How To Franchise Your Business by iFranchise Group

How To Franchise Your Business

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The Decision to Franchise ◦ ◦ ◦ ◦

How Franchising Works Alternatives Quality Control Legal Aspects of Franchising

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Marketing Your Franchise

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Selling Your Franchise

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Creating a Successful Franchise Strategy

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Questions and Discussion

◦ Structural Decisions ◦ Financial ◦ Organizational Development

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. © 2021 iFranchise Group. All Rights Reserved.

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Twice voted #1 Franchise Consulting Firm in North America in an Independent Survey of over 500 Franchisors More hands-on experience than any other firm ◦ ◦ ◦

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Consultants with over 700 years of franchise experience 98 out of the top 200 franchise companies Offices in Chicago, Dallas, Los Angeles, Boca Raton, Miami-Fort Lauderdale, Atlanta, Toronto, Dubai, UAE & Riyadh

More “senior level” experience ◦ ◦

Hands-on experience at start-up and established franchisors Former CEOs, CFOs, EVPs of more than 50 different franchise companies 

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The ability to bring more resources ◦ ◦

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

Faster completion Ability to provide assistance in several areas simultaneously

Breadth across four functional areas ◦ ◦ ◦ ◦

Strategic planning Quality control Marketing Organizational development

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Franchise experience in 50+ countries

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Numerous awards and publications

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A Premier fully-integrated public relations and digital media agency specializing in franchised businesses ◦ ◦ ◦ ◦ ◦ ◦ ◦

Public Relations Digital Lead Generation Search Engine Marketing Content Marketing Social Media Publishing Pay-Per-Click Advertising Website Design & Development

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Both franchise development and consumer branding

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Team with Hands-On Franchise Experience ◦ ◦ ◦

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Real world experience with nearly two dozen brands Efforts have resulted in tens of thousands of franchise leads And many hundreds of franchise sales

Recent honors and awards: ◦ ◦ ◦ ◦ ◦ ◦

Top supplier from Entrepreneur two years in a row Best New Agency (Ragan & PR Daily Ace Awards) PR Agency Elite – Mission: Fit to Own (PR News) Best Website Finalist (PR News) Best Media Relations Campaign Finalist (PR News) Best SEO Finalist (PR News)

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Considering franchising your business?

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Franchising less than one year?

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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. Also happy to send a copy of a video and a book if interested in exploring further.

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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

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

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Some state definitions vary, but are similar

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Do not have to use the “f-word”

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Franchisee typically pays

◦ Franchise fee average about $25,000 to $35,000 ◦ Royalty range between 4% and10% ◦ Advertising range between 1% and 2% ◦ Franchisor will often sell product to the franchisee

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Franchisor typically provides ◦ Initial training

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Restaurants only 25%

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Retailers

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Direct sales organizations

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B-to-B Service ◦ ◦ ◦ ◦

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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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Leverage Capital

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Speed of Growth

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Motivated management

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Reduced risk

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Few operational concerns

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Higher quality

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Organizational leverage

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

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Must “share profits”

Less Control Good relations with franchisees take work MYTH: Litigation

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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

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 – franchisee

Yes

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

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What are your goals? BE SPECIFIC!

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What is your risk tolerance?

◦ Certain levels of profits ◦ Sell company for a specific amount

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

Conduct Cash Flow Analysis to See if You Can Reach Your Goals ◦ Example:       

Goal = Sell company for $10 million at the end of five years Two units in operation Total Equity Investment in New Operation = $150,000 Total available capital = $200,000 Existing Free Cash Flow for Reinvestment = $100,000/year Units Break Even in First Year After that, Free Cash Flow from New Units = $50,000/year/each

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Year 1 Starting Capital

Year 2

Year 3

Year 4

Year 5

$250,000

$200,000

$250,000

$300,000

($150,000)

($300,000)

$50,000

$100,000

$150,000

$200,000

$100,000

Cash Flow

$100,000

$150,000

$200,000

$250,000

$350,000

Value @ 7x CF

$700,000

$1,050,000

$1,400,000

$1,750,000

$2,450,000

# Opened Capital invested New Cash Flow Existing Cash Flow Units – EOY

Terminal Value

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

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This Example

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Cannot get there from here

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Alternatives:

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

◦ ◦ ◦ ◦

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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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Year 4

Year 5

$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

Cash Flow

$100,000

$850,000

$1,200,000

$1,450,000

$1,850,000

Terminal Value

$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

Starting Capital # Opened Capital invested New Cash Flow Existing Cash Flow Units – EOY

Year 1

Year 2

Year 3

$3,250,000

$1,100,000

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With an influx of a little over $3 million ◦ ◦ ◦ ◦

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Problem: Realistic valuations ◦ ◦ ◦ ◦ ◦ ◦ ◦

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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 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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Name Fee

Name =

Franchise

System

Name Fee

Fee

Trademark License

Distributor

Name =

Business Opportunity or License

Fee System

Dealership

Agency Sales Rep Joint Venture

Name Fee System

Franchise

+ Joint Venture

Equity

Name

Trademark License

Product

System

Distributor/ Dealer

Name Fee

= Trademark

License

Advantages

Disadvantages

• Less Regulation - Still a Franchise in NY

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

Often, this alternative is eliminated because the company does not have adequate brand strength, and, even if they did, they would risk losing their trademark if they did not exercise control. Moreover, it is important to note that the “control” element of the franchise definition is very easy to trigger. © 2021 iFranchise Group. All Rights Reserved.

Fee System

Business = Opportunity or License

Advantages

Disadvantages

•Less Regulation? - More at the state level

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

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

Name System

Dealership or = Distributorship

Advantages

Disadvantages

•Less Regulation •Easier to sell

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

Dedicated dealerships can have many of the same advantages as franchising. The biggest disadvantages are the need to pay for services out of the wholesale margins. CAUTION: Can create an inadvertent franchise after the fact, as happened with Mitsubishi v. To-Am. © 2021 iFranchise Group. All Rights Reserved.

Name System

Agency or = Sales Rep

Advantages

Disadvantages

•Less Regulation •Easier to sell

•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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Technology-based shared services ◦ Use an app to drive business ◦ Avoid franchising by top-down fee structure ◦ Uber, Lyft, Airbnb

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Certification programs ◦ Certification Mark, not a Trademark 

TM/SM = Source of Product or Service

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CM = Characteristics of a Product or Service

◦ Cannot be used as a TM by the owner of the mark ◦ Must be willing to offer to all who qualify ◦ Cannot have exclusive territories ◦ Can easily stray into a franchise relationship © 2021 iFranchise Group. All Rights Reserved.

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TM License Business Opportunity

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Dealer / Distributor

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Sales Rep / Agent Joint Venture

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NY Franchise Law

Securities Laws

Sales Rep. Laws

Fair Dealership Laws

Relationship Laws

Business Opp. Laws

Franchise Laws Franchise

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Federal & 26 States

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New York Only

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26 States State / Industry Specific

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35 States

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State and Federal

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The decision should be goal driven ◦ ◦ ◦ ◦

Distance Speed Obstacles Risk tolerance

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A Volvo or a Rocket Ship?

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Don’t have to choose only one vehicle

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Don’t decide to franchise (or whatever) ◦ Instead, decide:    

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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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Successful prototype Credibility Differentiation “Sizzle” Buyer appeal Value Proposition

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Teachability Adaptability Systemization

R.O.I.?

Sell?

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Affordability Profitability

Market trends Capital Management

Succeed?

Clone?

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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”

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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

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

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Annual Cash-on-Cash R.O.I. at the unit level – our criteria ◦ 15% for Owner Operators ◦ 20% for Area Developers (who will support additional overhead)

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Occasional exceptions

Cost to Open a New Unit

150,000

Add a Franchise Fee

25,000

Add Working Capital

25,000

Franchisee Estimated Investment

200,000

Estimated Franchisee Revenue Year Three

500,000

Current Profit after Owner’s Compensation

70,000

Adjust Owner’s Compensation

15,000

One-Time Only / Capital Investment

5,000

Tax Minimization Strategies

5,000

Shared Overhead

5,000

Interest and Debt Service

5,000

Depreciation and Amortization

5,000

30,000)

80,000

Subtract Royalties, Fees, & Price Adjustments Estimated Franchisee Profit (adjusted) Divided Estimated Profit by Estimated Investment Estimated Franchisee Return © 2021 iFranchise Group. All Rights Reserved.

$80,000/$200,000 40%

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Perfecting the business

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

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Quick vs. Slick

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

Risk of Failure Business Model Risk

Competitive threat

Founded

Franchised

Units

1932

1990

420+

1953

1961

12,200+

1955

30,000+

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Business plan/strategic direction

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Legal documents and registrations

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Operations manuals

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Training program

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Quality control mechanisms and systems

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Effective marketing plan

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Franchise collateral materials

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Website and web-based marketing

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Advertise

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Design and implement a sales strategy

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Staff an organization to implement the plan

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Capital

If you don’t know where you are going, then any road will take you there. The Adventures of Alice in Wonderland

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You are entering a new business. Goals drive your business. Start with support and cost structure. What do you need to do to help your franchisees succeed? Don’t rely on guesswork: The

future of your business is at stake.

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Financial analysis is essential.

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Reverse engineer your success.

Goal

Sell for $10M in 5 Years

Average Selling

6.7 times EBIT

Year Five Earnings

$10M/6.7 or about $1.3M

Average Royalties

$30,000 per franchise

Average Net Royalties

$10,000 per franchise

Need to sell

$1.3M/$10,000 = 130 Franchises

Sales

5 48

Hire Franchise Salespeople 50

Sales

5 49

Hire Field Reps

Sales

5 50

Hire Support Staff

Sales

5 51

Sales

Personnel Marketing Office Space Brochures

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

5 52

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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 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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Structure

◦ Structure dictates support requirements and responsibilities ◦ Will (should) impact fees, royalties, targeted franchisee

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Targeted franchisee

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Territory – 10% mistake is huge

◦ Will dictate support requirements as well  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+ 

Other fees and margins on product sales

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

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

Leverage Existing Staff and Minimal Advertising

Second Hire

Royalty & Gross Margin Revenues First Hire

Time 57

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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

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Studies show franchisees outperform

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Anecdotal evidence

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Franchisee Selection Documentation & Training – the Tools

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Support

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Legal Documents and Compliance

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Intelligence

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Capitalization

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Work Ethic

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Personality

◦ Biggest reason for failure ◦ Can cause franchisees to cut corners

◦ ◦ ◦ ◦ ◦ ◦

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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

Franchisee

Entrepreneur

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Straight A Student

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Long tenure with job

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Corporate job

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Drives family car

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Few tickets

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Married Looking for security

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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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Role as a sales tool

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Role as a training tool

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Role as a reference tool

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Role as in reducing liability

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Extension of the legal documents

The Table of Contents is a Required Disclosure Item

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A good Operations Manual can help you avoid litigation 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 – 65

Discussions with Key Stakeholders

Review existing material, forms, & documentation

Develop preliminary outline

Determine gaps in current documentation

Assign responsibility for content creation

Identify Subject Matter Experts for gaps

Interview Subject Matter Experts

Onsite observation of units & documentation

Resolve Best Practices Conflicts

Draft material to cover all identified gaps

Edit all material into common style & “voice”

Revise first draft of Operations Manual based on client input

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Faster growth requires formal training programs

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Focus on training the trainer (your franchisee)

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Video pushes QC to lowest level of organization

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◦ For your staff ◦ For franchisees

◦ Franchisee will train their staff ◦ Should have tools to do so

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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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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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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Laws vary from state to state ◦ Franchisor’s state of incorporation ◦ Franchisor’s domicile ◦ Franchisee’s residence ◦ Territory covered ◦ Where discussions take place

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Track these variables closely

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Check with your attorney when in doubt

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States having franchise registration or business opportunity laws

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Must be registered prior to soliciting franchise leads

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Submission of advertising materials ◦ CA, MD, MN, NY, ND, RI, SD, WA

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Submit all advertising to your attorney in any event

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Relationship and state specific laws ◦ Termination

◦ Non-compete ◦ Escrow ◦ Other

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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

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Rescission

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Fines – both civil and criminal

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Attorney’s Fees

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◦ Return fees paid ◦ Make good on franchisee’s investment ◦ Up to $11,000 per violation for the FTC Rule ◦ State fines of up to $100,000

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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Start locally, then regionally ◦ ◦ ◦ ◦ ◦

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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

Different franchises require 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   

◦

Survey Top Franchisees 

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Background Hot Buttons Media

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?

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Name Recognition

◦ 40% say joining a “known brand” is not vital ◦ 40% would prefer a known brand, but are open to newer concepts

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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

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

Franchisor Marketing Dollars by Media Percentage of Total Expenditures: 2011-2021

60%

50%

40%

30%

20%

10%

Internet/ Digital

Franchise Website

2011

2012

Social Media

2013

2014

Direct Marketing

2015

2016

Trade Show

2017

Public Relations

2018

2019

In Market Meetings

2020

TV/Radio

2021

Other or Don't Know (not including brokers)

Source: Franchise Update 81

Source of Franchise Leads by Media Percentage of Total Leads Received: 2011-2020

80% 70% 60% 50% 40% 30% 20% 10% 0%

Internet/ Your Digital Franchise Opportunity Website 2011

2012

Referrals

2013

2014

Trade Shows

2015

P.R.

Email Mktg.

2016

Source: Franchise Update

Direct Mail

2017

TV/Radio Unknown

2018

2019

Other

2020

Breakdown of Expenditures on the Internet/Digital 2016-2021

70%

60%

50%

40%

30%

20%

10%

Franchise Opportunity Sites

Other Business Media

PPC

SEO

2016

2017

Email Marketing

2018

Social Remarketing/ Networking Target Trailing

2019

2020

Social Media Advertising

Digital Asset Creative

Sponsored Content/ Native Advertising

2021

Source: Franchise Update 83

The Franchise Sales Pipeline Public Relations Example CPL = $250

Print Advertising Example CPL = $150

Trade Shows Example CPL = $100

Direct Marketing Example CPL = $75

Internet/ Digital Leads Example CPL =$50 - $150

Brokers Cost Per Sale = $20K - $35K

Referrals/ Unsolicited CPL = $0

Lead Generation Time Varies by Media

Send Marketing Materials, Prequalify, Schedule Meetings

Average CPL: $312** Median CPL: $75

Meet With 3 – 10% of Leads Convert 15% - 20% of Completed CIRFs to Sales (Franchise Update reported 23.5% in 2020)

Initial Meetings with Candidates Further Qualify Follow-up meetings, assist with business plan & secure financing

Close 65% - 75% of Discovery Days

(Franchise Update reported an average of 73.4% in 2020)

Average 45 – 90 Days Lead to Meeting Time to close can range from 30-90 days or more following the initial face-to-face meeting Total time to close: often 12-20 weeks

(Franchise Update reported 18 weeks in 2020)

Award Franchise

Marketing Cost = $12,138, Average per sale* $9,650 Median per sale* Overall Expected Close Rate = 3.5% Close Rate for Qualified Leads = 13.5%**

* Average cost per sale was $10,500 in 2019; and $8,984 in 2018. While not measured separately in the Franchise Update report, Cost Per Sale numbers can be even higher for emerging brands based on anecdotal evidence. ** Historically, close rates in past years have hovered between 1.8% and 2%; average Cost per Lead (CPL) was between $126 and $213 in the previous two years. The numbers above are based on the most recent Franchise Update survey, and are influenced by a number of factors in 2020, including COVID-19. Copyright, iFranchise Group, Inc., 2015-2021. All rights reserved.

Source: Franchise Update.

Average Closing Costs

(Media Dollars Per Sale Excluding Broker Fees)

$14,000

$13,000 $12,138

$12,000 $10,500 $9,451

$10,000 $8,565

$8,200

$8,000

$9,142

$8,571

$8,984

$7,558

$7,000

$6,301

$6,000 $4,000 $2,000 $0

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

 

Most franchise companies do not have an unlimited marketing 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

Need to allocate resources based on an integrated lead generation strategy A canned approach will not work

Your message is no longer centered on print media. Instead, integrate all media around your website.



A focus on visual appeal alone can be a disaster

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Too many websites lack ◦ ◦ ◦ ◦

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Optimized content Mobile – friendly designs Organic traffic Substance over flash

Develop a plan to increase unique visitors, convert traffic, and improve franchise lead rates. ◦ ◦ ◦ ◦ ◦

Responsive design with mobile in mind Create effective calls-to-action Longer amount of time spent on-site You need a website design that converts traffic (conversion modeling) Improve franchise lead capture rates

““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 over 170 million Google results for the word “franchise”



Google is more than 65% of all online search

◦ Google’s algorithm — a closely held secret ◦ The algorithm changes up to 500 times a year ◦ Google’s goal: Deliver fresh and relevant content to the searcher

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Ranking factors fall into four basic categories

◦ ◦ ◦ ◦

On-Page coding On-Page content Inbound Link Authority Social Media Signals

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Strong positive SEO correlations ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦

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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)

Assessment

Social Media

Develop Links

Coding

•

Google’s 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



It never hurts to get a second set of expert eyes on your online marketing presence! ◦ ◦ ◦ ◦ ◦ ◦



Website Performance SEO Keyword Rankings Social Media Presence LinkedIn Profile PPC Advertising Campaign Online Reputation

Prioritize your efforts based on results and budget



Franchise marketing is very different from consumer marketing Franchise marketing is highly regulated The Five Sales ◦ ◦ ◦ ◦ ◦



Go into business for yourself Buy a franchise Invest in your industry Invest in your specific franchise The timing is right

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



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

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:  An average of 9, 11, and 13 franchises in their first three years  Median sales of 4, 5, and 6 sales in their first three years © 2021 iFranchise Group. All Rights Reserved.

The Franchise Sales Cycle Concept & Value Proposition Offer/Structure

Validation

Pre-Sale Communication

Marketing Plan

Support Message & Materials Opening Assistance

Post-Sale

Advertising Expenditures Training

Sales Process



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”

Value Proposition: 

Proven systems



Established brand



Advertising economies

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Operating economies



Shared knowledge



Support services provided

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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

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Compares the franchise offering to competitors

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Follows the above steps prior to arriving at the decision to purchase the franchise

100



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

101

35% 30% 25% 20% 15% 10% 5% 0

Earn More Money

Be Their Own Boss

General Do Something Independence They Love

Other

102



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

103

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

104

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 

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

105

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Be selective



Hire the best you can afford

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Maintain personal involvement



Let brand maintenance and the potential for franchisee success be your guideposts

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Train your sales staff

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Measure everything

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And, most of all, be sure a standard process is in place for handling each prospect

106



If the concept does not work, do not franchise

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Use franchisee success as your capacitor of growth

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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.

107

What If It Is Not Working -- Diagnosing Sales Problems

Publicity

Brokers

Trade Shows

Direct Mail

Internet

High leadIndicate costs Could Lead could indicate Concept Problems media selection problems Low conversions could Face-to-Face/Discovery Dayof In indicate short, close analysis Could indicate Poorvarious marketing materials media-specific, Salesmarketing, problems and sales statistics, -Urgency can be indicative of where Agenda Low conversions Few leads -Setting problems exist, allowing couldmay indicate Close could indicate -Closing Skills for appropriate corrective poorofsales skills or action. lack broker poor validation confidence

Referral

12 weeks

Marketing and Sales Audit Process Sales Factor

Franchise Concept Itself

Potential Problems • • • • • •

High unit investment Financial performance Look and feel Franchise structure Value proposition Franchisee validation

Symptoms

Diagnosis

• • • • •

Bad/No P.R. Low unsolicited inquiries Losing sales to competitors Repeat objections not overcome Prospects go dark after validation

• • • • • • • • •

Evaluate design/construction model Comparative financial analysis Evaluate unit economics/ops Contract comparison Marketing comparison Phone interviews of franchisees Franchisee satisfaction surveys (web) Evaluate real estate portfolio Survey “lost” sales

Franchise Lead Generation

• • • • • •

Media Selection Media Mix Message Ad Spend Target Audience Timing

• • • • •

High lead costs Low close rates Message confusion Few qualified prospects Low quality lead sources predominate

• • • • •

Historical vs. norms Media specific analysis Performance vs. competitors Message vs. competitors Franchisee or competitor surveys

Franchise Marketing Materials

• • • • • •

Target Audience Materials Used Message Inadequate differentiation Design Quality Production Quality

• • • • • •

Bad/No P.R. Low unsolicited inquiries Losing sales to competitors Repeat objections not overcome Lose sales to market leader Low application rate

• • •

Review for best practices Message based on surveys Application rate vs. norms

• • • • • • •

Lead handling Follow up Effective Process Sales Skills Salesperson Motivation Sales Tools Staffing v. Goals

• • • • • • •

Low application rate Low discovery day rate Low close rate Long “time to close” Variances in salesperson close rates Un- or under-worked leads Few broker leads

• • • • • • • •

Historical vs. norms (close, speed, etc.) Salesperson vs. salesperson Historical vs. past performance Develop sales process map Mystery shop sales force Leads per salesman Sales per salesman Broker validation calls

Sales Process & Technique

Problem Resolution – Phase Two Sales Factor

Franchise Concept Itself

Franchise Lead Generation

Franchise Marketing Materials

Sales Process & Technique

Confirmed Problem • • • • • • •

Unit investment Financial performance Look and feel Franchise structure Value proposition Franchisee validation Real estate model

Potential Solutions • • • • • • • •

Value engineer design and construction process Suspend sales and work on business model, support, franchisee training Retain design firm, consumer marketing firm, or PR firm as appropriate Revise franchise business structure Provide incremental value or reposition concept Communications plan, FAC, address survey-specific concerns Improve real estate process Develop third-party financing programs

• • • • • •

Media Selection Media Mix Message Ad Spend Target Audience Timing

• • • • • •

Develop formal marketing plan based on survey results Alter marketing mix to focus on higher-quality lead sources Alter message based on survey results Increase advertising expenditure based on goals Optimize website and PPC campaigns Develop and measure benchmarks; rotate bottom 10% quarterly

• • • • • •

Target Audience Materials Used Message Inadequate differentiation Design Quality Production Quality

• • • • •

Rewrite, redesign, and reprint materials as appropriate Develop or revise standard sales correspondence Rewrite and redesign web pages as appropriate Add technology improvements (auto-responders, sales software, etc.) Develop additional promotional tools (video, etc.)

• • • • • • •

Lead handling Follow up Effective Process Sales Skills Salesperson motivation Sales Tools Staffing v. Goals

• • • • • • • •

Develop and map effective sales process Train sales staff and provide guidelines to non-sales staff Replace poor sales personnel Benchmark and measure performance Alter compensation Evaluate external resource opportunities (FSO, LQS, software solutions) Add sales professionals, support staff, or both Proactive broker programs

112

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

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

Legal Coordination

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

Franchise Program for Moderate Growth Approximate Development Activity Schedule MO 1

MO 2

MO 3

MO 4

MO 5

MO 6

MO 7

MO 8

MO 9

MO 10

MO 11

MO 12

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

Legal Coordination

Strategy Legal Documents Quality Control Franchise Marketing Organizational Development

Franchise Program for Conservative Growth Approximate Development Activity Schedule MO 1

MO 2

MO 3

MO 4

MO 5

MO 6

MO 7

MO 8

MO 9

MO 10

Discovery & Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis

Legal Coordination

Strategy Legal Documents Quality Control

Franchise Agreement Disclosure Document State Registration Process Operations Manual

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

MO 11

MO 12

116

117



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 - $12k per sale (six months) ◦ Personnel: varies widely  Can bootstrap growth  Can spend hundreds of thousands

118

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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

119

www.ifranchisegroup.com 708-957-2300

Additional information from iFranchise Group: • • • • •

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