Should You Expand by Franchising?

Should You Expand by Franchising?

 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

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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

 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)

 Considering franchising your business?

 Franchising less than one year?

 Franchising more than one year?

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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”

 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.

 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

orLicense

Distributor

SalesRep

 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

Credibility

Differentiation

“Sizzle”

Buyer appeal

Value Proposition

 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

 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 . . . ?

 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

 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.

 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

 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

 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

 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

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

 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

 State regulations

◦ 14 registration states

◦ Regulate advertising

◦ Business opportunity states

◦ Determining applicability (even definitions vary – NY)

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:

 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

 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

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?

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.

Average Closing Costs (Media Dollars Per Sale Excluding Broker Fees)

 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

 Franchise marketing is very different from consumer marketing

 Franchise marketing is highly regulated

 The Five Sales

◦ Go into business for yourself

◦ Buy a franchise

◦ Invest in your industry

◦ Invest in your specific franchise

◦ The timing is right

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

 Unique process unlike any sale

◦ Quit your job

◦ No more benefits, paid vacations, 401ks

◦ Put your trust in someone you have never before met

◦ To invest your life’s savings

◦ In a business in which you have no experience

◦ And to which they are making a “lifetime” commitment

 And, oh, by the way, I can’t tell you how much you may make

A good concept

+The Right Message +Marketing Plan

+Adequate marketing budget +Good sales technique = leads = meetings = franchise sales

Some studies have indicated the average new franchisor will sell:

 An average of 9, 11, and 13 franchises in their first three years

 Median sales of 4, 5, and 6 sales in their first three years

The Franchise Success Cycle

 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”

Lead Received, Input and Qualified

Electronic or Print Brochure Sent to Candidate

Confidential Questionnaire (CQ) Received Review CQ – Financial Qualification

Personal Interview

Scheduled – Concept Review Call

FDD Sent to Client for Review and FDD Review Call Scheduled

Background, Criminal, and Reference Checks

FDD Review Call, Unit Economics Call Scheduled

Unit Economics Call

Held, Support Call Scheduled

Support Call Held –

Territory Call Scheduled

Territory Call Held Finance Call Scheduled

Finance Call Held

Discovery Day Invitation Made

Discovery Day Held at Franchisor’s HQ

Decision is Made on Candidate’s Approval

PRELIMINARY

Approval is Granted

Franchise or Site Selection Agreement Signed

 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

Franchise Program for Aggressive Growth

Approximate Development Activity Schedule

Benchmarking

Initial Planning Session

Strategic Planning & Gap Analysis

Financial SensitivityAnalysis

Disclosure Document

Franchise Agreement

State Registration Process

Operations Manual & Revisions

Training Program

Train-the-Trainer

Training Videos

SkyManual Online Operations Manual

Research / Profiling/ Brief

Franchise Marketing Plan

E-Brochure

Mini-Brochure

WebsiteDevelopment

Franchise Sales Video Script

Franchise Sales Visual Aids

Franchise Sales Training & Manual

Franchise Implementation Strategy

Field Consulting Manual

Implementation Consulting

Legal

Coordination

Strategy

Legal Documents

Quality Control

Franchise Marketing

Sales & Implementation

The iFranchise Group does not provide legal services but instead works through outside legal counsel

Franchise Program for Moderate Growth Approximate

Development Activity Schedule

Benchmarking

Initial Planning Session

Strategic Planning & Gap Analysis

Financial SensitivityAnalysis

Disclosure Document

Franchise Agreement

State Registration Process

Operations Manual & Revisions

Research / Profiling/ Brief

Franchise Marketing Plan

E-Brochure

Mini-Brochure

WebsiteDevelopment

Franchise Sales Training & Manual

Franchise Implementation Strategy

Implementation Consulting

Legal to sell in 36 non-registration states

Strategy

Legal Documents

Quality Control

Franchise Marketing

Sales & Implementation

Withregistration, legal to sell in all states

Franchise Program for Conservative Growth

Approximate Development Activity Schedule

Benchmarking

Initial Planning Session

Strategic Planning & Gap Analysis

Financial SensitivityAnalysis

Disclosure Document

Franchise Agreement

State Registration Process

Operations Manual & Revisions

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+.

 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: $20,000 to $200,000

◦ Organizational expenses: $10,000 to $20,000

◦ Franchise Marketing: $8k - $12k per sale (six months)

◦ Personnel: varies widely

 Can bootstrap growth

 Can spend hundreds of thousands

 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