Should You Expand by Franchising? FEW April 2024

 Voted #1 Franchise Consulting Firm in North America in an Independent Survey of over 900 Franchisors for the fifth year in a row

 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, 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 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

 TopFire Media

◦ Nation’s first fully integrated media firm SEO, PPC, Social Media, Blogging, PR, and Website Design and Development

◦ Both brand/consumer focused and franchise lead generation

◦ Recent honors and awards:

iFranchise Group.

 Best new agency (Ragan & PR Daily Ace Awards)

 Best Website Finalist (PR News)

 Best Media Relations Campaign Finalist (PR News)

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 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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 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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 Successful prototype

 Credibility

 Differentiation

 “Sizzle”

 Buyer appeal

 Value Proposition

Sell?

 Affordability

 Profitability

R.O.I.?

 Teachability

 Adaptability

 Systemization

Clone?

 Market trends

 Capital

 Management

Succeed?

TheKeyisCreatinga “Win-Win-Win”Scenario

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 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

iFranchise Group.

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

◦ 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”

 Credibility can be demonstrated in a variety of ways

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

 What makes you BETTER?

 Differentiation can be achieved in a number of ways

◦ 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…

 “Copycat” can work as a strategy if done right

◦ Speed of expansion – need for additional care

◦ “Fortress Strategy”

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Easy“ est” (Service)

Cheap“ est” (Lowest Price)

Black Hole

“ Where undifferentiated concepts go to die”

Big“ est” (Best Assortment)

Quick“ est” (Speed)

Hot“ est” (Fashion)

Source: McMillan|Doolittle

2013-2024

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iFranchise Group.

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The Fortress Strategy

EarlyToMarket

LateToMarket

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 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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 Who will buy your franchise?

 Appeal to a specific buyer

◦ Dentist for a dental franchise

◦ Restaurateur for a restaurant offering

◦ Someone who loves pets

◦ Someone who loves the outdoors

 Advantages of a well-defined buyer

◦ 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

 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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 Teachability

◦ Train in three months or less

◦ McDonald’s has a one year training program

◦ Train the business, not the technical expertise

 Medical franchises

 Real estate

 Complex restaurant operations

 Adaptability

◦ 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

 Operations Manuals

 Formal Training Programs

 Train-the-Trainer Programs

 Training Videos

 Learning Management Systems

 Systemized onsite support

◦ Assistance provided to your franchisees

iFranchise Group.

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 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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© 2013-2024 iFranchise Group. All Rights Reserved. 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 SubtractRoyalties,Fees&PriceAdjustments ($ 30,000) EstimatedFranchiseeProfit(adjusted) $ 80,000 DividedEstimatedProfitbyEstimatedInvestment $80,000/$200,000 Estimated Franchisee Return 40% 20