Alternatives to Franchising

 Voted #1 Franchise Consulting Firm in North America in an Independent Survey of over 1,000 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 assist 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:

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

 Best Website Finalist (PR News)

 Best Media Relations Campaign Finalist (PR News)

The iFranchise Group provides

a fully integrated approach

to the development and refinement of franchise businesses…

Marketing Assistance Franchise Implementation Services

• Franchise Feasibility

• Competitive Benchmarking

• Franchise Structure

• Territory Analysis and Determination

• Coordination with outside counsel on the developmentof legal documents

• Strategic Implementation Plans

• Financial analysis and fee optimization

• Business Plans for Capital Formation

• 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

• 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

But

the vast majority of our services are directly applicable to nonfranchised channels of distribution…

Strategy

Development

• Feasibility Studies

• Competitive Benchmarking

• Financial Structure

• Territory Analysis and Determination

• Coordination with outside counsel on the developmentof legal documents

• Strategic Implementation Plans

• Financial analysis and fee optimization

• Business Plans for Capital Formation

Quality Control, Documentation & Training Marketing Assistance Implementation Services

• 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

• Channel Partner Marketing Plans

• Primary Research on Targeted Channel Partner Candidates

• Business Op Brochures and other print collateral materials

• Business Op Promotional Videos

• Business Op Ad Design

• Website development

• Website optimization

• Business Op sales and marketing audits

• Biz Op Sales Training

• Implementation Consulting and Coaching

• Biz Op Sales Outsourcing

• PR, SEO, PPC, & Social Media

• Company Audits and Best Practices Benchmarking

• Due Diligence

• Expert Witness and Litigation Support

• Dealer Council Development

• Compliance Audits

• International Expansion

 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”

 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

 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

* 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.

 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

 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

 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

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

Cost to get into franchising can range from $50,000 to $200,000+

Name

System Fee Franchise = Name Fee Trademark License =

System Fee Business Opportunity orLicense = Name System Dealership = Distributor Agency JointVenture SalesRep System Name Fee

Equity +

JointVenture +

Name Fee Trademark License =

Advantages

Less Regulation

- Still a Franchise in NY

Disadvantages

•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 System Fee Business Opportunity orLicense =

•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?

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 Agency or SalesRep = 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.

Joint Venture = Name System

• GeneralPartnerships

• LimitedPartnerships

• 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 reasonable means of expansion, but is perhaps the worst vehicle when more aggressive growth is planned.

Franchise

 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

 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:

 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

 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

 Risk: Someone with a camera and a notepad

 First mover advantage

 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 it 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?

 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