Alternatives to Franchising
About iFranchise Group
Introduction
More hands-on experience than any other firm
• Consultants with over 900 years of franchise experience
• 98 out of the top 200 franchise companies
• Offices in Chicago, Dallas, Atlanta, Miami, and Dubai
More “senior level” experience
• Hands-on experience at start-up and established franchisors
• Former CEOs, CFOs, EVPs of more than 50 franchise companies
• Adecco, Armstrong Tile, Auntie Anne’s, Dunkin’, LINE-X, McAllister’s Deli, Pearle Vision, McDonald’s, PIP Printing, RE/MAS, Snap-on Tools, and other national brands
The ability to bring more resources
• Hands-on experience at start-up and established franchisors
Breadth across four functional areas
• Strategic planning
• Quality control
• Marketing
• Organizational development
Franchise experience in 50+ countries
Numerous Awards and Publications
Six years in a row, voted the #1 Franchise Consulting Firm in North America in an independent survey of over 1,100 franchisors
About TopFire Media
A premier fully-integrated public relations and digital media agency specializing in franchised businesses
• Public Relations
• Search Engine Marketing
• Content Marketing
• Social Media Publishing
• Pay-Per-Click Advertising
• Website Design & Development
Proprietary AI driven “Look-Alike” model that drives leads at less than half the national average CPL
Team with Hands-One 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)
About FranDevCo
A premier franchise development and sales organization
Helps emerging brands realize their full potential
Placed over 1,100 units with more than 600 franchises
Beyond sales, serves as an outsourced development partner with a consultative process
Support brands across diverse sectors
• Residential and Commercial Services
• Automotive
• Quick-service Restaurants
• Fitness
• Health and Wellness
• Beauty
• Pet
• Youth Enrichment
• And More
Recent honors and awards:
• Top Supplier Award from Entrepreneur
• Employee Satisfaction Award from Franchise Business Review
The iFranchise Group provides a fully integrated approach to the development and refinement of franchise businesses…
• Franchise Feasibility
• Competitive Benchmarking
• Franchise Structure
• Territory Analysis and Determination
• Coordination with outside counsel on the development of legal documents
• Strategic Implementation Plans
• Financial analysis and fee optimization
• Business Plans for Capital Formation Franchise Strategy Development
• Operations Manuals
• Systems and Forms
• Quality Control Procedures
• Training Programs and Training Aids
• Training Videos and other Intranet training applications
• Operational audits and best practices
• Learning Management Systems Quality Control, Documentation & Training
• Franchise Marketing Plans
• Primary Research on Targeted Franchisee Candidates
• Franchise Brochures and other print collateral materials
• Franchise Promotional Videos
• Franchise Ad Design
• Website development
• Website optimization
• Franchise sales and marketing audits Franchise Marketing Assistance
• Franchise Sales Training
• Implementation Consulting and Coaching
• Franchise Sales Outsourcing
• PR, SEO, PPC, & Social Media
• Company Audits and Best Practices Benchmarking
• Due Diligence
• Expert Witness and Litigation Support
• Franchisee Council Development
• Compliance Audits
• International Expansion Franchise Implementation Services
But most of our services are directly applicable to non-franchised channels of distribution…
• Franchise Feasibility
• Competitive Benchmarking
• Franchise Structure
• Territory Analysis and Determination
• Coordination with outside counsel on the development of legal documents
• Strategic Implementation Plans
• Financial analysis and fee optimization
• Business Plans for Capital Formation Franchise Strategy Development
• Operations Manuals
• Systems and Forms
• Quality Control Procedures
• Training Programs and Training Aids
• Training Videos and other Intranet training applications
• Operational audits and best practices
• Learning Management Systems Quality Control, Documentation & Training
Franchise Marketing Assistance
• Franchise Marketing Plans
• Primary Research on Targeted Franchisee Candidates
• Franchise Brochures and other print collateral materials
• Franchise Promotional Videos
• Franchise Ad Design
• Website development
• Website optimization
• Franchise sales and marketing audits
• Franchise Sales Training
• Implementation Consulting and Coaching
• Franchise Sales Outsourcing
• PR, SEO, PPC, & Social Media
• Company Audits and Best Practices Benchmarking
• Due Diligence
• Expert Witness and Litigation Support
• Franchisee Council Development
• Compliance Audits
• International Expansion Franchise Implementation Services
Definition of Franchising
What is Franchising?
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”
How Franchising Works
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
Franchising vs. Company-Owned Growth
Pros
Leverage Capital
Speed of Growth
Motivated management
Reduced risk
Few operational concerns
Higher quality
Organizational leverage
Cons
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
The Litigation Trade-Off:
Franchising vs. Company-Owned Growth
* Not responsible for acts of an independent contractor (franchisee) relative to third parties. Exceptions are when a) you create an agency and/or b) if you are negligent.
Analyzing the Company Growth Option
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
Raising Equity as an Alternative
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 give up 50% of the company, you need to grow twice as big
• Run the numbers again
Analyzing the Equity Alternative
Equity Raise Considerations
With an influx of a little over $3 million
• Can jump-start growth and leverage off 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
Franchising as an Alternative to Company Growth
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
Goal Driven Planning
Goal Driven Planning
Third-Party Distribution Strategies
Alternatives to Franchising
Name
System Fee Franchise = Name Fee Trademark License =
System Fee Business Opportunity or License = Name System Dealership = Distributor Agency Joint Venture Sales Rep System Name Fee
Can Combine Options Too
Name System Fee Franchise
Joint Venture + Equity +
Name Trademark License
Product
System Distributor/ Dealer
Advantages & Disadvantages of
Alternatives
Name Fee Trademark License =
Advantages Disadvantages
Less Regulation
- Still a Franchise in NY
•Lower fees
•Do you have strong name?
•No control over brand
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.
Advantages & Disadvantages of Alternatives
System Fee Business Opportunity or License =
Advantages Disadvantages
•Less Regulation?
- More at the state level
•Lower fees
•Do you have strong name?
•No control
•Create competition
•Poor image
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?
Advantages & Disadvantages of Alternatives
Dealership or Distributorship = Name System
Advantages Disadvantages
•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
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.
Advantages & Disadvantages of
Alternatives
Advantages Disadvantages Agency or Sales Rep = Name System
•Less Regulation
•Easier to sell
•ABSOLUTELY NO FEES
•Support provided for “free”
•Must have product /service
•Turnover is high
•Increased training costs
A “top-down” flow of revenues will avoid franchise laws.
Again, be aware of the creation of an inadvertent franchise.
Advantages & Disadvantages of Alternatives
Joint Venture = Name System
• General Partnerships
• Limited Partnerships
• Corporations
• L.L.C.s
Advantages Disadvantages
•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
•Underreporting
•No profit = no distributions
•Exit barriers
•Liability
•LOSS
On a one-off basis, this can be a reasonable means of expansion but is perhaps the worst vehicle when more aggressive growth is planned.
Franchise
The Non-Franchise Franchise:
The Uneven World of Exemptions
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
Developing Your Strategy
Choosing the Right Growth “Vehicle”
The decision should be goal driven
• Distance
• Speed
• Obstacles
• Risk tolerance
Don’t have to choose only one vehicle
Don’t decide to franchise (or whatever)
• Instead, decide:
o Do I want to build a third-party distribution channel?
o Do I want that channel to be branded?
o If it is branded, do I want to control quality?
o How do I want to be paid?
The law (or your lawyer) should never dictate your good business decisions
When is the “right” time to expand?
Perfecting the business
• If you think you have perfected your business, SELL IT!
• McDonald’s in 1955
Quick vs. Slick
• More unique, the sooner you should expand
o Risk: Someone with a camera and a notepad
o First mover advantage
o Who was the first . . . ?
• If you are going head-to-head with more established competition and your business model is not highly differentiated – be sure to refine first
What is right for YOU?
• What are your goals?
• What are your constraints?
• What is happening in the market?
• Do you have something unique?
Additional Information for Making a Decision
• Determine if your business is, in fact, franchisable (or if it can be expanded through any third-party distribution)
• Determine if third-party distribution channels are the best means of expanding your business
• Gain an understanding of what is involved in franchising, licensing, etc.
• Understand various cost options (and combinations of options) and how they can be adjusted to meet your growth goals
• Please consider our Analysts to be resources to you
If you would like a free copy of my book “Franchise Your Business” or a 90-minute educational video on the process of franchising, please email us at info@ifranchisegroup.com and mention that you received the offer here.
www.ifranchisegroup.com
