to close. The “B” prospect may have money issues, a less than supportive spouse or partner, be evaluating many different opportunities or unsure if they want to be in business for themselves. You will need to ask probing questions to determine if the “B” prospect can be moved to “A” status or should be removed from your pipeline. “B”

Prospect:

A “C” prospect is one who you determine either cannot or will not engage in the process. The “C” prospect should be put in a 6 month contact file. We do not chase a “C” prospect. There will be too many variables in the mix to understand, manage and/or resolve. Every call placed to a “C” prospect takes away from moving “A” to close and “B” to “A”. “C”

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Franchise Sales and Lead Generation Strategies

The Franchise Sales Process in 6 Simple Steps!

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1. The First Call The introduction of the franchise “Evaluation Process”: • Who we are? Business concept – why are we different? • Introduction of clients “territory” concept • Investment level (single unit or multi-unit or Area development concept for franchising) • Commitment for prospective franchisees to engage in “Evaluation Process” • Introduction to the ‘evaluation’ (sales) process • Introduction of the “discovery day”… • Introduction of Marketing Packet and CIRF (‘Confidential Questionnaire’) Commitment to return CIRF Introduction to the “Second Call”…

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2. The Second Call • Starts when we have reviewed the CIRF • This call is meant to engage the prospect in continuing the franchise “Evaluation Process” • It is a give and take dialogue • It introduces their self assessment of the Entrepreneurial skill sets • Helps the prospective franchisee understand that they are a franchise “partner” (“Desire to be in business for yourself and not by yourself” -“We achieve our success through you”) • We are seeking a commitment to the “discovery day” and the prospect’s (and our) validation process begins

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3. Invitation to Discovery Day • Upon review of the CIRF, and any related data, an invitation to attend a “discovery day” event should be extended to the qualified prospective franchisee. • It should be made known to that individual that this invitation is extended only selectively. • A prepared agenda for that event should include:  An overview of the business and franchise opportunity  A meeting with senior company management  A visit to a franchised business location (if available)  Mutual evaluation – “bring the wife, leave the checkbook”  Expectations of the franchisee should be managed…  A FDD should be presented not later than at this event.

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Selling the Discovery Day • • • • • • • • • •

Offered rarely, not a daily occurrence! An exploratory visit and a learning day No one makes a decision during that day No obligation on either side We want to see you and you want to get to meet leadership You are here to gather information! Determine our mutual interest interest level Gives you great ‘tools’ to ask better questions… Complete “due diligence” for everyone follows this event… Is a requirement for approval that we have in place to insure everyone in the process makes a great decision!

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4. Disclosure Document and Territory Call • In preparation for the ‘Discovery Day’ event, this call is to review the FDD (in detail) until all prospect questions have been answered • Territory is defined, reviewed and confirmed with your prospective franchisee BEFORE your ‘Discovery day’ • The prospective franchisee remains engaged through this process and is continuing to ask questions… • This call reviews addresses territory issues and continues to answer any questions that may have arisen from FDD review... • Neither of you wants any ‘surprises’ when you meet in person! • Confirmation of participation in the “Discovery Day” is made.

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5. Validation Call • Occurs once both parties makes a preliminary positive decision and before franchise agreements are prepared • Follows the participation in our “discovery day”, completion of “due diligence” on everyone’s behalf and a positive decision is made, a final validation call on behalf of the franchisor is made • In this call, both the Development Staff and the Franchise Company leader review the prospective franchisee’s application, territory, business entry plan and qualifies the candidate as a prospective franchise owner. • This should be done before the candidate acceptance is finalized

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6. Closing Meeting or Call

• Following the validation call or meeting, the final requests for contracts is submitted and franchise agreements are prepared for the new franchisee • Once agreements are prepared the prospective franchisee must hold them for the required time (FTC Rule 436) • Once the prospective franchisee has received and reviewed all documents and is ready to sign an agreement, this can be done by mail (overnight service recommended) or with franchise company leader • Your franchise sales staff is now prepared to take possession of all documents and the Franchisor can collect the initial fees

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Effective Prospect Follow-Up and Closing • Objections generally mean the candidate is NOT ready to buy • Questions are typical in the closing process… • Listen carefully for the difference – Questions generally relate to “how – or when - do I” do something and ‘objections’ are generally expressing concern • The questions you don’t want to ask are the questions you must ask! • Reinforce positive actions and withdraw emotional support when they are moving away from a positive decision… • Constantly tell them what the next steps are... • Be patient…but: • Ask for a decision…consistently!

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Uncovering Objections • Objections are an important part of communication… • Need to be patient with your prospects! • If we do not know the candidate’s objections, we can’t overcome them and move forward… • If they are not asking questions, you are unlikely to move the sale forward • Key to uncovering them is to ask questions • What’s preventing you from. . . • What other information . . . • It seems as if you’re concerned about . . .

• Look for objections to discuss with your prospective franchisee whenever you cannot get an “advance”…

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Establishing Sales Goals • Gain continual agreement for what your mutual “next steps” are throughout the process… • Goals with the prospect should be committed for both in terms of actions and timelines • Goals should be set for each contact with the candidate:  Each goal should ADVANCE the sale  Get them into the habit of saying YES in the process!  Have several goals for each contact with the candidate • Look for HIDDEN OBJECTIONS from the candidate • Always focus on creating ADVANCES in the sales process • Emotionally support the buyer as the sale advances – withdraw emotional support as they move away from affirming behavior!

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Examples of Some Advances       

Review our materials Submit the evaluation form Get spouse or partner on a conference call Check out competition; pricing in market Measure market demographics Evaluate the market for potential sites Schedule a “Face-to-Face” or “discovery day” meeting  Get the candidate to call franchisees  Talk to banker, lawyer, accountant, investor  Schedule a closing meeting

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What to measure… • Total Leads, by source & yield • Qualified leads (eliminate duplicates, not available) • International and ‘out-of-market’ leads • Total Marketing kits sent • Applications received • Disclosures completed • Total franchise sales (transactions) • Total franchise units (franchises) • Lead and franchise sales cost analysis should be done monthly, quarterly and each year

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Positioning Against Your Competitors • Expect that you are being compared to other franchise opportunities • Don’t assume that they are only looking at your category and don’t assume your prospect will proactively share this information with your salesperson • Determine who your true “competitors” are • Know your points of difference as a franchise system…be prepared to “sell what you have”… • NEVER speak negatively about other franchise systems – it can cause broad doubt about the franchise ‘business model’! • Focus on your competitive advantages – sell what you have to offer them!

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How Often Should I Contact the Candidate? • Establish mutual expectations for follow-up during the initial lead call, and confirm in the cover letter you send out Typical Follow-Up Schedule Full Brochure Sent Out

2nd follow-up call…if CIRF NOT received

(1 day max)

(5 days later)

Initial lead received candidate qualified

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1st follow-up call…if CIRF NOT received

Periodic Letters or E-mail

Follow-up Letter (7-10 days later)

(7 days later)

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What should result from the process? Assuming a single unit sales strategy: • From your total qualified leads… • 8 - 12 % of leads will submit CIRF (application) • No more than 60% of that number will make a commitment to a “discovery day” event • But, you should be closing about 30-35% of those that attend the discovery day event • Sales cycle will be a 12-20 week process, depending on the type of franchise concept & how many units you have operating - if you are an “emerging” franchisor (or have limited or challenged validation) you probably will not do as well… • Generally, you need to speak with many people to find a sale! Copyright, The iFranchise Group, 2015 All rights reserved

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What should result from the process? • Generally, the CEO should NOT sell franchises…it can make everything a ‘negotiation’ (and, typically, the CEO is running the business(es) and doesn’t have the time to work this process effectively)… • Management should be excited about the opportunity to “grant” a franchise, but needs to understand the importance of saying “NO”! • Franchise selection is critical to good outcomes!! • A franchise fee is worth a great deal less to any system than potential royalty and the “goodwill” of a successful franchisee • Don’t underestimate the importance of the salesperson to a successful franchise sale!

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Developing Your Franchise Strategy

Development Strategies

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Single-Unit Franchising Single-Unit Franchising is the traditional means of franchised expansion. . . Advantages of Single-Unit Franchising Single-Unit Start-up Franchising Franchisor Company

• • • •

Franchise Franchise Owner Owner

Greatest control over unit-level operations. Individual franchisees are more likely to be active in day-to-day operations. Single-unit candidates are more easily identified than multi-unit prospects. High degree of control over the selection of existing franchise owners for additional locations.

Disadvantages of Single-Unit Franchising • •

Slower rate of growth compared to more aggressive sales strategies. Ongoing support can be more expensive when supporting a larger number of single-unit operators.

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Single-Unit Franchising Issues to be addressed in making a decision… Issues with Single Unit Operations Single-Unit Start-up Franchising Franchisor Company

• • •

Territorial issues can be more complex, as can encroachment issues There will be a premium placed on training and communications under this structure Many more relationships to manage.

Franchise Franchise Owner Owner

Questions to ask • • •

How fast do you need to grow to meet your company’s growth objectives? Does your business lend itself better to an “owner-operator”? Can you “grow your own” multiple unit operators using single unit franchising?

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Conversion Franchising Conversion Franchising is a form of single unit franchising in which preferred terms are extended to someone who is “already in the business” . . . Advantages of Conversion Franchising Conversion Franchising Franchisor Company

Independent Franchise Franchise Owner Owner Operator

• • • •

Easily identifiable target franchisee can mean lower cost-per-lead Like individual franchisees, conversion franchisees are more likely to be active in day-to-day operations. Less rigorous training may be required – reducing costs Existing customer base can mean instant, possibly higher, royalties

Disadvantages of Conversion Franchising • • •

Franchisees can be entrepreneurial and more likely to challenge the system Generally offered lower franchise fees as an inducement; sometimes lower royalties Post-Termination restrictive covenants more difficult or impossible to enforce (or will not be signed)

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Conversion Franchising Conversion Franchising is a form of single unit franchising in which preferred terms are extended to someone who is “already in the business” . . . Issues in conversion franchising Conversion Franchising Franchisor Company

Independent Franchise Franchise Owner Owner Operator

• •

•

Territorial issues when territories overlap Conversion franchisees are extremely sensitive to the prospect of taking a royalty on existing sales, but it is probably not worth converting them if these sales are excluded What constitutes a conversion candidate – be specific

Questions to ask • • • • •

•

How fragmented is my marketplace? How independent are my candidates? How bad are their habits? If there are other franchisors in my marketplace, why haven’t these independents already converted? Does the money saved in franchise marketing, franchisee training, and initial support have a value that translates to reduced fees/royalties or an otherwise preferential offer? The key with conversion franchising is “incremental value” Copyright, The iFranchise Group, 2015 All rights reserved

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Area Development Agreements Area Development Agreements are like an option agreement for a single operator to open multiple units… Advantages of an Area Development Strategy • Rate of unit growth can be faster provided area developers meet their development schedules. • Experienced multi-unit owners may be strong operators and require less support from the franchisor. • Existing multi-unit operators of other systems are easily identified.

Area Development Agreements Franchisor Franchisor Company Company

Area Area Developer Developer Location Location One One

Location Location Two Two

Location Location Three Three

Disadvantages of an Area Development Strategy • The market to attract qualified multi-unit operators is highly competitive among franchisors seeking to expand. • More than half of all area developers fail to open the number of locations called for in their development agreement. • If problems develop with an area development franchisee, their territory can remain undeveloped as issues are resolved. • Larger area developers can command a high degree of power within a franchise system. • Rate of growth can, paradoxically, be slower in circumstances in which a slow development schedule supplants aggressive franchise marketing Copyright, The iFranchise Group, 2015 All rights reserved

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Area Development Agreements Issues when using an Area Development Strategy • Established area developers, if targeted, will have a number of issues that may be difficult to overcome:  Existing POS Systems and Charts of Accounts  Vendor relationships and discounts may be well established • Territorial issues minimized but development agreement structure becomes vital • Dealing with unfulfilled area development contracts

Area Development Agreements Franchisor Franchisor Company Company

Area Area Developer Developer Location Location One One

Location Location Two Two

Location Location Three Three

Questions to ask • Does the business model lend itself to passive ownership? • Are the unit economics strong enough to attract are area development prospects? • Will we be able to attract established area developers or will we need to “grow our own”?

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Area Representative Agreements Area Representative Agreements are a form of sub-franchise most frequently used domestically. . . Advantages of an Area Representative Strategy • Rate of unit growth can be faster provided area representatives meet their sales commitments. • Regional training and ongoing support provided by area representatives lessens the need to develop the franchisor’s own support system. Disadvantages of an Area Representative Strategy • Franchise fees and royalties are shared with area representatives. • The quality of training and ongoing support from one area representative to another can vary. • The franchisor may be liable for the actions of its area representatives, although they are not the franchisor's employees. • The franchisor may have to step in and provide support at a distance if an area representative leaves the system. • Fee splitting with a “middle-man.”

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Area Representative Agreements Issues with using Area Representative Strategy • Will we require the area representative to operate a unit? • What responsibilities will the AR have aside from sales? • How do we split fees and royalties? • Quality control at the unit level can be more difficult • Must structure the offering so it is compelling to both the Area Representative and the Franchisee • What is the franchisor’s economic trade-off for using this middle-man? Questions to ask • Do we need to grow substantially faster to achieve our growth goals or to meet the demands of the marketplace? • Are unit level operations simple enough that we can delegate responsibilities to a middle-man without sacrificing value or quality control? • Is there enough margin in the operation to provide a good return to both the Area Representative and the franchisor, without starving the franchisee?

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Development Strategy The ultimate development strategy that is adopted should ensure that: 1.

Approved candidates are capable and financially qualified to operate successful franchised locations.

Approved franchisees are capable and financially qualified

The franchisor is able to support franchise owners effectively and at a reasonable cost.

Quality remains high.

Risk of litigation is minimized.

Chances of franchisee success is optimized.

The franchisor is able to meet its development goals.

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Development Strategy The development strategy chosen should also match the goals and values of your company. Just because a successful competitor uses a particular strategy doesnâ&#x20AC;&#x2122;t mean that itâ&#x20AC;&#x2122;s right for you.

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Appropriateness of Your Franchise Business Structure Key Questions Regarding Your Business Structure: 

Do the types of franchises we’re selling encourage optimum unit-level performance?



Do the fees we charge cover our costs in all areas?



Are there provisions in our franchise agreement that we don’t execute against or enforce?



Is our franchise agreement up to date in terms of planning for future technology in our business?



Does our Item 7 investment range reflect reality?



Do our reporting requirements give us the data we need to adequately benchmark performance in our system?



Is our business structure flexible enough where it needs to be?



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Establishing Your Fee Structure

A Franchisorâ&#x20AC;&#x2122;s Journey Toward Sustained Profitability

Royalty Revenue

Revenues

Expenses

Franchise Fee Revenues Franchise Fee Associated Expenses

Losses

Break-Even Point

Time

Determining the Initial Fee • Match fee to service performed • Fee determination methods – – – –

• • • •

Cost plus Market comparables Positioning Financial analysis

Fees range from $5,000 to $150,000 Average fee: $25,000 Fee should not deter franchise sales Initial fee is a minor profit center

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Initial Fee Minor Profit Center Advertising Sales commissions Brochures & mailing Legal Site selection Training at HQ Field training Travel Initial support Totals

$5,000 - $13,000 $3,000 - $7,000 $500 $500 - $1,000 0 - $5,000 $2,000 - $5,000 $2,000 - $4,000 0 - $2,000 $2,000 - $5,000 $16,500 - $47,500

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Can Leverage off of Fixed Costs in Early Years of Franchising Advertising Sales commissions Brochures & mailing Legal Site selection Training at HQ Field training Travel Initial support

$5,000 - $13,000 $3,000 - $7,000 $500 $500 - $1,000 0 - $5,000 $2,000 - $5,000 $2,000 - $4,000 0 - $2,000 $2,000 - $5,000

Out of Pocket â&#x20AC;&#x201C; Early Years

$5,500 - $16,500

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Best Practices Royalty Determination – Six Steps • Perhaps your single most important decision • Comparables is only step one of the analysis • Should compare comparables on multiple fronts simultaneously • Don’t look at royalties in a vacuum but in relation to the opportunity/value proposition

• Financial modeling is essential to a proper analysis • This starts with understanding support requirements • Varies based on positioning, concept, structure, markets targeted, speed of growth, targeted franchisee, philosophy of the franchisor and many other factors • Support requirements translate to required staffing and organizational structure • Major elements of their cost structure – labor costs, space requirements, etc. • This is the beginning of an appropriate “cost plus” modeling approach

• Sensitivity analysis is the next step • Subject the model to testing under altered assumptions • “What if” modeling

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Adequacy of Your Organizational Structure

Six key areas of evaluation:  Does your reporting structure align the right responsibilities?  Do your senior managers have a workable number of people reporting to them?  Are responsibilities in the organization clearly defined?  If you have company-owned operations, are they structured properly within your organization?  Does the organizational structure “fit” your leadership style as an owner?  Has your organizational structure evolved over time to fit the growing needs of your business?

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Marketing and Other Fees • Initial launch marketing • Local marketing requirement • Cooperative marketing • System marketing fund • Back-Room Support Fees • Technology Fees • Other Fees

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Implementing the Franchise Strategy External Value Proposition

“How are we perceived by our franchisee candidates?”

 Relevancy of your concept today and in the years ahead  Equity of your consumer brand  Strength of your products and operations systems against your competitors  Strength of your franchise structure against your competitors  Overall marketability of your franchise opportunity Copyright, The iFranchise Group, 2015 All rights reserved

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Implementing the Franchise Strategy

Your Organization “How well do we perform as a team”

 Adequacy of your organizational structure  Coverage of critical functional responsibilities  Staff capabilities and experience  Leadership performance  Staffing ratios  Compensation structures  Staff morale and group dynamics Copyright, The iFranchise Group, 2015 All rights reserved

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Implementing the Franchise Strategy

Internal Value Proposition

“How are we perceived by our franchisees?”

 Franchisee profitability  Franchisee relationships  Quality of your store development processes  Quality of pre-opening support systems  Quality of ongoing support systems

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Developing a Top Performing Organization “How to perform as a team”

Coverage of Critical Functional Responsibilities • Brand management Concept • Product mix Development • Service offering

• Lead generation • Franchise qualification • Franchise sales

Franchise Development

Franchise Support

• • • •

• Company • Administration • •

Training Field support Advisory councils Franchisee communications Human resources Accounting Legal Office facilities

• Research & development • Quality assurance • Technology

• Real estate • Facility design • Construction

• Marketing support • Public relations • Third party supply contracts

• Franchise compliance • Insurance

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Staff Capabilities Young Franchisor  Hiring often limited by cash flow  Often little or no prior franchise experience on the management team

Established Franchisor  Goal should be to have a staff highly experienced in franchising  Experience from multiple franchise systems is desired

 Managers hold a wide range of responsibilities

 The initial management team hired needs to be hands on

 Founders need to focus on developing strong relationships with the initial group of franchisees

 Focus needs to be on the transition from founders to managers

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The Cost of Home Grown Talent Franchise Sales Cost = (Lost Sales x NPVOF) â&#x20AC;&#x201C; (Incremental Salary + Recruiting Fees)

Average Sales for Franchise Salesperson at Maturity Experienced Franchise Salesperson

Lost Franchise Sales

Inexperienced Franchise Salesperson

Time

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Staffing Ratios for the Franchisor

The right staffing ratios for your company will depend on a variety of factors including:  The type of industry in which you operate  The complexity of your unit level operations  The speed at which your system is expanding  The geography over which you’re expanding  The types of franchises you are awarding  Your philosophy toward support

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Implementation Planning and Support

President/CEO

Human Resources

General Counsel

Chief Financial Officer

Chief Operating Officer

Director of Purchasing

Accounting Staff

Director of Marketing

Director of Real Estate & Construction

Marketing Staff

General Manager Operations

Field Support Region 1 Franchisee & Company Operations

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Implementation Planning and Support

Year One Hires President/CEO

Human Resources

General Counsel

Chief Financial Officer

Chief Operating Officer

Director of Purchasing

Accounting Staff

Director of Marketing

Director of Franchising

Director of Real Estate & Construction

Marketing Staff

General Manager Operations

Field Support Region 1

Field Support Region 2

Franchisee & Company Operations

Franchise Sales

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Implementation Planning and Support

Year One Hires President/CEO Year Two Hires Human Resources

General Counsel

Chief Financial Officer

Legal Staff

Accounting Staff

Chief Operating Officer

Director of Purchasing

Director of Marketing

Director of Franchising

Director of Real Estate & Construction

Marketing Staff

General Manager Operations

Field Support Region 1

Field Support Region 2

Field Support Region 3

Franchisee & Company Operations

HQ Support Staff

Franchise Sales

Compliance

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Implementation Planning and Support

Year One Hires President/CEO Year Two Hires Human Resources

Year Three Hires

General Counsel

Chief Financial Officer

Legal Staff

Accounting Staff

Chief Operating Officer

Director of Training

Director of Purchasing

Director of Marketing

Purchasing Staff

Marketing Staff

General Manager Operations

HQ Support Staff

Field Support Region 1

Field Support Region 2

Field Support Region 3

Field Support Region 4

Franchisee & Company Operations

Director of Franchising

Franchise Sales

Director of Real Estate & Construction

Compliance

Site Selection

Design & Construction

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Typical Staffing Ratios Franchise development staff  Single unit focus = 1 for each 12-18 deals  Multi-unit focus = 1 for each 5-8 deals Field support staff  Single unit restaurant = 1 for each 20-25 units  Multi-unit restaurant = 1 for each 10-15 owner groups  Territory-based service system = 1 for each 30-35 owner territories Field marketing staff  1 for each 50 to 100 units/territories Overall staff to franchised locations (within a mature organization)  1 staff equivalent for each 7 to 11 locations Copyright, The iFranchise Group, 2015 All rights reserved

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Staff Morale and Group Dynamics

Good franchisors develop a loyal and happy staff by: 

Leading by example within the office



Educating their staff on franchising



Setting clear responsibilities, goals and objectives



Giving staff the resources they need



Allowing staff to do their job



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Maximizing Your Franchisee Relationships

Franchisee Profitability “The secret to our success is to make sure the franchisees make a little more money each year.” Ray Kroc McDonald’s Founder

Benchmarking franchisee profitability requires access to reliable and consistent information. Key measures include: 

Net operating income



Net income before owner’s compensation



Sales to investment ratio in the first year



Overall return on investment after financing costs

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Franchisee Relationships Strong Relationships Yield  More committed operators who will follow-through on your vision  Better customer experiences across your system  Improved franchise sales as a result of great references being provided  Less litigation/arbitration  An enhanced ability to introduce changes into your system

Weak Relationships Yield  An inability to move the system forward  A disproportionate amount of staff time dealing with unhappy franchisees  Greater cost of litigation or arbitration  A far less efficient franchise sales program  Lower morale for your staff

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Franchisee Relationships Common elements in systems having strong franchisee relationships: 

A strong corporate culture



A system leader who is respected



Profitable franchisees



Highly active franchisee advisory council program



Strong and capable field support staff

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Establishing an Advisory Council Structure Typical Approach to Councils 

Council members elected by their peers



Council consists of 8-12 franchisees



Council meets with franchisor between 2 and 4 times per year

Problems With The Above Approach 

Requires a small group of franchisees to properly represent the entire franchise system



Often challenging for the council to obtain input from other franchisees in the system



Lack of transparency to the system



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Alternative Approach to The Council Process Regional Advisory Councils

 Multiple regions  Elected officers in each region  All franchisees attend meetings

National Presidents’ Council

 Presidents of each regional council  Focus on higher-level strategic issues

 Minutes taken by franchisor and made available to all franchisees in the system

Developing Effective Franchisee Support Programs

Building Blocks for Supporting Franchisees

Nine Primary Areas of Support Third-Party Supplier Support Communications and Technology Brand and Local Marketing Field Consulting Supply Chain Ongoing Training Pre-Opening Training Construction Real Estate Not relevant to some service businesses

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10 Common Mistakes in Supporting Franchisees 1.

Lack of capital to provide adequate support, particularly in the early years of franchising

Hiring support staff that is under-qualified or given insufficient training and direction

Lack of operational experience by the franchisor

Failure to build the support program around the issues that are most important to franchisees

Failure to involve franchisees in key decisions

Failure to develop an effective change implementation process

The belief that technology can replace human contact

Failure by the franchisor to measure the results of its support efforts

Negative attitudes toward franchisees

Store Development Process Real Estate

• How refined is your real estate model? • How do you evaluate locations? • Who drives the site selection process?

Lease Negotiation

• How involved should you be as the franchisor? • Do your franchisees retain qualified real estate counsel? • Are your required lease inclusions appropriate?

Facility Design

• Are your design standards fully defined? • Have your construction standards been cost engineered? • Who selects the architect for each franchised location?

Facility Construction

• What options exist for construction? • Are you assisting franchisees in the bid process? • Are you benchmarking construction costs?

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Quality of Pre-Opening Support Pre-Opening Training:  Operations raining should focus on the quality of the customer experience  Who must attend training?  Length of the training course  Quality of course materials  Use of self-study or online course materials  Testing throughout the training process  Use of a certification program

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Quality of Pre-Opening Support On-site Training:  Goals for on-site training  Quality of the opening team  Agendas for on-site training  Assistance provided between the completion of construction and the first day of operation  Role of the on-site trainer  Monitoring the effectiveness of the on-site training process

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Quality of Ongoing Support Systems Field Consulting

Marketing Support

• Qualifications of reps hired

• Local advertising support

• Compensation structure

• Co-op programs

• Ratio of reps to units

• Public relations support

• Frequency of visits

• Brand monitoring activities

• Routing efficiency

• Quality of consumer marketing

• Agendas for each visit

• Consumer website

• Business planning tools

• Field marketing consulting

• Use of mystery shops

• Management of the system marketing fund

• Collection and dissemination of best practices • Working with troubled franchisees

• Consumer testing/research • Management of outside agency relationships

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Focus of Support May Vary Based on the Types of Franchisees You Have Multi-Unit Franchisee

Single Unit Franchisee  Financial statement basics

 Detailed business planning

 Expense controls

 Financial benchmarking

 Best practice sharing

 Planning for capital spending

 Sales training

 Technology development

 How to manage a family business effectively

 Multi-unit management training

 Strategies for local store marketing  Hiring good employees

 Assistance with finance or lease programs  Input on key strategy issues impacting the brand

 Managing employees

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Focus Within a Franchise Support Program

Compliance 20%

80% Helping franchisees increase revenues and profits

Focus support around an annual business plan with each franchisee

Prerequisites for the Business Planning Process 

Some level of standardization for franchisee accounting practices and income statement generation



Requirement that franchisees generate monthly financial statements



Technology available to capture and analyze income and expense information for the system



Field support staff who are capable as business consultants and trained in the franchisor’s process



The respect of your franchisees to provide value through the business planning process



Business Planning With Your Franchisees Key steps in the planning process: 1.

Create and continually refine the planning process with the input of your franchisees

Communicate the final process both internally and to your franchisees

Schedule an in-depth meeting with each franchisee to develop their plan for the coming year

Meet with franchisees at least quarterly to review progress to the plan and actions needed to address problem areas

Provide benchmarking data to franchisees throughout the year, allowing them to measure their own progress against the system as a whole

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Business Planning With Your Franchisees The planning process will vary based on the needs of each franchise system. In general, however, a franchiseeâ&#x20AC;&#x2122;s plan will focus on areas such as: Marketing

Operations Management

Human Resources

Facilities

Budget

Revenue Goals

Staff Levels

Maintenance

Local Marketing

Cost of Goods

Co-op Planning

Operating Expenses

Training & Development

Construction & Trade Dress Updates

Support of Systemwide Initiates Tracking Marketing Performance

Overall Profitability

Compensation Plan

Capital Expenditures

Turnover Targets

Cash Budget

New Staff Hires

Operations Quality

New Equipment Technology & Software Facility Lease Review

Customer Feedback

Quality of Ongoing Support Systems Communications

Vendor Relations

• Franchisee Intranet

• Supply agreements

• Newsletters

• Distribution structure and related agreements

• Seminars/conventions • Procedures for testing and introducing new products or services • Accumulating best practices • Disseminating best practices • Internal communications within the franchisor company

• Advertising or public relations agencies • Legal counsel • Various third-party approved supplier programs • Auditing of supplier contracts • Quality assurance programs

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Quality of Ongoing Support Systems Technology • Website • Intranet

Compliance • State and federal franchise laws

• POS and back office systems

• Business opportunity and industry laws

• Polling of POS and back office data

• Franchise sales process

• Integration with vendor technologies • Other telecommunications – cell phone, Internet, VoIP, etc. • Store security systems

• Compliance with your obligations as the franchisor under the franchise agreement and operations manual • Franchisee compliance with your standards • Franchise transfer process • Insurance

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The Need For Constant Monitoring Strategic Planning

Best Practices Audit

 Process should be completed annually.

 Should be completed every 3-5 years.

 Focuses on corporate vision, strategies and tactics.

 Both an internal and external focus.

 Primary focus is internal.

 External focus looks at your value proposition compared to your competitors.

 External focus concentrates on competitive threats.  Entire company should be involved in the process.  Tied to your development and support budget.

 Internal focus on efficiency and results of tactics employed.  Measures the overall value proposition of your company as a franchisor.

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Conclusion • Franchising is a means of duplicating success, not creating success • Thrives by creating win-win situations • You must be selective • Franchising is a new and different business • Is not the right solution for every business • Provides one of the most powerful business expansion models ever developed

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Questions