Structures and Operational Strategies for Successful Expansion Within the USA
Copyright © iFranchise Group, Inc. 2012-2019
Agenda
Strategy and Growth Legal Issues – Structure & Development Marketing and Sales Legal Issues – Franchise Operations Quality Control and Support → Lots of content → Please interrupt us with questions!
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About the Panel Rick Morey, Partner DLA Piper − Works with both start-up and mature franchise systems − Transactional franchise and M&A − Frequent speaker on franchise legal issues
Barry Falcon, CFE, Senior Advisor iFranchise Group − Former President & Co-Founder, ShelfGenie Franchise Systems − Former CEO, Concrete Craft − Former Owner of Velocity Sports Performance (Franchisee) − Works with emerging brands in many sectors of franchising
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About DLA Piper Franchise Group
With lawyers in cities across the Americas, Asia Pacific, Europe and the Middle East, DLA Piper is proud to represent the International Franchise Association and hundreds of franchise companies in more than 70 business sectors and 100 countries
Representing all types of franchisors in all stages of growth, from start-ups to the largest chains →
Registration/disclosure, refranchising, M&A, financing, supply chain and other transactional matters
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International offices provide support for international development
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Dedicated team of franchise litigators address terminations and other dispute resolution in courts and arbitration around the world
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Support of subject matter experts knowledgeable about franchising
Law Firm of the Year. Recognized by U.S. News World Report as “Law Firm of the Year” in the Franchise Law category in 2016. The firm also received a tier-one category ranking in Atlanta, Chicago and Washington, DC/Northern Virginia.
Chambers Global: The World’s Leading Lawyers for Business. “Clearly the crème de la crème of the franchising world” “This global heavyweight maintains its reputation as an international leader in franchising work”
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About iFranchise Group More hands-on experience than any other firm − 27 consultants with over 500 years of franchise experience − Our consultants have worked with 98 out of the top 200 franchise companies worldwide
More “senior level” experience − Former CEOs, CFOs, and EVPs of 18 major franchise companies − Experience with start-up franchise programs and big franchisors
Breadth across four functional areas − Strategic Planning − Quality Control − Marketing − Organizational Development
The ability to bring more resources − Faster completion − Ability to provide assistance in several areas simultaneously
More data = Better data − 150,000 leads tracked through iFranchise Group clients
Franchise experience in 45 countries Affiliated with TopFire Media (www.topfiremedia.com) 5
The Importance of Strategy
What Is Needed to Franchise?
Solid business model Legal documents and registrations Business plan/strategic direction 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 7
If you don’t know where you are going, then any road will take you there. The Adventures of Alice in Wonderland
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Strategic Planning – The Key to Success 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 future of your business is at stake Financial analysis is essential Reverse engineer your success
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Goal Driven Modeling
Goal
Sell for $10M in 5 Years
Average Selling Price
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
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Goal Driven Planning
Sales
50
30 25 15 10 Year
1
2
3 11
4
5
Goal Driven Planning
Hire Franchise Salespeople 50
Sales
30 25 15 10 Year
1
2
3 12
4
5
Goal Driven Planning Hire Field Reps Sales
50
30 25 15 10 Year
1
2
3 13
4
5
Goal Driven Planning Hire Support Staff Sales
50
30 25 15 10 Year
1
2
3 14
4
5
Goal Driven Planning
Sales
50
Personnel Marketing
30
Office Space Brochures
25
15 10 Year
1
2
3 15
4
5
GAP Analysis and Growth Planning Year One Hires President/CEO Year Two Hires Human Resources
Year Three Hires
General Counsel
Chief Financial Officer
Legal Staff
Accounting Staff
Chief Operating Officer
Director of Training
Director of Purchasing
Director of Marketing
Purchasing Staff
Marketing Staff
General Manager Operations
Director of Franchising
Franchise Sales
HQ Support Staff
Field Support Region 1
Field Support Region 2
Field Support Region 3
Field Support Region 4
Franchisee & Company Operations
Franchisee & Company Operations
Franchisee & Company Operations
Franchisee & Company Operations
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Director of Real Estate & Construction
Compliance
Site Selection
Design & Construction
Present Value of A Franchisee Important concept to understand when measuring hiring decisions, advertising and marketing related expenditures – Present Value of a Franchise (PVOF) Should use this principle in decision-making Compensation structures of many organizations are based on current EBIT type calculations, which does not properly account for the revenue and growth factor provided by incremental franchise sales PVOF = Net Present Value of franchise fees, royalties, product/ equipment sales, advertising fees, and other revenue, less any direct expenses, discounted to today’s dollars based on the average anticipated life of a franchise. In other words, the lifetime value of a franchise. Just one example
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The Hidden Costs of Underperformance Franchise Sales Cost = (Lost Sales x PVOF) – (Present Value of Incremental Salary + Recruiting Costs) Average Sales for an Experienced Franchise Salesperson at Maturity Experienced Franchise Salesperson
Lost Franchise Sales
Inexperienced Franchise Salesperson Time 18
The Benefits of Top Performance
Franchise Sales Superstar
Incremental Franchise Sales Average Sales for Experienced Franchise Salesperson at Maturity
Franchise Sales
Experienced Franchise Salesperson
Inexperienced Franchise Salesperson Time 19
Legal Issues – Structure & Development
Legal Issues – Structure & Development Franchise v. License Structure
Federal and state laws
Definition of a franchise → association with trademark → significant control or assistance/marketing plan → required payment/franchise fee
Dangers of hidden/springing franchise
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Legal Issues – Structure & Development Franchise Company Setup
Trademark protection
Typically form new entity → segregate liabilities → financial statements
Separate trademark holding company?
Watch for parent providing post-sale services
Operations manual
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Legal Issues – Structure & Development Types/Structures for Development
Single-unit franchise agreement
Development rights agreement
Development agent agreement
Master franchise agreement
Joint venture/management arrangement
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Legal Issues – Structure & Development Franchise Agreement Issues
Understand target franchisee → small, mom & pop operator → investor who will find operator → multi-brand, multi-unit developer
Territorial rights
Economics
Distribution channels
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Legal Issues – Structure & Development Franchise Agreement Issues
Supplier restrictions/rebates
Non-compete
Personal participation
Website/e-commerce
Training
Advertising → fund, co-op, local → marketing spending requirement
Term/renewal
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Legal Issues – Structure & Development Franchise Sales Compliance
Franchise Disclosure Document → sales tool vs. legal protection → 14 days before binding agreement/consideration
State registration/disclosure laws → register before offer or sale → process
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Legal Issues – Structure & Development Franchise Sales Compliance
Financial performance representations → expresses or implies specific level or range of sales, income or profit → must be in FDD → business plan review risk
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Legal Issues – Structure & Development Consequences of Non-compliance
Rescission
Damages and attorneys’ fees
Settlements/losses in FDD for 10 years
Administrative fines/slow registration
Bargaining chip in dispute
M&A/financing impact
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Marketing and Sales
Marketing Planning
A Requisite for Rapid Growth
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 30
Marketing Materials Essential for Speed
Franchise marketing is very different from consumer marketing Franchise marketing is highly regulated Tools: − Your web page should be your first concern − Develop a mini-brochure for the sake of economy − A full-sized brochure is essential for credibility − E-brochures and other recent tools
Be sure to have your attorney and registration states review all materials
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Marketing Effectiveness Different franchises requires 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 Public Relations Example CPL = $250
Print Advertising Example CPL = $150
Trade Shows Example CPL = $100
Direct Mail Example CPL = $75
Internet/ Digital Leads Example CPL =$25 - $75
Brokers Cost Per Sale =$15K - $25K
Referrals/ Unsolicited CPL = $0
Lead Generation Time Varies by Media
Average CPL: $113
Send Marketing Materials, Prequalify, Schedule Meetings
Meet With 3 – 10% of Leads
Convert 15% - 20% of Completed CIRFs to Sales
Close 65% - 75% of Discovery Days
Initial Meetings with Candidates Further Qualify Follow-up meetings, assist with business plan & secure financing Award Franchise 33
Average 45 – 90 Days Lead to Meeting Time to close can range from 30-90 days or more following the initial faceto-face meeting Total time to close: often 12-20 weeks Average Marketing Cost = $8,571 per sale Overall Expected Close Rate = 1.8%
Average Franchisee Recruitment Budget (in Thousands of Dollars) $225 208.6 198
$200
197
202.5
201.8 181.5
186.8
175
$175
165 153
166.7
162
162.8
152.8
$150 $125 $100 $75 $50 $25 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Franchise Update 34
Franchisor Marketing Dollars by Media Percentage of Total Expenditures: 2010 - 2019
60%
Almost 60% of Franchise Lead Spend is Focused on Digital Media
50%
40%
30%
20%
10%
0% Internet/ Digital
Franchise Website
Social Media
2010
2011
Direct Mail
2012
2013
Trade Show
2014
2015
Source: Franchise Update
35
Public Relations
2016
In Market Meetings
2017
2018
TV/Radio
2019
Other
Source of New Franchisees
Percentage of Total Franchises Signed: 2010 - 2018 50%
40%
30%
20%
10%
0% Internet Digital
Referrals
2010
2011
Brokers
2012
2013
2014
Other
2015
Source: Franchise Update 36
2016
2017
Trade Shows 2018
Public Relations
Must Have Integrated Marketing Strategy Referrals are best, but finite PR is “more finite” for some than others Print ads should be combined with online options Trade shows vary in effectiveness Direct contact / Direct mail works only when highly targeted Internet is cool zone; will generate the most leads −Many prospects will use Internet exclusively −Need to “wade through” these leads
Mix / budget vary based on: −Targeted franchisee −Cost / the franchise opportunity −Aggressiveness of goals 37
Brokers as a Form of Lead Generation How brokers work − Generally refer candidates to 3-6 franchisors − Don’t care which one the candidate buys − Represent 100+ franchisors
The good news − Obtain pre-qualified candidate − Third party validation − Broker feedback − Pay only for success
The bad news − Require work to stay “top of mind” − Look for best sales teams, commissions, hottest − Liability for broker actions − Fees average about $20,000 − Often won’t work with emerging concepts 38
Working with Brokers Key: finding incremental candidates Becoming increasingly more important −Level of professionalism and scrutiny has increased −In 2000, 11% of new units came through brokers −Today it is 30%+ −60% of all franchisors use brokers −93% have made at least 1 placement
Do not replace internal sales force or FSO
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SEO, PPC, Public Relations, & Social Media
Breakdown of Expenditures on the Internet (2016-2019) 70%
60%
50%
40%
30%
20%
10%
0% Franchise Opportunity Sites
Other Business Media
PPC
SEO
Email Marketing
2016
2017
Social Remarketing/ Networking Target Trailing
2018
2019
Source: Franchise Update 41
Social Media Advertising
Digital Asset Creative
Sponsored Content/ Native Advertising
Breakdown: Source of New Franchisees From the Internet (2009 – 2018) 50%
40%
30%
20%
10%
0% Online Portals
SEO
PPC
2009
2010
Social Media 2011
2012
Unknown
2013
2014
Other
2015
Source: Franchise Update 42
2016
Remarketing
2017
2018
Email Marketing
Sponsored Content/ Native Advertising
The Importance of Website Optimization 50% of searchers will go no further than one page 75% of searchers will go no further than two pages 90% of searchers will go no further than three pages
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Web Optimization – The Need for Measurement Website effectiveness −Alexa rankings or other third party tools −Google Analytics −Internal website statistics
Web marketing demands new statistics −Visitor counts −Bounce rates −Conversion rates −And others…
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Factors Influencing Website Search Engine Positioning NOTE: SEO factors continually change as search engines adjust algorithms. Still Important: Responsiveness – Your site should display properly on desktop and mobile platforms Keywords – Each search engine ranks websites based on an optimum keyword usage Link Maximization – Many search engines will rank sites by the number and relevance of inbound links Page Design – In order to encourage visitors to spend more time on your website, it is important that each page is optimized in terms of user experience
Less important: Graphics Optimization – Photos and other images loaded onto the site should be evaluated in terms of their size, compression rate and image quality Page Titles and Anchor Text – Title and anchor text for each page should be optimized with appropriate keywords META Descriptions – The descriptions that search engines use to rank and describe the site META Keywords – Keywords used to determine what search terms are generating traffic
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Pay-Per-Click Advertising In addition to site optimization, most franchisors should seriously consider Pay-for-Performance Advertising These services charge you on “cost-per-click” basis In addition to manual and expedited search engines submissions to, franchisors should also initiate paid keyword advertising campaigns with: − Google − Bing (includes Yahoo, MSN)
Social media platforms (Facebook, LinkedIn) also offer pay-per-click and other paid advertising options
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The Pay-Per-Click Advertising Conundrum
A company with a large PPC budget can still get out-positioned by smaller competitors with lower budgets Budget = $300
Bid of $10.00 per click at 50 clicks per day = $500 per day Budget = $500
Bid of $15.00 per click at 20 clicks per day = $300 per day
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The Pay-Per-Click Advertising Conundrum
Bid of $20.00 per click at 50 clicks per day = $1,000 per day
Budget = $500 Budget = $300 But you can run out of ad dollars at the end of the day
Bid of $15.00 per click at 20 clicks per day = $300 per day
Allowing the competitor with the lowest budget to gain top positioning for half a day at 1/5 the cost Budget = $100
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Increasing Capture Rates Visits to your site will not increase franchise sales unless you get the prospect’s information Don’t give too much information Have multiple capture mechanisms Make them an offer they cannot refuse −Free video or free information or other offer −Make sure the offer has value (information vs. commercial) −The offer should only be provided in “exchange” for information
Track capture rates and work to improve them
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Dealing with Internet Leads The good news is the bad news − High percentage of leads from the web − But these leads also bring with them some close rates in the 1% range − How do you handle all these leads without increasing sales staff
We do not advocate substituting internet autoresponders for live lead calls or other personal connections − Too easy to delete the email − Lack of a personal touch – lack of interest? − Users want to engage on the platform they are most comfortable using (website, social media, mobile) – make use of live chat functions, messaging, texting, etc. in addition to phone calls
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The Franchise Sales Process
The Sales Process is Predictable IT IS A PROCESS!! The hardest (& most important) job in franchising Be selective −Don’t grow too fast −First 10 can be the easiest
The qualification process Develop a strategy – not a pitch Measure everything
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The Franchise Sales Cycle Concept & Value Proposition Offer/Structure
Validation
Sales Communication Marketing Plan
How fast can I grow? Support
How fast should I grow?
Message & Materials
Opening Assistance
Quality Control
Advertising Expenditures Training
Sales Process
Selectivity
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Recommended Flow of the Sales Process
Lead Received and Qualified
Full or Mini Brochure Sent to Candidate
Completed CIRF Received
Personal Interview Scheduled
Credit/Criminal Checks Completed
Personal Interview and DISCLOSURE of FDD
Review of Candidate’s CIRF
Reference Checks
Discovery Day Follow-up Discussion with Candidate
Decision is Made on Candidate’s Approval
PRELIMINARY Approval is Granted
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Franchise or Site Selection Agreement is Signed
Variations on the Sales Process
Publicity
Trade Shows
Direct Mail
Internet
Lead
Assist On-Line with Pre-Meeting Financing, Qualification Business Disclosure Site Plan Processes Selection, Etc. Site Visits Application or Market First Seminars Face-to-Face/Discovery Day Brokers
Disclose on Discovery Day Close At “Decision Day” CloseClose Thereafter
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Referral
Marketing and Sales Audit Process Sales Factor
Franchise Concept Itself
Potential Problems • • • • • •
High unit investment Financial performance Look and feel Franchise structure Value proposition Franchisee validation
Symptoms
Diagnosis
• • • • •
Bad/No P.R. Low unsolicited inquiries Losing sales to competitors Repeat objections not overcome Prospects go dark after validation
• • • • • • • • •
Evaluate design/construction model Comparative financial analysis Evaluate unit economics/ops Contract comparison Marketing comparison Phone interviews of franchisees Franchisee satisfaction surveys (web) Evaluate real estate portfolio Survey “lost” sales Historical vs. norms Media specific analysis Performance vs. competitors Message vs. competitors Franchisee or competitor surveys
Franchise Lead Generation
• • • • • •
Media Selection Media Mix Message Ad Spend Target Audience Timing
• • • • •
High lead costs Low close rates Message confusion Few qualified prospects Low quality lead sources predominate
• • • • •
Franchise Marketing Materials
• • • • • •
Target Audience Materials Used Message Inadequate differentiation Design Quality Production Quality
• • • • • •
Bad/No P.R. Low unsolicited inquiries Losing sales to competitors Repeat objections not overcome Lose sales to market leader Low application rate
• Review for best practices • Message based on surveys • Application rate vs. norms
• • • • • • •
Lead handling Follow up Effective Process Sales Skills Salesperson Motivation Sales Tools Staffing vs. Goals
• • • • • • •
Low application rate Low discovery day rate Low close rate Long “time to close” Variances in salesperson close rates Un- or under-worked leads Few broker leads
• • • • • • • •
Sales Process & Technique
Historical vs. norms (close, speed, etc.) Salesperson vs. salesperson Historical vs. past performance Develop sales process map Mystery shop sales force Leads per salesman Sales per salesman Broker validation calls
Problem Resolution – Phase Two Sales Factor
Franchise Concept Itself
Confirmed Problem • • • • • • •
Unit investment Financial performance Look and feel Franchise structure Value proposition Franchisee validation Real estate model
Potential Solutions • • • • • • • •
Value engineer design and construction process Suspend sales and work on business model, support, franchisee training Retain design firm, consumer marketing firm, or PR firm as appropriate Revise franchise business structure Provide incremental value or reposition concept Communications plan, FAC, address survey-specific concerns Improve real estate process Develop third-party financing programs
Franchise Lead Generation
• • • • • •
Media Selection Media Mix Message Ad Spend Target Audience Timing
• • • • • •
Develop formal marketing plan based on survey results Alter marketing mix to focus on higher-quality lead sources Alter message based on survey results Increase advertising expenditure based on goals Optimize website and PPC campaigns Develop and measure benchmarks; rotate bottom 10% quarterly
Franchise Marketing Materials
• • • • • •
Target Audience Materials Used Message Inadequate differentiation Design Quality Production Quality
• • • • •
Rewrite, redesign, and reprint materials as appropriate Develop or revise standard sales correspondence Rewrite and redesign web pages as appropriate Add technology improvements (auto-responders, sales software, etc.) Develop additional promotional tools (video, etc.)
• • • • • • •
Lead handling Follow up Effective Process Sales Skills Salesperson motivation Sales Tools Staffing v. Goals
• • • • • • • •
Develop and map effective sales process Train sales staff and provide guidelines to non-sales staff Replace poor sales personnel Benchmark and measure performance Alter compensation Evaluate external resource opportunities (FSO, LQS, software solutions) Add sales professionals, support staff, or both Proactive broker programs
Sales Process & Technique
Trends in Franchise Sales Franchise Sales Outsourcing Lead Qualification Outsourcing −Sort the wheat from the chaff −Often charge on a pay-per-lead basis −Allows focus on best leads
Alternative is to bring this in-house −If this is the strategy, be sure that the team assigned is well trained and qualified
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Legal Issues – Franchise Operations
Legal Issues – Franchise Operations Negotiating with Franchisees
Depends on size/experience of both franchisor and franchisee
Territory versus right of first offer
Fees
Expect others to know
60
Legal Issues – Franchise Operations Standards Enforcement
Allow variations among franchisees? → can’t take them back → harmful to brand? → will others copy? → clear documentation
Quality assurance audits/objectivity → levels of concern → compliant franchisees want action
61
Legal Issues – Franchise Operations Standards Enforcement – Joint Employer
Concerns decreased, not eliminated
State law enforcement
Private plaintiffs
Only standards critical to brand → review operations manual → employee guidance clearly optional → training
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Legal Issues – Franchise Operations Franchisee – Franchisee Disputes
Watch out for structures where you are “traffic cop” for system
Giving up territory or customers challenging
63
Legal Issues – Franchise Operations Franchisee Associations and FACs
Differences
Form one before one forms?
Can be great benefit to system → solicit input and get buy-in → uncover problems early
Varied representation to be effective
64
Legal Issues – Franchise Operations Remodels/System Changes
Look to contract first
Perfect change before roll-out → test with franchises? → input from system
Adopt in company-owned outlets
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Legal Issues – Franchise Operations Remodels/System Changes
Voluntary to prove effectiveness?
Demonstrate results
Negotiate financing options
Franchisor contribution/royalty relief?
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Legal Issues – Franchise Operations Relationship Laws/Termination
Termination is last resort
Slow escalation process
Watch out for “boy who cried wolf”
Fair approach, non-discriminatory
67
Legal Issues – Franchise Operations Relationship Laws/Termination
Check for registration/disclosure compliance
Check franchise agreement
Watch for relationship laws
Default letter/logical structure
Follow through
68
Quality Control Breeds Long Term Success
69
Operations Manuals Five roles of the Operations Manual −Sales −Training −Reference −Quality Control & Best Practices −Liability Prevention
Is your Operations Manual state-of-the-art? −Inaccurate or incomplete information – negligence −Inadvertent triggers of “agency law”
70
Other Quality Control Tools Faster growth requires formal training programs −For your staff −For franchisees
Train-the-Trainer too −Franchisee will train their staff −Should have tools to do so
Video pushes QC to lowest level of organization Online training increases QC and can decrease liability −Customized by employee −Document what is reviewed and test scores −Lowers on-site training time and costs for both the franchisor and the franchisee 71
Quality Control Starts at Home Adapt your organization to franchising −Train all employees on sales and documentation −Train all on franchisee interaction and documentation −Differences between franchisees and employees −“Million Dollar Phone Call”
Attitude – “those darn franchisees” Don’t expect standards that you yourself will not follow
72
Developing a Best-in-Class Support System 73
Your Business Structure Impacts Your Ability to Support Franchisees Effectively Do the types of franchises we’re selling encourage optimum unitlevel performances? Do the fees we charge cover our costs in all areas? Are there provisions in our franchise agreement that we don’t execute against or enforce? Is our franchise agreement up to date in terms of planning for future technology in our business? Do our reporting requirements give us the data we need to adequately benchmark performance in our system? Is our business structure flexible enough where it needs to be? How accessible are we to our franchisees? How well have we developed critical mass within individual markets?
74
Focus Within a Franchise Support Program
Compliance 20%
80% Helping franchisees increase revenues and profits
75
Focus of Support May Vary Based on the Types of Franchisees You Have
Single Unit Franchisee
Multi-Unit Franchisee
Financial statement basics
Detailed business planning
Expense controls
Financial benchmarking
Best practice sharing
Planning for capital spending
Sales training
Technology development
How to manage a family business effectively
Multi-unit management training Assistance with finance or lease programs
Strategies for local store marketing
Input on key strategy issues impacting the brand
Hiring good employees Managing employees 76
Building Blocks for Supporting Franchisees Nine Primary Areas of Support Third-Party Supplier Support Communications and Technology Brand and Local Marketing Field Consulting Supply Chain Ongoing Training Pre-Opening Training Construction Real Estate Not relevant to some service businesses
77
Real Estate Support
Basic building blocks: Experience from existing company-owned or franchised locations Detailed/documented site criteria specific to your unit model Defined process the franchisee and you will work through together Strong internal process for review and acceptance of individual sites Appropriate lease inclusions Process for reviewing the final lease
78
Real Estate Support
Limiting your liability: Document your requirements and process the franchisee must follow Ensure the franchisee conducts and documents their own due diligence Approving versus accepting the franchisee’s site Ensure the franchisee retains a qualified real estate attorney Review each lease to ensure your lease requirements have been met prior to execution
79
Real Estate Support
Typical lease issues of concern to the franchisor: Lease term and renewal options Total occupancy costs as a percentage of anticipated revenues Landlord construction allowances Use clause Exclusivity provisions for specific products or services Ability to display the franchisor’s trademarks Radius restrictions Right to assign the lease 80
Facility Design
Basic building blocks: Knowledge of your minimum space requirements Ability to design around your criteria for franchisee ROI Detailed design documentation for each type of unit Thorough process for working with outside designers and architects Process for final approval of architectural drawings
81
Facility Design
Questions to ask: What input should franchisees be given into design decisions? Should the franchisee use their own architect? If we require the franchisee use our architect, should they have more than one to select from?
82
Construction Process
Adding value as the franchisor: Provide a standard bid form and ensure franchisees use it Track bids Negotiate pricing on standard construction items with key suppliers Map out the construction process for the franchisee and their contractor Make site visits at appropriate points during construction Find the right balance between cost and durability/image Track and benchmark final construction costs Develop the final punch list while the contractor is still on-site
83
Pre-Opening Training Process Making the process more effective: Always ensure the majority franchisee owner attends training Ensure your facilities will allow for an effective training experience Explain the training process to trainees before they arrive Incorporate home study materials prior to training Involve multiple staff members from your organization in the training process Mix classroom, unit, and field training Involve suppliers in the training process, where possible Mix franchisees and trainees from company units Continually evaluate, test, and provide feedback 84
Pre-Opening Training Process
On-site training at the franchisee’s location: Start with detailed agendas for training Soft openings versus grand openings Ensure the franchisee has met minimum staffing levels before you travel to their location Involve both your training team and your field representative Lessen the amount of hands-on training each day the unit is open Provide a written summary of the on-site training experience
85
Ongoing Training Process
Be sure your requirements are adequately documented within the FDD and Franchise Agreement Focus training on the key positions within the operation Maintain records of training certifications at each location Support the franchisee’s role as trainer Field consultants as a training resource The use of regional training events Remedial training for under-performing franchisees Reward franchisees that invest in training 86
Supply Chain Often a weak link in smaller franchise systems How involved should the franchisor be? At what levels should the franchisor become involved? Involving franchisees in the supply chain process Auditing supplier performance Internal versus external expertise
Manufacturer
Distributor
87
Franchisee
Supply Chain Key points of most major supplier contracts: Term of the supply agreement Ordering procedures/lead times Delivery guidelines (frequency, days, and times) Minimum drop size Vendor stocking requirements for any proprietary items Credit terms offered to franchisees Pricing structure (e.g., distribution margin versus cost-per-case Ability of the vendor to increase pricing during the term of the contract Ability for the franchisees to receive price decreases during the term Transportation charges Process for missing or damaged items 88
Field Support Process Primary decisions to be made: Qualifications for the field support position Compensation structure Where should reps be located? Ratio of reps to units Frequency of visits Routing efficiency Agendas for each visit Business planning tools Use of third-party mystery shops or quality assurance resources 89
Prerequisites for the Quality Field Support Some level of standardization for franchisee accounting practices and income statement generation Requirement that franchisees generate monthly financial statements Technology available to capture and analyze income and expense information for the system Field support staff who are capable as business consultants and trained in the franchisor’s process The respect of your franchisees to provide value through the business planning process Defined expectations and responsibilities for both franchisees and the franchisor company 90
Business Planning with Your Franchisees Key steps in the planning process: 1.
Create and continually refine the planning process with the input of your franchisees
2.
Communicate the final process both internally and to your franchisees
3.
Schedule an in-depth meeting with each franchisee to develop their plan for the coming year
4.
Meet with franchisees at least quarterly to review process to the plan and actions needed to address problem areas
5.
Provide benchmarking data to franchisees throughout the year, allowing them to measure their own progress against the system as a whole
91
Business Planning with Your Franchisees The planning process will vary based on the needs of each franchise system. In general, however, a franchisee’s plan will focus on areas such as: Marketing
Operations Management
Human Resources
Facilities
Budget
Revenue Goals
Staff Levels
Maintenance
Local Marketing
Cost of Goods
Co-op Planning
Operating Expenses
Training & Development
Support of Systemwide Initiates
Overall Profitability
Compensation Plan
Construction & Trade Dress Updates
Capital Expenditures
Turnover Targets
Cash Budget
New Staff Hires
Tracking Marketing Performance
New Equipment Technology & Software Facility Lease Review
Operations Quality Customer Feedback
92
Marketing Support
Initial launch marketing activities Local marketing processes Co-op marketing programs System marketing fund
93
Communications and Technology
Phone
Field Visits
Newsletter
Training
Conference Calls Communication Strategy
Blog Social Media
Secure Web Portal
Webinar Convention
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Advisory Council
Third-Party Supplier Support Opportunities Depending on the size and needs of your system, outsourcing support in areas such as the following may be worth considering: Marketing
Quality assurance
Public relations Site selection
Insurance compliance administration
Facility design
Franchisee web portal
Construction management
Other information technology
Benchmarking
Franchisee training
Accounting
Convention/meeting management Printing
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Third-Party Supplier Support Opportunities www.franchise.org
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Involve Franchisees in the Development of Your Support Programs They’ll provide input on what priorities your support program should focus on As your system grows, franchisees will provide many of the best-practices your support program should incorporate Franchisee involvement will dramatically increase acceptance and adoption rates of new initiatives you introduce Franchisees can help beta-test new programs Encourages a philosophy of doing things with them, not to them 97
Developing a Top Performing Organization “How to perform as a team� 98
Adequacy of Your Organizational Structure Six key areas of evaluation: 1.
Does your reporting structure align the right responsibilities?
2.
Do your senior managers have a workable number of people reporting to them?
3.
Are responsibilities in the organization clearly defined?
4.
If you have company-owned operations, are they structured properly within your organization?
5.
Does the organizational structure “fit� your leadership style as an owner?
6.
Has your organizational structure evolved over time to fit the growing needs of your business?
Staff Capabilities
Young Franchisor
Established Franchisor
Hiring often limited by cash flow
Goal should be to have a staff highly experienced in franchising
Often little or no prior franchise experience on the management team
Experience from multiple franchise systems is desired
Managers hold a wide range of responsibilities
The initial management team hired needs to be hands-on
Founders need to focus on developing strong relationships with the initial group of franchisees
Focus needs to be on the transition from founders to managers
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Staffing Ratios for the Franchisor The right staffing ratios for your company will depend on a variety of factors including: The type of industry in which you operate The complexity of your unit-level operations The speed at which your system is expanding The geography over which you’re expanding The types of franchises you are awarding Your philosophy toward support
Typical Staffing Ratios Franchise development staff Single unit focus = 1 for each 12-18 deals Multi-unit focus = 1 for each 5-8 deals Field support staff Single unit restaurant = 1 for each 20-25 units Multi-unit restaurant = 1 for each 10-15 owner groups Territory-based service system = 1 for each 30-35 owner territories Field marketing staff 1 for each 50 to 100 units/territories Overall staff to franchised locations (within a mature organization) 1 staff equivalent for each 7-11 locations
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Staff Morale and Group Dynamics
Good franchisors develop a loyal and happy staff by: −Leading by example within the office −Educating their staff on franchising −Setting clear responsibilities, goals, and objectives −Giving staff the resources they need −Allowing staff to do their job −Communicating and interacting with staff regularly 103
Maximizing Your Franchisee Relationships
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Franchisee Profitability
“The secret to our success is to make sure the franchisees make a little more money each year.” Ray Kroc McDonald’s Founder
Benchmarking franchisee profitability requires access to reliable and consistent information. Key measures include: Net operating income Net income before owner’s compensation Sales to invest ration in the first year Overall return on investment after financing costs 105
Franchisee Relationships
Strong Relationships Yield
Weak Relationships Yield
More committed operators who will follow-through on your vision
An inability to move the system forward A disproportionate amount of staff time dealing with unhappy franchisees
Better customer experiences across your system Improved franchise sales as a result of great references being provided
Greater cost of litigation or arbitration A far less efficient franchise sales program
Less litigation/arbitration An enhanced ability to introduce changes into your system
Lower morale for your staff
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Franchisee Relationships Common elements in systems having strong franchisee relationships: A strong corporate culture A system leader who is respected Profitable franchisees Highly active franchisee advisory council program Strong and capable field support staff
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Establishing an Advisory Council Structure Typical Approach to Councils Council members elected by their peers Council consists of 8-12 franchisees Council meets with franchisor between 2-4 times per year
Problems with the Above Approach Requires a small group of franchisees to properly represent the entire franchise system Often challenging for the council to obtain input from other franchisees in the system Lack of transparency to the system Encourages negative franchisees to sit on the sidelines and ignore council-supported initiatives 108
Alternative Approach to the Council Process Regional Advisory Councils
National Presidents’ Council
Multiple regions
Presidents of each regional council
Elected officers in each region
Focus on higher-level strategic issues
All franchisees attend meetings Minutes taken by franchisor and made unavailable to all franchisees in the system 109
10 Common Mistakes in Supporting Franchisees 1.
Lack of capital to provide adequate support, particularly in the early years of franchising
2.
Hiring support staff that is under-qualified or given insufficient training and direction
3.
Lack of operational experience by the franchisor
4.
Failure to build the support program around the issues that are most important to franchisees
5.
Failure to involve franchisees in key decisions
6.
Failure to develop an effective change implementation process
7.
The belief that technology can replace human contact
8.
Failure by the franchisor to measure the results of its support efforts
9.
Negative attitudes toward franchisees
10. Fear of losing control with franchisees 110
Ongoing Strategic Planning “How are we doing?”
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The Need for Constant Monitoring
Strategic Planning
Best Practices Audit
Process should be completed annually
Should be completed every 3-5 years
Focuses on corporate vision, strategies, and tactics
Both an internal and external focus
Primary focus is internal External focus concentrates on competitive threats
External focus looks at your value proposition compared to your competitors
Entire company should be involved in the process
Internal focus on efficiency and results of tactics employed
Tied to your development and support budget
Measures the overall value proposition of your company as a franchisor 112
Your customers audit your system every day. Periodic audits of your franchise program will help ensure the essential building blocks are in place for your franchisees to deliver on your promises to them‌
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