Should you Expand by Franchising? by iFranchise Group

Should You Expand by Franchising?

About iFranchiseGroup

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 different franchise companies

 Adecco, Armstrong Tile, Auntie Anne’s, Capriotti’s, Dunkin Donuts, LINE-X, McAlister’s Deli, Pearle Vision, McDonald’s, PIP Printing, RE/MAX, 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

Six years in a row, voted the #1 Franchise Consulting Firm in North America in an independent survey of over 1,100 franchisors Numerous Awards and Publications

About TopFireMedia

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-On 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

What Is Franchising?

• FTC rule 436 cites three elements that legally define a franchise:

 The use of a common trademark

 The exercise of control or provision of assistance

 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”

Franchise vs. Company-Owned

Pros

• Leverage Capital

• Speed of Growth

• Motivated management

• Reduced risk

• Few operational concerns

• Higher quality

• Organizational leverage

• Must “share profits” Cons

 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

Analyzing the Company Growth Option

What are your goals? BE SPECIFIC!

• Certain levels of profits

• Sell company for a specific amount

Conduct

Cash

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?

Flow Analysis to See if You Can Reach Your Goals

• 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

Analyzing the Equity Alternative

How Franchising Works

Franchisee typically pays

• Franchise fee average about $25,000 to $35,000

• Royalty range between 4% and10%

• Advertising fees range between 1% and 2%

• Franchisor will often sell product to the franchisee

Franchisor typically provides

• Trademark and branding

• Initial training

• Operations manual and systems

• Ongoing supervision and support

• Other support services

Alternatives to Franchising

Franchisability

Proven

Credibility Differentiation

Need for a Profitable Prototype

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

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

5. “I saw the angel in the marble and carved until I set him free.” --Michelangelo

Credibility

Prospects will not buy unless you make them believethey 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 fee 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.

Differentiation

Why buy from “the new kid on the block” if there is a bigger and better-established 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”

Black Hole “Where undifferentiated concepts go to die”

Source: McMillan|Doolittle

The Fortress Strategy

EarlyToMarket

LateToMarket

• 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 several 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

Buyer Appeal and Value Proposition

Who will buy your franchise?

Appeal to a specific buyer

• Dentist for a dental franchise

• Restaurant for a restaurant offering

Advantages of a well-defined buyer

• Don’t have to compete for franchisees in the “general franchise marketplace”

Create a strong value proposition

• Someone who loves pets

• Someone who loves the outdoors

• Branding and brand advertising

 Two unites are better than one

 Your brand may be stronger than you think

• Operations Manual and Training

• Can focus on the emotions that your buyer will have

• Purchasing power

• Information technology

• Research and development (recipes, products, services, etc.)

• Assistance provided to your franchisees

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 On-site Support

• Assistance provided to your franchisees

R.O.I. “Hurdle Rates”

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

• Customized by employee

• Document what is reviewed and test scores

• Lowers on-site training time and costs for both the franchisor and the franchisee

• 15% for Owner Operators

• 20% for Area Developers (who will support additional overhead) Occasional exceptions

Determining R.O.I. –Simplified Analysis

Does my business have what it takes to succeed as a franchise?

What Is Needed to Franchise?

Capital Requirements to Franchise

Consulting and legal costs vary based on franchise company’s situation

• Desired speed of growth influences services needed

• Ability to work internally

Do not go into franchising undercapitalized

• Legal fees: $15,000 to $35,000+

• Consulting and Development: $40,000 to $250,000

• Organizational expenses: $10,000 to $25,000

• Franchise Marketing: $8,000 to $10,000 per sale (six months)

• Personnel: varies widely:

 Can bootstrap growth

 Can spend hundreds of thousands

Strategic

Franchise Program for Aggressive Growth

Approximate Development Activity Schedule

Choosing the Right Growth “Vehicle”

The decision should be goal-driven

• Distance

• Speed

• Obstacles

• Risk tolerance Key to franchise success is to help your franchisees succeed! You don’t have to choose only one vehicle!

Don’t decide to franchise!

Instead, decide:

• Do I need 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 neverdictate your good business decisions