IsYourBusinessFranchisable?
The Decision to Franchise
◦ How Franchising Works
◦ Alternatives
◦ Quality Control
◦ Legal Aspects of Franchising
Marketing Your Franchise
Selling Your Franchise
Creating a Successful Franchise Strategy
◦ Structural Decisions
◦ Financial
◦ Organizational Development
Questions and Discussion
Wearegoingtotrytocoveragreatdealofinformation,soweare askingthatyouholdyourquestionsuntiltheendofthesession unlesstheyareonaparticularslide.
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More hands-on experience than any other firm
◦ Consultants with over 800 years of franchise experience
◦ 98 out of the top 200 franchise companies
◦ Offices in Chicago, Dallas, Los Angeles, Boca Raton, Miami-Fort Lauderdale, Atlanta, Toronto, Dubai, UAE, and Riyadh
More “senior level” experience
◦ Hands-on experience at start-up and established franchisors
◦ Former CEOs, CFOs, EVPs of more than 50 different franchise companies
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
The ability to bring more resources
◦ Faster completion
◦ Ability to assist in several areas simultaneously
Breadth across four functional areas
◦ Strategic planning
◦ Quality control
◦ Marketing
◦ Organizational development
Franchise experience in 50+ countries
Five years in a row, voted the #1 Franchise Consulting Firm in North America in an independent survey of over 1,000 franchisors
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
Both franchise development and consumer branding
Team with Hands-On Franchise Experience
◦ Real world experience with nearly two dozen brands
◦ Efforts have resulted in tens of thousands of franchise leads
◦ And many hundreds of franchise sales
Recent honors and awards:
◦ Top supplier from Entrepreneur five years in a row
◦ Best New Agency (Ragan & PR Daily Ace Awards)
◦ PR Agency Elite – Mission: Fit to Own (PR News)
◦ Best Website Finalist (PR News)
◦ Best Media Relations Campaign Finalist (PR News)
◦ Best SEO Finalist (PR News)
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Considering franchising your business?
Franchising less than one year?
Franchising more than one year?
Wearehappytosendyouacopyofthis presentation,soyoucanlimityournotetakingif yousodesire. Also,happytosendacopyofa videoandabookifinterestedinexploring further.
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FTC rule 436 cites three elements that legally define a franchise:
◦ The use of a common trademark
◦ The exercise of control or provision of assistance
◦ The collection of fees, royalties, mark-ups or other monies from the franchisees
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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Franchisee typically pays
◦ Franchise fee average about $35,000 to $45,000
◦ Royalty range between 4% and10%
◦ Advertising range between 1% and 2%
◦ Franchisor will often sell product to the franchisee
Franchisor typically provides
◦ Use of trademark
◦ Initial training
◦ Operations manual and systems
◦ Ongoing supervision and support
◦ Marketing support
◦ Other support services like purchasing, R&D, etc.
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Leverage Capital
Speed of Growth
Motivated management
Reduced risk
Few operational concerns
Higher quality
Organizational leverage
Must “share profits”
◦ Franchise unit will usually generate less profit than a profitable unit
◦ But far more profit than an unprofitable company-owned operation
Less Control
Good relations with franchisees take work
MYTH: Litigation
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orLicense
Distributor
SalesRep
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Fee
9
Name System
Franchise = Name Fee Trademark License = System Fee Business Opportunity
= Name System = Dealership
Agency JointVenture
System Name Fee
The decision should be goal driven
◦ Distance
◦ Speed
◦ Obstacles
◦ Risk tolerance
A Volvo or a Rocket Ship?
Don’t have to choose only one vehicle
Don’t decide to franchise (or whatever)
◦ Instead, decide:
Do I want to build a third-party distribution channel?
Do I want that channel to be branded?
If it is branded, do I want to control quality?
How do I want to be paid?
The law (or your lawyer) should never dictate your good business decisions
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Credibility
Differentiation
“Sizzle”
Buyer appeal
Value Proposition
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Affordability Profitability TheKeyisCreatinga “Win-Win-Win”Scenario Sell? Clone? Succeed? R.O.I.? Market trends Capital Management Teachability Adaptability Systemization
Successful prototype
The franchisee should make a return on the time they invest
◦ No different than if they were to go out and get a job
◦ Salary should be “market rate”
The franchisee should make a return on their investment
◦ No different than if they invested in a stock
◦ Return should be commensurate with what they would make if they were to make an investment of similar risk
◦ Ability to sell back their investment at the end of the term
Franchisees expect that they will need to build their business
◦ Will expect these returns in three years or less
Annual Cash-on-Cash R.O.I. at the unit level – our criteria
◦ 15% for Owner Operators
◦ 20% for Area Developers (who will support additional overhead)
Occasional exceptions
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© 2024 iFranchise Group. All Rights Reserved. 14 CosttoOpenaNewUnit $ 150,000 AddaFranchiseFee $ 25,000 AddWorkingCapital $ 25,000 FranchiseeEstimatedInvestment $ 200,000 EstimatedFranchiseeRevenueYearThree $ 500,000 CurrentProfitafterOwner’sCompensation $ 70,000 AdjustOwner’sCompensation +$ 15,000 One-TimeOnly/CapitalInvestment +$ 5,000 TaxMinimizationStrategies +$ 5,000 SharedOverhead +$ 5,000 InterestandDebtService +$ 5,000 DepreciationandAmortization +$ 5,000 EstimatedFranchiseeProfit(adjusted) $ 80,000 DividedEstimatedProfitbyEstimatedInvestment $80,000/$200,000 EstimatedFranchiseeReturn 40% SubtractRoyalties,Fees,&PriceAdjustments ($ 30,000)
Perfecting the business
◦ If you have perfected your business, SELL IT!
◦ If you are standing still, someone is gaining
◦ McDonald’s in 1955
Quick vs. Slick
◦ If you are going head to head with more established competition and your business model is not highly differentiated – be sure to refine first
◦ More unique, the sooner you should franchise
Risk: Someone with a camera and a notepad
First mover advantage
Who was the first . . . ?
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Business plan/strategic direction
Legal documents and registrations
Operations manuals
Training program
Quality control mechanisms and systems
Effective marketing plan
Franchise collateral materials
Website and web-based marketing
Advertise
Design and implement a sales strategy
Staff an organization to implement the plan
Capital
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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 futureofyourbusinessisat stake.
Financial analysis is essential.
Reverse engineer your success.
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There are certainly a large number of neophyte franchisors who take a “Ready-Fire-Aim” approach
◦ Often rely on guesswork
◦ Or analysis of what comparable franchisors are offering to make major decisions
“Me-Too” is not a strategy – it is a recipe for disaster!
◦ Uniqueness is important to success, whether achieved through the business model, marketing, support, structure, fees, or marketing.
◦ Me-Too assumes that business economics are the same, support is the same, and that a new franchisor will simply differentiate themselves based on great franchise marketing
◦ But established franchisors often have many advantages not shared by newer franchisors
◦ So the Me-Too strategy that is taken by many new franchisors can actually be responsible for their failure
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The impact of a 1% royalty mistake
◦ If a single franchisee generates $500,000 in revenue
◦ 1% = $5,000 off the bottom line
◦ But franchisees will never tell you that they are paying too little and often inertia will keep the royalty where it is at for years
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28 Lost revenue from a single franchise $5,000 Times 100 franchises opened $500,000 Times 20 years $10,000,000 Lost enterprise value at 10x earnings $5,000,000 Total Loss $15,000,000
Many people think franchises have lower level of quality – just the opposite is true
The Quality Trade-Off ◦ More difficult to control
Higher Caliber
More highly motivated
Longer term
Studies show franchisees outperform Anecdotal evidence
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© 2024 iFranchise Group. All Rights Reserved. Franchisee Selection Documentation & Training – the Tools Support Legal Documents and Compliance QualityControlComesataCost 30
Role as a sales tool
Role as a training tool
Role as a reference tool
Role as in reducing liability
Extension of the legal documents
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TheTableofContentsisaRequiredDisclosureItem 31
Discussions with Key Stakeholders
Review existing material, forms, & documentation
Develop preliminary outline Determine gaps in current documentation
Assign responsibility for content creation
Onsite observation of units & documentation Interview Subject Matter Experts Identify Subject Matter Experts for gaps
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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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)
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Franchise Legislation Within the US 2023
Notes:
• Within Indiana, Michigan and Wisconsin, registration is effective immediately upon the application being filed.
• South Carolina provides an exemption if the franchisor has filed a State trademark registration.
States having no franchise or filing requirements
States having franchise registration requirements
States where franchisors must file to comply with business opportunity laws
• Florida, Nebraska, Kentucky, Utah and Texas require a simple exemption filing. Once that is filed, a franchisor can begin tooffer franchises.
• Connecticut, Maine, South Carolina and North Carolina provide an exemption if the franchisor has obtained a Federal registration of its trademark
• Six States require registration of advertising prior to use. (CA, MD, MN, NY, ND, WA)
• New York, Oklahoma and Rhode Island require the FDD be provided to a prospective franchisee at the earlier of (i) the 1st personal meeting held to discuss the franchise or (ii) 10 business days before any agreements are signed or any monies paid (including fully refundable deposits).
• Michigan and Oregon require the FDD be provided to a prospective franchisee 10 business days before any agreements are signedor any monies paid (including fully refundable deposits).
• Many states also have State Relationship Laws that impact issues such as franchise termination or non-renewal. Your franchise legal counsel can advise you on relevant issues involving these states.
• Check with your franchise legal counsel for additional details and updates which are available. Legend:
CA WA SD ND MN WI IL IN MI NY VA MD RI UT NE TX FL SC NC CT ME KY Hawaii Alaska
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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Start locally, then regionally
◦ Cluster support
◦ More effective franchise advertising
◦ Consumer advertising economies
◦ Brand building
◦ Buying economies
Don’t expand faster than your support capability
◦ Quality control is key
◦ Nothing sells franchises as well as happy and successful franchisees
◦ Three hour drive time
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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
Background
Hot Buttons
Media
◦ Survey Top Franchisees
Characteristics of top performers
Are we selecting the right lead generation strategies?
Is the advertising message appropriate for our targeted franchisee profile?
Are we targeting the right prospects and using the right media based on our development strategy?
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The Franchise Sales Pipeline
Send Marketing Materials, Prequalify, Schedule Meetings
Convert 15% - 20% of Completed CIRFs to
(Franchise Update reported 30.5% in 2023)
Meet With 3 – 10% of Leads Close 65% - 75% of Discovery Days
(Franchise Update reported an
Average 45 – 90 Days
Lead to Meeting Time to close can range from 30-90 days or more following the initial face-toface meeting
Total time to close: often 12-20 weeks
Marketing Cost = $11,638 Average per sale*
Overall Expected Close Rate = 1.82%**
Close Rate for Qualified Leads = 15% (those that meet certain pre-qualifiers)
** Historically, close rates have hovered between 1.8% and 2%, but higher (around 3%) in recent years, but now appears to be leveling off to previous averages, since close rate dropped back to 1.82% this year; average Cost per Lead (CPL) was $155 in the prior year, $197 in 2021, and spiked to over $300 in 2020 due to the pandemic. The numbers above are based on the most recent Franchise Update survey. Average CPL:
* Average cost per sale ranged from about $9,000 to over $12,000 in recent years. While not measured separately in the Franchise Update report, Cost Per Sale numbers can vary for emerging brands, in particular.
Copyright, iFranchise Group, Inc., 2015-2024 All rights reserved. Public Relations Example CPL = $250 Print Advertising Example CPL = $150 Trade Shows Example CPL = $100 Direct Marketing Example CPL = $75 Internet/ Digital Leads Example CPL =$50 - $150
Per Sale = $20K
$35K Initial
Further Qualify Follow-up meetings, assist with business plan & secure financing Award Franchise
$253**
Referrals/ Unsolicited CPL = $0 Brokers Cost
-
Meetings with Candidates
average of 73.3% in 2023)
Sales
Lead Generation Time Varies by Media
Source: Franchise Update.
Average Closing Costs (Media Dollars Per Sale Excluding Broker Fees)
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Source: Franchise Update
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 $7,000 $8,200 $13,000 $8,565 $9,451 $9,142 $6,301 $7,558 $8,571 $8,984 $10,500 $12,138 $9,270 $10,086 $11,639
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
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Franchise marketing is very different from consumer marketing
Franchise marketing is highly regulated
The Five Sales
◦ Go into business for yourself
◦ Buy a franchise
◦ Invest in your industry
◦ Invest in your specific franchise
◦ The timing is right
Be sure to have your attorney and registration states review all materials
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Unique process unlike any sale
◦ Quit your job
◦ No more benefits, paid vacations, 401ks
◦ Put your trust in someone you have never before met
◦ To invest your life’s savings
◦ In a business in which you have no experience
◦ And to which they are making a “lifetime” commitment
And, oh, by the way, I can’t tell you how much you may make
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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
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