How to Franchise Your Business - Paid Symposium 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. © 2019 iFranchise Group. All Rights Reserved.

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

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27 consultants with over 500 years of franchise experience 98 out of the top 200 franchise companies Offices in Chicago, Dallas, Los Angeles, 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 two dozen major 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 Top Agency Experience ◦ ◦ ◦ ◦ ◦ ◦

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

Recent honors and awards: ◦ ◦ ◦ ◦ ◦

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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Mark Siebert – CEO, 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

Frequent speaker at franchise industry events, and has written or collaborated on multiple papers, articles, and interviews within the franchise media ◦ Author of the book, “Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever” ◦ Author of the book, “The Franchisee Handbook: Everything You Need to Know About Buying a Franchise”

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Barry Falcon – CFE, Senior Advisor, iFranchise Group ◦ ◦ ◦ ◦

Former President and Co-Founder, ShelfGenie Franchise Systems Former CEO, Concrete Craft Former Owner of Velocity Sports Performance (Franchisee) Works with emerging brands in many sectors of franchising

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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.

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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 ◦ Operations manual and systems ◦ Ongoing supervision and support ◦ Other support services

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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

15 15

Year 1 Starting Capital

Year 2

Year 3

Year 4

Year 5

$250,000

$200,000

$250,000

$300,000

Capital invested

($150,000)

($300,000)

New Cash Flow

$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

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

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

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Cannot get there from here

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Alternatives: ◦ ◦ ◦ ◦

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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

17 17

Year 1

Year 2

Year 4

Year 5

$3,250,000

$1,100,000

$850,000

$1,250,000

$1,500,000

Capital invested

($2,250,000)

($1,050,000)

($750,000)

($1,200,000)

($1,500,000)

New Cash Flow

$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

Existing Cash Flow Units – EOY

Year 3

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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

19 19

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

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.

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. © 2019 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

26 26

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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 © 2019 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 donâ&#x20AC;&#x2122;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

Hire Franchise Salespeople 50

Sales

Hire Field Reps Sales

Hire Support Staff Sales

Sales

Personnel Marketing Office Space

Brochures

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

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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

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“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

◦ Will dictate support requirements as well

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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+ 

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 58

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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

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

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Work Ethic

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Personality ◦ ◦ ◦ ◦ ◦ ◦

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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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B or C Student

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Long tenure with job

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Moved from job to job

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Corporate job

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Owned businesses

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Drives family car

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Sports car

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Few tickets

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Lots of tickets

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Divorced

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Married Looking for security

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“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

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A bad Operations Manual can be a franchisor’s worst nightmare

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Operations Manuals must provide you with adequate brand control but should not be too prescriptive – a fine line

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Must avoid creating an inadvertent “agency” relationship

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Must avoid potential areas of negligence or take great care when prescribing actions

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Should cross-reference regulations and not cite them

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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 – 66

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 ◦ For your staff ◦ For franchisees

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Focus on training the trainer (your franchisee) ◦ Franchisee will train their staff ◦ Should have tools to do so

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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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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

Franchise Legislation within the U.S. Legend:

MN SD

WI IA

KY CA

IL IN OH

States having franchise registration laws only

RI CT MD

SC LA

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 that are available.

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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 r2

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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

Slide 81 r2

Low in the current enviroment--probably more like 20-30%? rstidham, 12/16/2007

Average Franchisee Recruitment Budget (in Thousands of Dollars)

$225 208.6 198

$200

197

202.5

201.8 181.5

186.8

175

$175

165 153

166.7

162

162.8

152.8

Franchisor Marketing Dollars by Media Percentage of Total Expenditures: 2010-2019

60%

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

50%

40%

30%

20%

10%

0% Internet/ Digital

Franchise Website

Social Media

2011

Direct Mail

2012

2013

Trade Show

2014

2015

Public Relations

2016

In Market Meetings

2017

2018

TV/Radio

Other

2019

Source: Franchise Update 83

Source of Franchise Leads by Media Percentage of Total Leads Received: 2009-2018

80%

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

2011

Referrals

2012

Trade Shows

2013

2014

P.R.

2015

Email Mktg.

2016

Direct Mail

2017

TV/Radio Unknown

Other

2018

Source: Franchise Update 84

Breakdown of Expenditures on the Internet/Digital 2016-2019

70%

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

60%

50%

Note emergence of remarketing

40%

30%

20%

10%

0% Franchise Opportunity Sites

Other Business Media

PPC

SEO

Email Marketing

2016

2017

Social Remarketing/ Networking Target Trailing

2018

Social Media Advertising

Digital Asset Creative

Sponsored Content/ Native Advertising

2019

Source: Franchise Update 85

Average Closing Costs

(Media Dollars Per Sale Excluding Broker Fees)

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

Source: Franchise Update

2009

2010

2011

2012

2013

2014

2015

2016

2017

The Franchise Sales Pipeline Public Relations

Print Advertising

Trade Shows

Direct Mail

Example CPL = $250

Example CPL = $150

Example CPL = $100

Example CPL = $75

Internet Leads Example CPL =$25 - $75

Brokers Cost Per Sale =$15K - $25K

Referrals/ Unsolicited CPL = $0

Lead Generation Time Varies by Media

Average CPL: $113

Send Marketing Materials, Prequalify, Schedule Meetings

Meet With 3 – 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

Award Franchise

Average 45 – 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 = $8,571 per sale Overall Expected Close Rate = 1.8%

Source: Franchise Update.



Franchise marketing is very different from consumer marketing Franchise marketing is highly regulated This image cannot currently be display ed.



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

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 © 2019 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 Advertising Expenditures

Post-Sale Training

Sales Process



 



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.



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



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.

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

Legal Coordination

Strategy Legal Documents Quality Control Franchise Marketing Organizational Development

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

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

Legal Coordination

Strategy Legal Documents Quality Control

Financial Sensitivity Analysis 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

100

101



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

102



Everyone believes they have the solution to lead generation ◦ ◦ ◦ ◦ ◦



PR practitioners – credibility Ad agencies – predictability Social media firms – engagement Search engine optimizers – visibility Video houses – compelling storytelling

Messaging is not coordinated across media professionals When your only tool is a hammer, then every problem is a nail

104

 

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

105

Source: FranchiseUpdate.com

106

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

107



A focus on visual appeal alone can be a disaster



Too many websites lack ◦ ◦ ◦ ◦



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

108



Public Relations as a next step ◦ ◦ ◦ ◦ ◦ ◦ ◦



Positions brand in marketplace Builds credibility and validation Generates franchise sales leads Creates brand awareness Establishes thought leadership Amplifies marketing initiatives Validates your concept

By creating inbound links, PR also helps increase with SEO outcomes

109



Business Objectives  Maximize core brand  Foster better understanding and appreciation among key audience segments  Leverage and integrate 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

110



Focus on proprietary innovations and technology Integrate PR with other marketing initiatives Establish brand with influential trade media Deepen relationships with all media



 

Establish core brand values and pull through digital Concentrate on trends, events, news and other influential outreach points Focus on business growth Identify audience segments (i.e., Veterans, Latinos, women, etc.)

Connect brand with bloggers

111

    

  

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 and spokespeople Position key messaging in paid media opportunities ◦ Wire distribution of press releases ◦ Mat release ◦ Audio news release ◦ Radio market tour Develop target media lists Integrate ongoing outreach to bloggers and social media Pitch, pitch, pitch

112



Seek out trend stories for inclusion



Develop seasonal or current event pitches



Hold event to leverage engagement with media, bloggers, consumers o o o o o



Grand Opening Trade Shows Announcements Blogger Events Launches

Take advantage of opportunistic media for brand, industry and key spokespeople

113

    



  

Total impressions – Year over Year

Number of interviews/opportunities Tiered Media – Define Tier I, II, III Number of clicks/shares/calls

Participation in digital activities, social media, and web traffic Consistent increase of Likes, Tweets, reposts, shares and links Event attendance (as scheduled)

Inbound leads (typical close rate 8% - 12%)

Quantify positive, neutral content vs. negative content

114



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

◦ Amplifying brand recognition and building credibility in the minds of potential consumers

115

““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



Ranking factors fall into four basic categories

◦ ◦ ◦ ◦

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

116



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

No longer relevant ◦ Keyword domains significantly less important ◦ Keyword density declining in importance

117



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)

118



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



If you do not know (and work on) this number, you should



Proactively develop backlinks as part of your strategy

119



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 Google Maps Foursquare and other Geo-Targeted site Review sites (Yelp, etc.)

120

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

121



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 ◦ Validates your business model  72% of the 30-49 year old bracket are now active on social media  60% of the 50-64 year old bracket are now the fastest growing segment on social media ◦ 47% of people that follow a brand on Twitter are likely to visit that company’s website ◦ Pinterest has more than 100 million users (85% female) ◦ Instagram has 500 million monthly active users



Conversations

◦ Average person sees over 3,000 ads a day ◦ Only 14% of people trust advertisements ◦ But 92% trust the recommendations of others *http://www.jeffbullas.com/2015/01/17/20-social-media-facts-and-statistics-you-should-know-in-2017/

122



Focus on a specific audience ◦ ◦ ◦ ◦



Enhance your presence ◦ ◦ ◦ ◦



Target groups 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

123



Facebook o o o



Twitter o o



450 million users – more influential and affluent professionals Better for franchise lead generation

YouTube o o



424 million users Average user spends 31 minutes a day

LinkedIn o



Over 1 billion active users Average user spends 55 minutes per day Franchise lead generation

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

Other Social Sites can be even more important

124



Largest network of professionals online ◦ ◦ ◦ ◦



450 million members 4 million business company pages 2.1 million LinkedIn groups 40% of users check LinkedIn daily

More decision makers are on LinkedIn ◦ CEOs have an average of 930 connections



LinkedIn usage

◦ Highest among the 30-49 (32%) and 50-64 (26%) age groups ◦ Far above-average among those with a college degree (46%)



LinkedIn usage trends upward alongside household income (HHI) ◦ 44% among those with HHI of at least $75k ◦ More than triple the rate for those with less that ◦ $30k in HHI (15%)

125



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.

126

Email marketing is not dead! 



Email marketing can be easily 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

With the growth of mobile and the future of mobile e-commerce, email marketing is just getting started… ◦

98% of prospects check their email at least once a day.

◦

Email is the most popular activity on smartphones among users ages 25-46.

127

Industry Publications

128



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 should be 1080p HD ◦ Title, video description, and video tags - are the core elements of optimized YouTube search

129



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

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.

131

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

Day 132

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

133

GOALS Initial Evaluation, Research, USP, & Strategy Creation

Responsive Website Must Capture Leads, Have Call to Action

Website Optimized around Keywords & Inbound Links

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

Prioritize & Optimize Appropriate Social Media Channels

134

GOALS Initial Evaluation, Research, USP, & Strategy Creation

Responsive Website Must Capture Leads, Have Call to Action

Website Optimized around Keywords & Inbound Links

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

Prioritize & Optimize Appropriate Social Media Channels

135

We create Integrated Lead Generation Marketing plans tailored around your budget and goals! TopFire Media was created to meet market needs head-on with our fully-integrated approach. ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦

Franchise Lead Generation Website Design & Development Search Engine Optimization Public Relations Social Media Management Content Marketing LinkedIn Optimization Email Marketing Pay-Per-Click Advertising

136



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

137



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

140



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

141



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”

142

Value Proposition: 

Proven systems



Established brand



Advertising economies



Operating economies



Shared knowledge



Support services provided

144



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

145



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

146

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

Be Their Own Boss

General Do Something Independence They Love

Other

147



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

148

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

150

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!

151

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

152

 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! © 2019 iFranchise Group. All Rights Reserved.

153

 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”… © 2019 iFranchise Group. All Rights Reserved.

154

 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: o o o

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! © 2019 iFranchise Group. All Rights Reserved.

155

 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

156

 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

157

 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! © 2019 iFranchise Group. All Rights Reserved.

158

160

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 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.

161

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

Franchise Owner

 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.

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 “owneroperator”?  Can you “grow your own” multiple unit operators using single unit franchising?

162

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 Operator Owner

 Easily identifiable target franchisee can mean lower costper-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) © 2019 iFranchise Group. All Rights Reserved.

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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 Operator Owner

 Conversion franchisees are extremely sensitive to the prospect of taking a royalty on existing sales, but it is probably not worth Territorial issues when territories overlap  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.”

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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.

Area Development Agreements

 Experienced multi-unit owners may be strong operators and require less support from the franchisor.

Franchisor Franchisor Company Company

 Existing multi-unit operators of other systems are easily identified.

Area Area Developer Developer Location Location One One

Location Location Two Two

Disadvantages of an Area Development Strategy Location Location Three Three

 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.

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Issues when using an Area Development Strategy  Established area developers, if targeted, will have a number of issues that may be difficult to overcome:

Area Development Agreements

o Existing POS Systems and Charts of Accounts

Franchisor Franchisor Company Company

o Vendor relationships and discounts may be well established

 Territorial issues minimized but development agreement structure becomes vital

Area Area Developer Developer Location Location One One

Location Location Two Two

 Dealing with unfulfilled area development contracts 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 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.

AreaRepresentative Development Area Agreements Franchisor Franchisor Company Company

Franchisee Support

Location Location One One

Area Area Representative Developer Location Location Two Two

Franchise Agreement

Location Location Three Three

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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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

AreaRepresentative Development Area Agreements

 Must structure the offering so it is compelling to both the Area Representative and the Franchisee

Franchisor Franchisor Company Company

Franchisee Support

Location Location One One

Area Area Representative Developer Location Location Two Two

Franchise Agreement

 What is the franchisor’s economic trade-off for using this middle-man?

Questions to ask Location Location Three Three

 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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The ultimate development strategy that is adopted should ensure that:  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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The development strategy chosen should also match the goals and values of your company. Just because a successful competitor uses a particular strategy doesn’t mean that it’s right for you.

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Key Questions Regarding Your Business Structure:  Do the types of franchises we’re selling encourage optimum unitlevel 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?  Do we have well written bylaws for our advisory council? © 2019 iFranchise Group. All Rights Reserved.

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172

Royalty Revenue

Revenues

Expenses

Franchise Fee Revenues Franchise Fee Associated Expenses

Losses

Break-Even Point

Time

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

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

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Fee should not deter franchise sales

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Initial fee is a minor profit center

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Advertising

$5,000 - $13,000

Sales commissions

$3,000 - $ 7,000

Brochures & mailing Legal Site selection

500

$ 500 - $ 1,000 0 - $ 5,000

Training at HQ

$2,000 - $ 5,000

Field training

$2,000 - $ 4,000

0 - $ 2,000 $2,000 - $ 5,000 $16,500 - $47,500

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Advertising

$5,000 - $13,000

Sales commissions

$3,000 - $ 7,000

Brochures & mailing Legal Site selection

500

$500 - $ 1,000 0 - $ 5,000

Training at HQ

$2,000 - $ 5,000

Field training

$2,000 - $ 4,000

Travel

0 - $ 2,000

Initial support

$2,000 - $ 5,000

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

$5,500 - $16,500

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

Perhaps your single most important decision



Comparables is only step one of the analysis o o



Financial modeling is essential to a proper analysis o o o o o



Should compare comparables on multiple fronts simultaneously Don’t look at royalties in a vacuum but in relation to the opportunity/value proposition 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 o o

Subject the model to testing under altered assumptions “What if” modeling



Analysis of the value proposition – what do I get for my money?



Positioning in the marketplace



Reverse engineering franchisee ROI

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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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

Initial launch marketing



Local marketing requirement



Cooperative marketing



System marketing fund



Back-Room Support Fees



Technology Fees



Other Fees

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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 © 2019 iFranchise Group. All Rights Reserved.

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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

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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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183

• 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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Young Franchisor  Hiring often limited by cash flow  Often little or no prior franchise experience on the management team  Managers hold a wide range of responsibilities  Founders need to focus on developing strong relationships with the initial group of franchisees

Established Franchisor  Goal should be to have a staff highly experienced in franchising  Experience from multiple franchise systems is desired  The initial management team hired needs to be hands on  Focus needs to be on the transition from founders to managers

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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 186

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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President/CEO

Human Resources

General Counsel

Chief Financial Officer

Chief Operating Officer

Accounting Staff

Director of Purchasing

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

Accounting Staff

Director of Marketing

Director of Franchising

Director of Real Estate & Construction

Marketing Staff

General Manager Operations

Director of Purchasing

Field Support Region 1

Field Support Region 2

Franchisee & Company Operations

Franchise Sales

189

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 Marketing

Director of Franchising

Director of Real Estate & Construction

Marketing Staff

General Manager Operations

Director of Purchasing

Field Support Region 1

Field Support Region 2

Field Support Region 3

Franchisee & Company Operations

HQ Support Staff

Franchise Sales

Compliance

190

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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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

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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  Communicating and interacting with staff regularly © 2019 iFranchise Group. All Rights Reserved.

193

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“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 © 2019 iFranchise Group. All Rights Reserved.

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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 © 2019 iFranchise Group. All Rights Reserved.

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

196

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

197

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  Encourages negative franchisees to sit on the sidelines and ignore council-supported initiatives © 2019 iFranchise Group. All Rights Reserved.

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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

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200

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

201

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

10. Fear of losing control with either the support staff or franchisees

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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?

203

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

204

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

205

Quality of Ongoing Support Systems Field Consulting

Marketing Support

• Qualifications of reps hired

• Local advertising support

• Ratio of reps to units

• Public relations support

• Compensation structure • Frequency of visits • Routing efficiency

• Co-op programs

• Brand monitoring activities

• Agendas for each visit

• Quality of consumer marketing

• Use of mystery shops

• Field marketing consulting

• Working with troubled franchisees

• Consumer testing/research

• Business planning tools

• Consumer website

• Collection and dissemination of best practices

• Management of the system marketing fund

• Ongoing rep training

• Management of outside agency relationships

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Single Unit Franchisee  Financial statement basics  Expense controls

Multi-Unit Franchisee  Detailed business planning  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

 Assistance with finance or lease programs

 Hiring good employees

 Input on key strategy issues impacting the brand

 Managing employees

207

Compliance 20%

80% Helping franchisees increase revenues and profits

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 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  Defined expectations and responsibilities for both franchisees and the franchisor company © 2019 iFranchise Group. All Rights Reserved.

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Key steps in the planning process: 1. Create and continually refine the planning process with the input of your franchisees 2. Communicate the final process both internally and to your franchisees 3. Schedule an in-depth meeting with each franchisee to develop their plan for the coming year 4. Meet with franchisees at least quarterly to review progress to the plan and actions needed to address problem areas 5. Provide benchmarking data to franchisees throughout the year, allowing them to measure their own progress against the system as a whole ÂŠ 2019 iFranchise Group. All Rights Reserved.

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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 Capital Expenditures Cash Budget

Compensation Plan

New Equipment

Turnover Targets

Technology & Software

New Staff Hires

Facility Lease Review

Operations Quality Customer Feedback 211

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

212

Technology  Website  Intranet  POS and back office systems  Polling of POS and back office data  Integration with vendor technologies  Other telecommunications – cell phone, Internet, VoIP, etc.  Store security systems

Compliance  State and federal franchise laws  Business opportunity and industry laws  Franchise sales process  Compliance with your obligations as the franchisor under the franchise agreement and operations manual  Franchisee compliance with your standards  Franchise transfer process  Insurance

213

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. 214



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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www.ifranchisegroup.com 708-957-2300

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