Structures and operational strategies

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

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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

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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.

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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

Print

2011

Direct Mail

2012

2013

Trade Show

2014

2015

Source: Franchise Update

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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

Print

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

Print

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

62

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

65

Legal Issues – Franchise Operations Remodels/System Changes 

Voluntary to prove effectiveness?



Demonstrate results



Negotiate financing options



Franchisor contribution/royalty relief?

66

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

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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

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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

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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

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Marketing Support

 Initial launch marketing activities  Local marketing processes  Co-op marketing programs  System marketing fund

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Communications and Technology

Phone

Field Visits

Newsletter

Training

Conference Calls Communication Strategy

Blog Social Media

Secure Web Portal

E-mail

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�

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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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