How to manage agressive franchise growth (12 7 16) (dh & bf)

How to Manage Aggressive Franchise Growth Dave Hood, Ph.D. President The iFranchise Group

Barry Falcon, CFE Senior Strategy Consultant The iFranchise Group

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Information About the iFranchise Group Emerging Franchise Systems  Head office: Chicago  Established: 1997  Focus Areas     

Franchise strategy Operations Training Franchise relationships Franchise vendor programs

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Established Franchise Systems

Discussion Topics

Common growth path for new franchisors ………............…………………………………

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Risks associated with rapid expansion at an early stage …............................................

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Core elements required to implement an aggressive growth program …........................

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Case study of of Auntie Anne’s Soft Pretzels .................................................................

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Common Growth Path for Emerging Franchisors Average Size of Franchise Systems in the United States

 Most franchise systems are regional rather than national in scale  70% of franchise systems have 50 or fewer operating locations  6% of franchise systems have 500 or more locations

Source: International Franchise Association

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Common Growth Path for Emerging Franchisors

Reality for Many New Franchisors Initial Franchise Implementation

Factors That Limit Rapid Growth in Early Years

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The founders typically fill the primary role of selling and supporting franchisees the first several years

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Management team’s focus is split between company-owned locations and growing the franchise network

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Franchise lead generation spend is typically $30,000 or less in their first year of franchising

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Lack of capital for infrastructure development and lead generation spend

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Initial franchise sales are often made to existing contacts or customers of the founder’s business

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Limited processes in place for proper execution of the sales and support program

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Initial franchise locations are typically within 100 miles of the franchisor’s home office

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Understanding and adoption of franchising best practices is limited due to lack of franchise experience

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Common Growth Path for Emerging Franchisors

Phases of Growth for Many New Franchisors

Investment in Infrastructure and Staffing

Sales/Support Systems Established

Founder driven Limited resources Local focus

Systems established or refined based on learnings from first franchisees who are recruited and supported

Lead generation spend increases

Franchisee validation becomes stronger

Systems continue to be refined

Number of Locations

Validation of the Franchise Model

1

2

3

4

5

6

Experienced staff hired Support departments begin to form

7

8

Years as a Franchisor

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Resources and Experience Support Rapid Growth

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10

11

12

Common Growth Path for Emerging Franchisors Path to Profitability for Most New Franchisors Royalty Revenue

Revenues and Expenses

Overhead

Franchise Fee Revenues Franchise Fee Associated Expenses Periods of Negative Cash Flow

Break-Even Point Page 7

Time

Common Growth Path for Emerging Franchisors Aggressive growth too early a franchisor’s development could result in the following challenges:  Mistakes being made in the franchise sales process  Poor franchisee selection  Poor real estate decisions  Inadequate support of new franchisees  Duplicating mistakes rather than replicating operational success  Poor franchisee validation  A damaged brand and sales cycle

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Common Growth Path for Emerging Franchisors

Case Study of a Failed Aggressive Expansion Strategy

Initial goal to sell 12,000 units in 10 years

1999 Founded in CA and franchised

300 unit deal for Florida Announced

2007 49 locations open nationwide

2013 53% SBA loan failure rate

2007-2009 Franchisee lawsuits filed

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2014 Brand sold to Brix Holdings

2016 18 locations open nationwide

2016 2 locations open in Florida

Common Growth Path for Emerging Franchisors Many other examples exist of franchisors that elected to expand too quickly without properly planning, resourcing their franchise program, or properly supporting franchisees.

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What it Takes to Successfully Implement and Manage Rapid Expansion of Your Franchise Network

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Elements Required to Support Rapid Expansion Prior to undertaking aggressive franchise expansion, a franchisor should have the following in place: 

A successful base of profitable franchisees that view their franchisor as providing credible and strong leadership

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A strong internal culture that is focused on the success of franchisees and not simply growth in the number of franchise locations

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An understanding and adopting franchising best-practices in growing and supporting franchisees

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A franchise business structure (e.g., franchisee profile and types of franchises the franchisor is awarding) that is optimized for rapid expansion

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An existing staff organization capable of supporting the desired rate of growth

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Opportunity for growth in terms of the market

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Elements Required to Support Rapid Expansion Each of The Processes Below Must be Well Designed and Implemented Proven Business Model Positive Franchisee Validation

Strong Value Proposition

Strong Franchise Relations

Pre-Sale

Lead Generation Plan/Budget

Operations Support Lead Generation Execution Opening Assistance

Well Designed Sales Process

Post-Sale Training

Site and Lease Development

Copyright, The iFranchise Group, 2013.

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Selection of Qualified Candidates

All rights reserved.

Elements Required to Support Rapid Expansion

Franchisee Profile Conservative Growth Strategy

Aggressive Growth Strategy

 Targeting first-time business owners who may or may not have related experience

 Targeting more sophisticated candidates with business ownership experience

 Focus on single-unit growth

 Greater focus on multi-unit development

 Focus on owner-operators who will be actively involved in daily operations

 Candidates more financially qualified  Only awarding single-unit franchises to individuals who have a desire and capability to expand into multiple units

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Elements Required to Support Rapid Expansion Area Development Franchising Advantages of Area Development Agreements  Ability to work with more sophisticated owners  Fewer franchise relationships for the franchisor to manage, lowering the franchisor’s support costs  Potentially faster growth within a market  Greater consistency in advertising since one franchisee can advertise across multiple locations

Disadvantages of Area Development Agreements  Area developers likely to act more independently than single unit owners  Risk that development schedules are not met  Risk that the area developer may not be a strong operator or a positive contributor to the franchise community

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Elements Required to Support Rapid Expansion Area Representative Franchising Advantages of Area Representative Agreements  Faster growth  Less capital intensive for the franchisor  Area reps are locally based in each market

Disadvantages of Area Representative Agreements  The most complex form of franchising  Fees are split with the area representative, lowering revenues for the franchisor  Less control over quality in unit-level operations  Need to develop separate training and support systems for area representatives  Requires the use of a totally separate FDD dedicated to area representative sales

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Elements Required to Support Rapid Expansion Franchisee Profile A common theme among most rapidly growing and successful franchise systems is that many of the new locations or territories are developed by existing franchisees.

Expanding with existing franchisees reduces risk for the franchisor, and drives down the required lead generation budget for franchise candidates.

If franchise owners that have already invested in the brand are not eager to make further investments in additional locations, that is a sign of an unhealthy system and one that is unlikely to support rapid growth.

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Elements Required to Support Rapid Expansion

Average Marketing Cost Per Sale

Lead Generation and Sales Metrics to Support Rapid Expansion:

$10,000 $9,000 $8,000

 Budget at least $7,000 to $10,000 in media cost per franchise sale

$7,000 $6,000

 Anticipate a close rate from lead to sale of between 1% and 3%

$5,000 $4,000

 Expect a sales cycle of between 6 and 12 weeks for a service business, or 12 to 26 weeks for a multi-unit restaurant sale

$3,000 $2,000 $1,000 $0

2012

2013

Source: Franchise Update Media, 2012-2016

2014

2015

2016

 Understand that these metrics assume strong validation exists from the franchisee community, and you’re employing a well designed franchise sales process

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Elements Required to Support Rapid Expansion The following pages provide a number of recommendations for strengthening franchisee onboarding and support processes in order to better accommodate rapid expansion. As a general rule, franchisors adopting more aggressive growth strategies need the following:  Stronger controls should be in place to create greater efficiencies in the store development process  More advanced systems need to be developed to ensure the proper support of your franchisees  Technology needs to play a greater role to track processes and foster improved communication both within the franchisor company and with your franchisees  A franchisor should place greater emphasis on hiring support staff with prior franchise experience rather than promoting less experienced people from within  Vendors capable of supporting a rapidly growing system need to be identified and onboarded

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Elements Required to Support Rapid Expansion Site Selection Process Conservative Growth Strategy

Aggressive Growth Strategy

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Franchisor provides site criteria to the franchisee

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Franchisee sources their own broker

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Franchisor has no contact with the franchisee’s broker as sites are being surfaced

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Once a site is found, the franchisee or broker provides information to the franchisor for review

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Before meeting with franchisee candidates in a new market, the franchisor commissions a detailed market analysis to optimize territories and fully understand the market opportunity

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Franchisor provides site criteria to the franchisee, and guides them on where to focus their site selection efforts based on the market analysis

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If franchisee sources their own broker, franchisor qualifies them and trains them on requirements for the site selection process

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Franchisor may require franchisees to use a designated broker

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Franchisor provides broker with a pre-defined site evaluation package template that broker must use to submit information

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Franchisor visits proposed site(s) for review and acceptance

Franchisor visits proposed site(s) for review and acceptance

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Elements Required to Support Rapid Expansion

Store Design Process Conservative Growth Strategy

Aggressive Growth Strategy

 Franchisor provides standard design templates to franchisee

 Franchisor negotiates design fees with one or more highly qualified architects

 Franchisee retains their own architect

 Franchisees are required to use an architect designated by the franchisor

 Franchisee’s architect conducts site measurements and obtains design criteria from the landlord  Franchisor reviews/approves the construction drawings developed by the franchisee’s architect  Franchisee pays all design related expenses

 Franchisor may have an in-house design team that develops floor plans and interior elevations which are then provided to the architect retained by the franchisee  Designated architect develops construction drawings and submits them to the franchisor for review/approval  Franchisee pays all design related expenses

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Elements Required to Support Rapid Expansion

Construction Process Conservative Growth Strategy

Aggressive Growth Strategy

 Franchisee obtains construction bids from local contractors they source in their market

 If the franchisee is allowed to select their own contractor, franchisor provides minimum qualification criteria

 Franchisee selects their contractor who then builds the facility

 Franchisor may require the franchisee to select from one of several designated contractors who will build their location

 The contractor or the franchisee updates the franchisor on construction progress  A representative of the franchisor visits the location prior to the contractor leaving to approve construction and develop a final punch list

 Franchisor will negotiate with key vendors (e.g., equipment, lighting, signage, etc.) that the contractor must use  A representative of the franchisor visits the location at several key points during the construction process

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Elements Required to Support Rapid Expansion

Franchisee Training Process Conservative Growth Strategy  Franchisees attend and complete the franchisor’s pre-opening training at the franchisor’s training facility  One or more representatives of the franchisor will provide some onsite training at the franchisee’s location surrounding their opening

Aggressive Growth Strategy  Franchisees are required to complete pretraining (e.g., online training) prior to attending training at the franchisor’s training facility  Franchisor requires the franchisee to bring additional personnel to training, so that more people are trained and certified prior to opening  One or more representatives of the franchisor provide onsite training  The franchisor should develop a capability to train franchisees on how to effectively manage multiple locations

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Elements Required to Support Rapid Expansion Field Support Process Conservative Growth Strategy

Aggressive Growth Strategy

 Franchisees are visited several times during the year

 Franchisees are visited several times during the year

 Focus for the field representative includes business coaching, operations review, sharing of best practices and compliance monitoring

 Focus for the field representative includes business coaching, operations review, sharing of best practices and preparing the franchisee for continued growth in the system

 Initial field representatives are likely to be employees who have been recruited from the franchisor’s existing team or companyowned locations

 Franchisor supplements their field support process with outside vendors who conduct mystery shops and quality assurance checks (for foodservice concepts)  Field representatives are typically hired from outside, and have prior related experience with other franchise brands  Technology is in place to capture and retain all support communications that are undertaken with franchisees  Field representatives work from their home, in the region they are supporting Page 24

Elements Required to Support Rapid Expansion Franchisee Reporting and Financial Statements Conservative Growth Strategy  Franchisees required to submit periodic reports (e.g., sales activity) to franchisor  Franchisees are required to maintain their accounting statements according to generally accepted accounting principles  Franchisees conduct their own accounting and are required to submit income statements to franchisor either monthly or quarterly

Aggressive Growth Strategy  Franchisor uses a cloud-based back office platform to collect, analyze and benchmark POS data from its franchisees  Franchisees are required to use a standard chart of accounts and income statement format  Franchisees are required to use the same accounting software (e.g., QuickBooks)  Franchisor reserves the right to require franchisees to use a designated accounting provider for their business  Franchisor is given 24/7 electronic access to the franchisees’ accounting files, and uses a third-party firm to collect, analyze and benchmark KPIs from the financial statements  Franchisees benefit from benchmarking of both POS and income statement data

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Elements Required to Support Rapid Expansion

Supply Chain Management Conservative Growth Strategy

Aggressive Growth Strategy

 Supply chain is managed by the founder or an employee with little to no experience in supply chain

 Supply chain is managed by an experienced employee, or is outsourced to a highly qualified vendor

 Franchisor relies on the suppliers that supported their initial company-owned locations

 Franchisor selects suppliers based on their ability to support a rapidly growing system

 Supplier contracts (if they exist) are negotiated at the local level  The franchisor may elect to supply some items (e.g., uniforms, paper products, etc.) directly to franchisees

 Franchisor negotiates national account pricing (or better) with key suppliers to the system  Supplier contracts are much more sophisticated, and are drafted to anticipate rapid growth of the system  Franchisor incorporates an auditing process (for pricing, quality, etc.) for its key supply contracts  Franchisor is less likely to supply minor products to franchisees directly

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Case Study of Auntie Anne’s Soft Pretzels

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How Auntie Anne’s Managed Rapid Growth Brief history of the brand:  Founders both grew up in the Amish community, in Lancaster County, PA  Anne started Auntie Anne’s in 1988 as a part-time business to raise money for her family  Anne and Jonas were educated through the eighth grade. Neither of them had any business or franchise experience  Anne started her business by borrowing $6,000 from her Amish father-in-law  Auntie Anne’s was later sold to Focus Brands in 2010  Today there are more than 1,700 Auntie Anne’s locations in more than 30 countries

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How Auntie Anne’s Managed Rapid Growth

Domestic Units Open End of Year

Early-Stage Rapid Expansion:

650 600

 In its first decade of franchising, Auntie Anne’s opened more than 600 domestic and 50 international locations

550 500 450 400

 This rapid growth occurred with virtually no franchisee-initiated litigation

350 300

 Although hand-rolled pretzels are native to the Northeast region, the brand performed equally well throughout the US

250 200 150 100 50 0

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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 The initial international locations opened in Asia (1995), and were an immediate success with consumers

How Auntie Anne’s Managed Rapid Growth Keys to Auntie Anne’s success in managing rapid growth during its early phase of expansion:  Strong culture focused on transparency and franchisee success  High standards for awarding franchises  Solid training and operations systems  Focus on accepting only quality real estate locations  High level of franchisee support  Commitment to grow with existing franchise owners who were the best operators in their market

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How Auntie Anne’s Managed Rapid Growth

Auntie Anne’s Regional Office Locations A key to the company’s early-stage success was to remain focused on validating the franchise program and support processes within the Northeast region where the concept started and expansion posed the least risk.

In the mid-1990s, Auntie Anne’s opened five clusters of 4-5 company-owned stores around the country. A regional office was also established near each store cluster. The benefits of this strategy included:  A regional support presence for franchisees  Regional operating knowledge that would translate into more effective support of franchisees  Credibility with franchisees that their franchisor was making a direct investment in their region  Strong cash flow for the company, since Auntie Anne’s was able to hand-pick strong locations for its companyowned regional stores

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How Auntie Anne’s Managed Rapid Growth US Locations Operating at End of 2015 1,400 1,250 1,200

By 1995, Auntie Anne’s success had encouraged more than 20 competitors to enter the market. As the company continued to maintain its focus on quality, the majority of these competitors fell away.

1,000

Auntie Anne’s dominance in its category is due more than anything to the company’s historical focus on selecting strong franchisees, giving them the tools they need to succeed, and supporting them at a high level.

800

600

400 279 200

0

Wetzel's Pretzels

Auntie Anne's

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Questions

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