ShouldYouExpandbyFranchising?
© 2022 iFranchise Group. All Rights Reserved. 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 2 Wearegoingtotrytocoveragreatdealofinformation,soweareaskingthatyouholdyourquestionsuntiltheendofthesessionunlesstheyareonaparticularslide.
Four years in a row voted the #1 Franchise Consulting Firm in North America in an independent survey of over 900 franchisors 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 & 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 provide assistance in several areas simultaneously Breadth across four functional areas ◦ Strategic planning ◦ Quality control ◦ Marketing ◦ Organizational development Franchise experience in 50+ countries Numerous awards and publications 3 © 2022 iFranchise Group. All Rights Reserved.
© 2022 iFranchise Group. All Rights Reserved. Considering franchising your business? Franchising less than one year? Franchising more than one year? Wearehappytosendyouacopyofthispresentation,soyoucanlimityournotetakingifyousodesire. 4
© 2022 iFranchise Group. All Rights Reserved. FTC rule 436 cites three elements that legally define a franchise: 1. The use of a common trademark 2. The exercise of control or provision of assistance 3. 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” 5
© 2022 iFranchise Group. All Rights Reserved. Franchisee typically pays ◦ Franchise fee average about $25,000 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 ◦ Initial training ◦ Operations manual and systems ◦ Ongoing supervision and support ◦ Other support services 6
© 2022 iFranchise Group. All Rights Reserved. What are your goals? BE SPECIFIC! ◦ Certain levels of profits ◦ Sell company for a specific amount What is your risk tolerance? ◦ 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 8 8
© 2022 iFranchise Group. All Rights Reserved. 9 Year 1 Year 2 Year 3 Year 4 Year 5 CapitalStarting $250,000 $200,000 $200,000 $250,000 $300,000 # Opened 1 1 1 1 2 investedCapital ($150,000) ($150,000) ($150,000) ($150,000) ($300,000) New Cash Flow 0 $50,000 $100,000 $150,000 $200,000 Existing Cash Flow $100,000 $100,000 $100,000 $100,000 $100,000 Units – EOY 3 4 5 6 8 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 Terminal Value $450,000 in free cash flow by Year Six = $3,150,000 valuation ONLY IF NO INCREMENTAL OVERHEAD IS NEEDED TO SUPPORT
© 2022 iFranchise Group. All Rights Reserved. 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 Cannot get there from here Alternatives: ◦ 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 10 10
© 2022 iFranchise Group. All Rights Reserved. 11 Year 1 Year 2 Year 3 Year 4 Year 5 CapitalStarting $3,250,000 $1,100,000 $850,000 $1,250,000 $1,500,000 # Opened 15 7 5 8 10 investedCapital ($2,250,000) ($1,050,000) ($750,000) ($1,200,000) ($1,500,000) New Cash Flow 0 $750,000 $1,100,000 $1,350,000 $1,750,000 Existing Cash Flow $100,000 $100,000 $100,000 $100,000 $100,000 Units – EOY 17 24 29 37 47 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
© 2022 iFranchise Group. All Rights Reserved. With an influx of a little over $3 million ◦ 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 Problem: Realistic valuations ◦ 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 12 12
© 2022 iFranchise Group. All Rights Reserved. 14 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
© 2022 iFranchise Group. All Rights Reserved. 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 1515
© 2022 iFranchise Group. All Rights Reserved. 10 15 25 30 50 Year 1 2 3 4 5 Sales 16
© 2022 iFranchise Group. All Rights Reserved. 10 15 25 30 50 Year 1 2 3 4 5 Sales Hire Franchise Salespeople 17
© 2022 iFranchise Group. All Rights Reserved. 10 15 25 30 50 Year 1 2 3 4 5 Sales Hire Field Reps 18
© 2022 iFranchise Group. All Rights Reserved. 10 15 25 30 50 Year 1 2 3 4 5 Sales Hire Support Staff 19
© 2022 iFranchise Group. All Rights Reserved. 10 15 25 30 50OfficeMarketingPersonnelSpace Year 1 2 3 4 5 Sales Brochures Cost to get into franchising can range from $50,000 to $200,000+ 20
© 2022 iFranchise Group. All Rights Reserved. SystemNameFee Franchise= NameFee LicenseTrademark= SystemFee OpportunityBusinessorLicense= SystemName Dealership = SalesAgencyDistributorJointVentureRep System Name Fee 21
© 2022 iFranchise Group. All Rights Reserved. SystemNameFee Franchise Name TrademarkLicense ProductSystem Distributor/Dealer JointVenture + Equity + 22
© 2022 iFranchise Group. All Rights Reserved. NameFee LicenseTrademark= Less Regulation - Still a Franchise in NY •Lower fees •Do you have strong name? •No control over brand Advantages Disadvantages 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. 23
© 2022 iFranchise Group. All Rights Reserved. •Less Regulation? - More at the state level •Lower fees •Do you have strong name? •No control •Create competition •Poor image Advantages Disadvantages SystemFee OpportunityBusinessorLicense= 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? 24
© 2022 iFranchise Group. All Rights Reserved. •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 AdvantagesDistributorshipDealershipDisadvantagesor=SystemName 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. 25
© 2022 iFranchise Group. All Rights Reserved. •Less Regulation •Easier to sell •ABSOLUTELY NO FEES •Support provided for “free” •Must have product /service •Turnover is high •Increased training costs Advantages SalesAgencyDisadvantagesorRep=SystemName A “top-down” flow of revenues will avoid franchise laws. Again, be aware of the creation of an inadvertent franchise. 26
© 2022 iFranchise Group. All Rights Reserved. •Less Regulation •Easier to sell •May make more $ •ABSOLUTELY NO FEES •Negotiated each agreement •Marriage vs. Parent •Majority end in “Divorce” •Fiduciary Duty •Accounting difficulties •••••UnderreportingNoprofit=nodistributionsExitbarriersLiabilityLOSS Advantages Disadvantages VentureJoint=SystemName On a one-off basis, this can be reasonable means of expansion, but is perhaps the worst vehicle when more aggressive growth is planned. • GeneralPartnerships • LimitedPartnerships • Corporations • L.L.C.s 27
© 2022 iFranchise Group. All Rights Reserved. 28 LawsFranchise Opp.Business Laws Relationship Laws DealershipFair Laws LawsRep.Sales LawsSecurities FranchiseNY Law Franchise Federal & 26 States TM License New York Only Business Opportunity 26 States Dealer / Distributor State / Industry Specific Sales Rep / Agent 35 States Joint Venture State and Federal
• Michigan and Oregon require the FDD be provided to a prospective franchisee 10 business days before any agreements are signed or any monies paid (including fully refundable deposits).
WACA NDSD MN WIIL INMI NY AV MD RIUT NETX GAFLSC NC CTMEKYIALA OH OK HN HawaiiAlaska Franchise & Business Opportunity Legislation within the U.S. 2021
• Check with your franchise legal counsel for additional details and updates which are available. States having no franchise or business opportunity laws States having franchise registration laws business opportunity Stateslaws having both franchise registration and business opportunity laws
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Statesonlyhaving
• 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).
Notes:
• Within Indiana, Michigan and Wisconsin, registration is effective immediately upon the application being filed. Oregon regulates franchises but no filing is required there.
• Six States require registration of advertising prior to use. (CA, MD, MN, NY, ND, 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.
Legend:
• 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, South Carolina and North Carolina provide an exemption if the franchisor has obtained a Federal registration of its trademark
© 2022 iFranchise Group. All Rights Reserved. Fractional Franchises (Two years and 20%) Large Investment (Over $1M excluding R/E) Sophisticated Franchisee (Five Yrs. + $5M Net Worth) Minimal Payment (pays/commits less than $500/first 6 mos.) Leased Departments Single Trademark License Exclusion Fall under other regulations (PMPA) Officers and directors of the franchisee (very specific def.) CAUTION: The FTC Exemptions are NOT honored by all states ◦ Patchwork Quilt ◦ Need an attorney to decipher 3030
© 2022 iFranchise Group. All Rights Reserved. Technology-based shared services ◦ Use an app to drive business ◦ Avoid franchising by top down fee structure ◦ Uber, Lyft, Airbnb Certification programs ◦ Certification Mark, not a Trademark TM/SM = Source of Product or Service 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 3131
© 2022 iFranchise Group. All Rights Reserved. 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 32
© 2022 iFranchise Group. All Rights Reserved. 34 Successful prototype Credibility Differentiation “Sizzle” Buyer appeal Value Proposition Affordability Profitability TheKeyisCreatinga “Win-Win-Win” Scenario Clone?Sell? Succeed?R.O.I.? Market trends Capital Management Teachability Adaptability Systemization
© 2022 iFranchise Group. All Rights Reserved. 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 35
© 2022 iFranchise Group. All Rights Reserved. 36 CosttoOpenaNewUnit $ 150,000 Add a Franchise Fee $ 25,000 AddWorkingCapital $ 25,000 Franchisee Estimated Investment $ 200,000 Estimated Franchisee Revenue Year Three $ 500,000 Current Profit afterOwner’sCompensation $ 70,000 AdjustOwner’sCompensation +$ 15,000 One TimeOnly/CapitalInvestment +$ 5,000 Tax Minimization Strategies +$ 5,000 Shared Overhead +$ 5,000 Interest and Debt Service +$ 5,000 DepreciationandAmortization +$ 5,000 EstimatedFranchiseeProfit(adjusted) $ 80,000 DividedEstimatedProfitbyEstimatedInvestment $80,000/$200,000 Estimated Franchisee Return 40% SubtractRoyalties,Fees,&PriceAdjustments ($ 30,000)
© 2022 iFranchise Group. All Rights Reserved. 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 . . . ? 38
© 2022 iFranchise Group. All Rights Reserved. 39 FailureofRisk Speed To CompetitiveMarketthreatModelBusinessRisk
© 2022 iFranchise Group. All Rights Reserved. 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 41
© 2022 iFranchise Group. All Rights Reserved. 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 futureofyourbusinessisatstake. Financial analysis is essential. Reverse engineer your success. 42
be responsible for their failure 43
newer franchisors ◦ So the
simply differentiate
Copying assumes that business economics are the same, support is that a franchisor will themselves established franchisors often have many advantages not shared by Copycat strategy that is taken by many new can actually
new
based on great franchise marketing ◦ But
the same, and
© 2022 iFranchise Group. All Rights Reserved. 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 “Copycat” 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. ◦
franchisors
© 2022 iFranchise Group. All Rights Reserved. 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 to little and often inertia will keep the royalty where it is at for years 44 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
© 2022 iFranchise Group. All Rights Reserved. StakeholdersDiscussionswithKey Review existing material, forms, documentation& preliminaryDevelopoutline Determine gaps in Onsitedocumentationcurrentobservationofunits&documentationSubjectInterviewMatterExpertsIdentify Subject Matter Experts for gaps Draft material to cover identifiedallgaps Edit all material into common style & “voice” Revise first draft of Operations Manual based on client input responsibilityAssign for contentResolvecreationBestPracticesConflicts 45
© 2022 iFranchise Group. All Rights Reserved. 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 laws 46
The Franchise Sales Pipeline 47
© 2022 iFranchise Group. All Rights Reserved. 48 A good concept +The Right +MarketingMessagePlan +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
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 FranchiseFranchiseTrainingStateDisclosureAgreementDocumentRegistrationProcessOperationsManualTrainingProgramsVideos&LMSContentPrimaryResearch/ProfilingFranchiseMarketingPlanDevelop/PrintBrochureMini-BrochureFranchiseSalesVideoWebsiteOptimizationSalesTraining&ManualImplementationStrategyImplementationConsulting OrganizationalFranchiseQualityLegalStrategyDocumentsControlMarketingDevelopmentCoordinationLegal 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 FranchiseFranchisePrimaryStateDisclosureAgreementDocumentRegistrationProcessOperationsManualResearch/ProfilingFranchiseMarketingPlanDevelop/PrintBrochureMini-BrochureWebsiteOptimizationSalesTraining&ManualImplementationStrategyImplementationConsulting CoordinationLegal OrganizationalFranchiseQualityLegalStrategyDocumentsControlMarketingDevelopment
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 MO 11 MO 12 Discovery & Benchmarking Initial Planning Session Strategic Planning Financial Sensitivity Analysis Franchise StateDisclosureAgreementDocumentRegistrationProcessOperationsManual CoordinationLegal 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+.StrategyLegalDocumentsQualityControl
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© 2022 iFranchise Group. All Rights Reserved. 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 55
© 2022 iFranchise Group. All Rights Reserved. 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 56
www.ifranchisegroup.com7089572300 Additional information from iFranchise Group: • Speak to our consultants about specifics • Copy of these slides • “How to Franchise” Video • “How to Franchise” Book • Digital Franchise Marketing Assessment
