Is your business franchisable (jan 2015) by iFranchise Group

Is Your Business Franchisable?

About the iFranchise Group •

More hands-on experience than any other firm

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More “senior level” experience

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27 consultants with over 500 years of franchise experience Our consultants have worked with 98 out of the top 200 franchise companies worldwide Offices: Chicago, Los Angeles, Dallas, Dubai, Jeddah

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Former CEOs, CFOs, EVPs of two dozen major franchise companies

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Experience with start-up and established franchise programs

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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

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Breadth across four functional areas

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

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Franchise Dynamics

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TopFire Media

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Strategic Planning Quality Control Marketing Implementation and Organizational Development

Nation’s premier franchise sales outsourcing firm Sold about 2,000 franchises since 2010 making it “top 10” each year 25 sales and marketing professionals who have collectively sold over 7,000 franchises 400 additional years of franchise experience Former Senior Executives at Cendant, Chem-Dry, The Dwyer Group, LINE-X, Management Recruiters International, Ponderosa, TCBY, Ziebart, and other national brands. Nation’s first fully integrated media firm -- SEO, PPC, Social, Blogging, PR, and Mobile Both brand/consumer focused and franchise lead generation Recent honors and awards: • Best new agency (Ragan & PR Daily Ace Awards) • Best Website Finalist (PR News) • Best Media Relations Campaign Finalist (PR News)

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A Fully Integrated Approach to Franchising

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Primary Research Marketing Plans Brochures Videos Collateral

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

• Media Placement • Trade Shows • Performance Monitoring • Reporting

Note: TopFire Media Does Consumer Marketing Too Feedback Loop - 200,000 leads - 500/sales/year

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

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

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How Franchising Works • Franchisee typically pays – – – – –

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

• Franchisor typically provides – – – – –

Initial training Operations manual and systems Ongoing supervision and support Other support services Trademark & Trademark Maintenance

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Franchisability • • • • • • • • •

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

• Affordability • Profitability

R.O.I.?

Sell? • Market trends Succeed? • Capital • Management

Clone?

Can I Sell Franchises?

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Need for a Profitable Prototype • NOT a legal requirement • A practical requirement for almost all franchisors – Exceptions: Direct sales of a proprietary product, prototype operations that may differ from the franchise offering but provide prototype operational knowledge, etc.

• Five reasons you need a prototype – Credibility in the sales process – A venue to train your franchisees – A venue to test operational refinements (new products, marketing, etc.) – Defense against accusations of misrepresentation • While not legally required, failed franchisees could sue for fraud • If you do not have an operating unit (and presumably no FPR) they can claim fraud even if you never said a word • If you show no units or unprofitable operations, a jury may be more likely to side with your franchisee

– “I saw the angel in the marble and carved until I set him free.” -Michelangelo

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Credibility •

Prospects will not buy unless you make them believe they can succeed – – –

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Credibility can be demonstrated in a variety of ways – – – – – – –

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That said, 40% say joining a “known brand” is not vital And 40% prefer a known brand but are open to new concepts In fact, some franchisees are looking for “the next new thing”

Years in operation Number of units Financial performance Management and staff credentials Look and feel of the operation Press clippings, awards, and other notoriety Perception of customer acceptance

Credibility can be improved through – – – – – – – – – –

Strong franchise marketing materials Professional website design Franchise sales videos Operations manuals, training videos, Learning Management Systems, etc. Testimonials Use of a design firm Use of a public relations firm Strong social media campaigns Use of a Financial Performance Representation Hiring strong staff, well-known lawyers and consultants, etc.

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Differentiation •

Why buy from “the new kid on the block” if there is a bigger and better established competitor who does the exact same thing?

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What makes you BETTER?

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Differentiation can be achieved in a number of ways – – – – – – – – –

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Unit design, look and feel Unique recipes Product assortment Ad campaigns and message, consumer positioning Price Service Investment level Business economics And many other means…

“Me Too” can work as a strategy if done right – –

Speed of expansion – need for additional care “Fortress Strategy”

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The McMillan|Doolittle “EST” Model Cheap“est” (Lowest Price)

Black Hole “Where undifferentiated concepts go to die”

Easy“est” (Service)

Big“est” (Best Assortment)

Quick“est” (Speed)

Hot“est” (Fashion)

Source: McMillan|Doolittle

Later Market Entrants Must Compete Differently The Fortress Strategy

Early To Market Late To Market

“Sizzle” • You sell the “sizzle,” not the steak – franchise sales is an emotional decision • Sizzle, sex appeal, hot concept – the buyer wants to be part of something that they perceive as “fun,” enjoyable, happening, cutting edge, or that will otherwise appeal to their self image • “Sizzle” can be achieved in a number of ways – – – –

Unit design, look and feel Franchise marketing materials Perceived consumer acceptance Messaging

• Differences of opinion make horse races – Mark Twain – What you think is sexy may be a terrible opportunity for others – Almost anything can be given sizzle with good marketing and good messaging

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Buyer Appeal and Value Proposition •

Who will buy your franchise?

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Appeal to a specific buyer – – – –

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Advantages of a well-defined buyer – –

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Dentist for a dental franchise Restaurateur for a restaurant offering Someone who loves pets Someone who loves the outdoors

Don’t have to compete for franchisees in the “general franchise marketplace” Can focus on the emotions that your buyer will have

Create a strong value proposition –

Branding and brand advertising • •

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Two units are better than one Your brand may be stronger than you think

Operations Manual and Training Purchasing power Information technology Research and development (recipes, products, services, etc.) Assistance provided to your franchisees

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Can My Business Be Cloned?

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“Clonability” •

Teachability – – –

Train in three months or less McDonald’s has a one year training program Train the business, not the technical expertise • • •

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Adaptability – –

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Medical franchises Real estate Complex restaurant operations

Will your success translate to other markets? Factors to consider include geography, location, climate, regional tastes, laws and regulations at a state or local level

Systemization – – – –

Every business has systems Need to get them out of your head and onto “paper” Brand consistency is imperative Tools • • • • • •

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Operations Manuals Formal Training Programs Train-the-Trainer Programs Training Videos Learning Management Systems Systemized onsite support

Assistance provided to your franchisees

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Can My Business Provide Adequate Financial Returns?

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R.O.I. “Hurdle Rates” •

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

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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 ROI 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

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

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

Estimated Franchisee Sales Year Three =

$ 500,000

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

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

Estimated Franchisee Profit (adjusted)

Divide Estimated Profit by Estimated Investment Estimated Franchisee Return =

80,000

$80,000 / $200,000 40%

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

Business plan/strategic direction Legal documents required by law Operations manuals Training program Quality control mechanisms Effective marketing plan Develop a web page and web-based marketing Franchise collateral materials Design a sales strategy Advertise Staff an organization to implement the plan Management Team Capital

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Capital Requirements to Franchise • 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 $250,000 Organizational expenses: $10,000 to $25,000 Franchise Marketing: $8k - $10k per sale (six months) Personnel: varies widely • Can bootstrap growth • Can spend hundreds of thousands

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Conclusion • Not every successful business can be franchised • Speed of growth is a function of: – Franchise marketing – Ability to service franchisees

• The key to successful franchising is making sure your franchisee succeeds

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708-957-2300 www.ifranchisegroup.com