SlideShare a Scribd company logo
1 of 59
Download to read offline
Strategic Advice
        & Guidance
        Based on Real World Experience

                     Elements of Successful Franchising
Copyright 2009 MSA                                    1




   What is franchising




                        Franchising is
              simply a method of expansion and
                          distribution



Copyright 2009 MSA
                                                      2
Company’s use franchising

          To Achieve:

              Rapid Expansion

              Brand Recognition

              Consistency in the
              delivery of Brand Promise


Copyright 2009 MSA
                                                     3




   A franchise is a form of a license


          Grants to franchisee the right to
             use marks

          Establishes Brand Standards

          Based on a financial relationship
             between the franchisor and franchisee


Copyright 2009 MSA
                                                     4
Franchising in the economy

          Over 100 different industries
          Over 900,000 US locations
          Over 4% of U.S. private-sector economy
          Indirectly over 11% of private-sector economy
          Over 8% of all private sector jobs
          Indirectly over 12% of private sector jobs
          Employs more people than durable goods
          manufacturing, financial activities and
          construction

Copyright 2009 MSA
                                                                 5




   Franchising statistics (US)


             Estimated 1,500 different franchisors from
             more than 120 industry sub-sets
             Over 900,000 establishments – franchisors
             and franchisees
             11 Million jobs – 8.1% of all private sector jobs
             3.3% of all small businesses




Copyright 2009 MSA
                                                                 6
Franchising statistics (US)


             Over $880 billion (4.4%) of total U.S. private
             sector economy – direct impact
             Over $2.3 trillion (11.4%) of private sector
             economy – direct and indirect impact
             Franchised establishments grew by 18.5%
             during the period 2001 through 2005




Copyright 2009 MSA
                                                              7




   Two types of franchises



          Product distribution franchising

          Business format franchising




Copyright 2009 MSA
                                                              8
Product distribution franchising



          Products are typically made by the franchisor for
          sale by franchisee

          Products usually require some preparation and
          post sale service.



Copyright 2009 MSA
                                                              9




   Product distribution franchising



          Strong identification with brand

          Soft drinks, beer, bottling, automobiles and
          trucks, mobile homes, auto accessories,
          gasoline, farm equipment etc.




Copyright 2009 MSA
                                                              10
Business format franchising

          The system of delivery is more important in
          business format franchise than in a product
          distribution franchise

                 Restaurants, hospitality, automotive
                 aftermarket, travel, consumer products and
                 services



Copyright 2009 MSA
                                                              11




   The franchise relationship


          Based on a contract between the franchisor and
          the franchisee

          Detailed in the Franchise Disclosure Document,
          agreements, other licenses and operating
          manuals



Copyright 2009 MSA
                                                              12
The franchise relationship

          Partners
           There is no fiduciary relationship between a
           franchisor and a franchisee
           Franchisors generally work closely with their
           franchisees so there is often a feeling of a
           partnering relationship
           The franchisor and the franchisee have their
           roles in the relationship and they are
           interdependent of each other

Copyright 2009 MSA
                                                           13




   The franchise relationship

          Parent and Child
           It sometimes feels that way
             Early guidance, training and support
           But - franchisees are not children
             Franchisees are independent business
             people responsible for the day-to-day
             operation of their business
             Franchising is a contractual relationship


Copyright 2009 MSA
                                                           14
The franchise relationship


          Dictator
           For true entrepreneurs, the restrictions of
           being a franchisee can be overwhelming
           Franchisees need to be “entrepreneur lite”
           Franchisees voluntarily agree to follow a
           system but are responsible for the day-to-day
           operation of their business



Copyright 2009 MSA
                                                           15




                     Ownership Structures Used in
                             Franchising




Copyright 2009 MSA
                                                           16
Single unit franchisee


          One location owned and operated by one
          franchisee under single unit agreement
          Location generally supervised by franchisee
          In their own right, franchisee is not a significant
          economic force
          Historically the most common relationship -
          Mom and Pop franchising


Copyright 2009 MSA
                                                                17




   Single unit franchisee

          Weaknesses
           Slower growth for system
           More franchisees to work with
           Franchisee may be less sophisticated
           Financial condition of franchisee may cause
           less risk taking
           Tends to increase cost of managing and
           servicing system


Copyright 2009 MSA
                                                                18
Single unit franchisee

                              Franchisor




                        Single Unit Franchisee


Copyright 2009 MSA
                                                            19




   Developer/multi-unit franchisee


              Multiple locations owned by one franchisee.
              Generally each location has a single unit
              agreement.
              Developer generally has the right and the
              obligation to develop locations
               Fixed Number of units
               Set time for development
               Typically in a defined area


Copyright 2009 MSA
                                                            20
Developer/multi-unit franchisee

           Can have significant advantages - if done right
            Lower per location cost of acquisition
            Better controlled growth in markets
            Fewer franchisees to work with
            Franchisees are usually more sophisticated
            Franchisees financial condition are generally
            stronger – able to make business decisions
            Can reduce cost to support each location


Copyright 2009 MSA
                                                              21




   Developer/multi-unit franchisee

                                   Franchisor




                     Development     Developer Owned Single
                      Agreement          Unit Franchises

Copyright 2009 MSA
                                                              22
Master franchisee


          Master franchisee is granted the right and
          obligation to seek sub-franchisees
             Fixed number of units
             Set time for development
             Typically in a defined area
          Master franchisee typically required to own and
          operates at least one location



Copyright 2009 MSA
                                                             23




   Master franchisee

          Typically collect royalties and fees
          Fees are generally split between franchisor and
          master franchisee
          Typically provides services to “sub-franchisees”
            Training
            Site selection
            Field support, etc.
          Has fallen into some disfavor domestically
          Is still frequently used internationally

Copyright 2009 MSA
                                                             24
Master franchisee
                                  Franchisor
         Master Franchise
           Agreement

                            Master Franchisee



                     Single of Multi-Unit “Sub” Franchises
Copyright 2009 MSA
                                                             25




   Area representative

          Provides franchise sales and support based on
          a commission structure
          Fees typically are split between franchisor and
          area representative
          Area representative may be responsible for
            Site development
            Opening and continuing assistance
            Training and other local management duties
          Area Representative typically owns a franchises

Copyright 2009 MSA
                                                             26
Area representative
                                      Franchisor
                         Area
                                                     Single or
                     Representative
                                                     Multi-Unit
                      Agreement
                                                    Agreements

                          Area Representative
                        Solicits and supports franchisees
        No Contractual
         Relationship


                      Single or Multi-Unit Franchises
Copyright 2009 MSA
                                                                  27




   Conversion or experienced

          Nonaffiliated operator converts to franchisor’s
          brand
          Terms of relationship may differ from greenfield
          franchises:
            Fees
            Training
            Location
          Conversion often not complete – initially
          Can create some difficulties in consistency


Copyright 2009 MSA
                                                                  28
Conversion or experienced

          Benefits for franchisee by converting:
           Improved brand identity and protection against
           competitors
           Economies of scale – purchases

          Benefits for franchisor:
           Useful in consolidating market
           Useful in real-estate constrained market
           National accounts servicing

Copyright 2009 MSA
                                                               29




   Non-traditional/mass gathering
          Franchisee may be a company that holds the
          rights to mass gathering locations
          May have terms that are different than traditional
          franchise offered to other franchisees
          Types of mass gathering locations
            Airports, train stations, hospitals, college
            campuses, convenience stores, sports
            stadiums, ballparks, food courts, portable
            kiosks in parks, etc
          Traffic generated by high traffic locations with
          captured audience

Copyright 2009 MSA
                                                               30
Dual branding


          Two or more franchise concepts operate in one
          location
          Reasons for using
            May utilize labor more efficiently
            May improve return on real estate
            May expand a location’s day part
            Allows for shared common space


Copyright 2009 MSA
                                                          31




   Retrofranchising

          Company owned locations sold to franchisees
          Popular reorganization and expansion strategy
           Useful in reshuffling inventory of owned
           operations
           Can be used to incentivize critical mass by
           franchisee
          Franchisor obtains capital from the sale
           Proceeds used for debt reduction or other
           uses

Copyright 2009 MSA
                                                          32
Retrofranchising


          Eliminate local operations and personnel
          Reduces field management, home office
          administration and finance
          Continues existing distribution system
          Passive revenue (franchise fee, royalty, etc.)
          Not to be confused with churning




Copyright 2009 MSA
                                                           33




   Alternative distribution strategies


          Company owned operations
          Joint ventures
          Cooperatives
          Licensing
            Distributorships/Dealerships
          Telemarketing



Copyright 2009 MSA
                                                           34
Strategic Advice
        & Guidance
        Based on Real World Experience

                             Why do companies franchise
Copyright 2009 MSA                                          35




   Advantages for franchisors

          Control
           The franchisor does not control the day-to-day
           management of the franchisee’s location
           Franchisor sets brand standards
            Products and services
            Consumer brand management/promise
            Marketing
            Less than company owned operations -
            generally greater than independent dealers

Copyright 2009 MSA
                                                            36
Advantages for franchisors


          Unit investment and operating costs are
          transferred to franchisee
            Accelerates expansion
            No contingent liability on expansion capital
            No contingent liability on real estate
            No equity dilution



Copyright 2009 MSA
                                                           37




   Advantages for franchisors

          Market penetration
           Increased brand recognition as locations open
           Enables penetration of smaller markets
           Accelerates market dominance over local
           competitors
           Improves location availability from landlords
           As system expands value of brand, at the
           franchisor and franchisee level increases


Copyright 2009 MSA
                                                           38
Advantages for franchisors


          Collective buying power
           Reduces costs for products, equipment, etc
           because of system purchasing capacity
           Shared resources
             Warehouses, production and distribution
           Brand marketing though system marketing
           fund


Copyright 2009 MSA
                                                              39




   Advantages for franchisors

          Franchisee manages the day-to-day activities of
          their local business to system standards
          Franchisee responsible to execute to brand
          standards
          Franchisee manages labor, etc.
          Reduces company per unit cost of support
          Franchisees harder to unionize
          Franchisee liable for local operations –
          substantially reduces risk of vicarious liability

Copyright 2009 MSA
                                                              40
Advantages for franchisors


          Franchisee motivated to succeed
           Long term view of customer service
           Motivated to work longer hours
           Able to react quicker to local opportunities
          Knowledgeable about local markets
          Source of new product and service ideas
          Franchisee at risk for unit performance


Copyright 2009 MSA
                                                           41




   Advantages for franchisors

          Revenue
           Franchise fee upon signing agreement
           Development fee from multi-unit developers
           Continuing royalties typically based on gross
           sales
           Contributes to advertising and marketing
           Additional revenue opportunities
           Reduced costs because of purchasing power
           Franchisor does not share directly in unit
           losses

Copyright 2009 MSA
                                                           42
Advantages for franchisees


          Tested system of operations
          Brand standard product and services
          Franchisor’s brand (if established)
          Site selection and development assistance
          Training
          Headquarters and field support
          Support from other franchisees


Copyright 2009 MSA
                                                          43




   Advantages for franchisees


          Reduced start up costs
          Reduced costs of goods
          Marketing assistance
          National accounts
          As part of system better able to compete with
          local and national competitors
          May provide exit strategy


Copyright 2009 MSA
                                                          44
Disadvantages for franchisor

          Cost of franchise system development
           Professional fees
             Consulting
             Legal
             Accounting
           Registration and filing fees
           Preparation of financial performance
           representation
           Enterprise costs - staff and overhead
           Franchisee recruitment

Copyright 2009 MSA
                                                            45




   Disadvantages for franchisor
          Control
           Franchisees are independent business owners
           executing a licensed system
           Franchisees are responsible for day-to-day
           management of their business
           Inability/limitations on setting pricing
           Reduces location selection flexibility
           Changes in business direction may be limited
           due to agreements with franchisees
           Authority over system is limited to rights and
           obligations included in franchise agreement

Copyright 2009 MSA
                                                            46
Disadvantages for franchisor

          Maintaining good franchisee relations
           Time consuming
           Often politicized
           Diminishes management independence
          Substandard franchisee performance
          Long term relationship – contractual terms
          Difficulty in terminating relationship
          Potential litigation


Copyright 2009 MSA
                                                              47




   Disadvantages for franchisor

          Fees
           Generally can’t be changed during the term
           Can be dependent on
            Competition
            Anticipated and realistic growth projection for
            system
            Cost of services offered to franchisees
            Return on investment for franchisee and
            franchisor

Copyright 2009 MSA
                                                              48
Disadvantages for franchisees
          Loss of independence – localization of business
          Over-dependence on franchisor
          Performance of other franchisees
          Unrealistic expectations
          Territorial restrictions
          Risk of termination
          Restrictions on transfers to buyers
          Ability to continue and terms of successor
          agreements
          Continuing costs of being in system

Copyright 2009 MSA
                                                            49




        Strategic Advice
        & Guidance
        Based on Real World Experience

                          Threshold Analysis - Feasibility
Copyright 2009 MSA                                          50
Franchisability




                      Every business can be franchised, but

                     Not every business should be franchised




Copyright 2009 MSA
                                                               51




   Prototype


                        Having a great idea is not enough

          The franchisor should have profitably operated
                   the business being franchised

           Better yet, they should have done it more than
                                 once


Copyright 2009 MSA
                                                               52
Prototype

          The business should be able to define
            Criteria for locations
            Location layout – interior decor, exterior
            design, signage, etc
            Construction and development costs
            Seasonality and competition
            Brand personality
            Marketing
            Pricing strategy and operating costs
            Training
            Supply chain, etc, etc, etc, etc, etc, etc, etc.

Copyright 2009 MSA
                                                               53




   Profitable prototype


          The business - even after franchise fees and
          debt service is profitable in a reasonable period
          of time
          The business can breakeven and become cash
          positive in a reasonable period of time
          Return on investment will be acceptable for
          each class of franchise being offered



Copyright 2009 MSA
                                                               54
Proven product or service


          The business is based on a well-established
          consumer demand
          The business can distinguish itself from the
          competition.
          The business has a high return customer base
          The company has ownership of its trade and
          service marks
          Recognizable brand


Copyright 2009 MSA
                                                         55




   Proven product or service

          Types of businesses that generally lend
          themselves to franchising
            sale at retail of goods and services
            restaurants (most)
            margins that allow for fees and leave
            adequate return on investment
            lower regulations
            stable market
            low technology


Copyright 2009 MSA
                                                         56
Operating systems

          The business:
            Is based on an organized concept
            Can be systematized and codified in manuals
            and training programs
            Is simple to operate
            Can be consistently executed
            Has been in operation for a sufficient time to
            project its future
            If in a fragmented industry is a plus

Copyright 2009 MSA
                                                             57




   Desire to expand rapidly


          The company has:
            Realistic expansion goals
            Can financially support growth and operations
            through break even
            Has sufficient management band-width
            Can support locations in multiple markets?



Copyright 2009 MSA
                                                             58
Teachable


          Franchisees:
            Can be taught to manage the business in a
            reasonable period of time
            Will be able to manage the day-to-day
            operation of the business to brand standards
            after training
            Will be able to recruit sufficient staff with the
            education and skills required


Copyright 2009 MSA
                                                                59




   Return on investment

          The cash investment is reasonable and
          affordable for the franchisee profile
          The investment is financeable
          Does not have serious cash flow deficiencies or
          cash calls that create barriers
          Will meet the ROI goals of the anticipated
          classes of franchisees



Copyright 2009 MSA
                                                                60
Franchisor operations


          The franchisor can provide
            Training
            Headquarters and field support
            Competent advice to franchisees
            Product and service enhancements
            Evolve the business to meet competition over
            time



Copyright 2009 MSA
                                                           61




   Marketable

          Someone - besides Mom and Dad – has
          requested a franchise
          There is sufficient number of potential
          franchisees
             That meet the profile
             Who have the capital
             Who are likely to invest in the franchise
          The concept will support fees necessary to
          provide required franchisor services


Copyright 2009 MSA
                                                           62
Strategic Advice
        & Guidance
        Based on Real World Experience
                      Development Of A Franchise Program

Copyright 2009 MSA                                         63




   The five realities



               One: Every company that desires to expand
                by franchising should not necessarily
                become a franchisor.




Copyright 2009 MSA
                                                           64
The five realities




               Two: Each company is unique, and fungible
                development or legal strategies rarely work




Copyright 2009 MSA
                                                              65




   The five realities



               Three: Franchising is governed by laws and
                regulations, but it is first a method of
                conducting business.




Copyright 2009 MSA
                                                              66
The five realities




               Four: Business decisions should direct the
                structure and relationships of the franchise
                system.




Copyright 2009 MSA
                                                                67




   The five realities



               Five: The legal documents need to be well
                drafted and clearly convey the
                determinations made in developing the
                business system within the rules, regulations
                and case law governing franchising.




Copyright 2009 MSA
                                                                68
Strategic design components

            Operational
            Training
            Marketing
            Financial
            Legal

                     Each element of a franchise system is
                          interdependent on each other


Copyright 2009 MSA
                                                             69




   The initial steps


          Franchisability
          Review of potential alternative expansion
          strategies
          Advantages and disadvantages for franchisor
          and franchisee
          Availability of human and financial resources
          Assemblage of required outside professionals



Copyright 2009 MSA
                                                             70
Industry analysis and background



          Every franchisor has two levels of competition
            For the end-user consumer
            For the potential franchisees




Copyright 2009 MSA
                                                           71




   The franchisor’s operations


          Understand the existing operations
          Determine how the franchisee is supposed to
          operate
          Determine the support programs
          andorganization needed to meet these
          requirements



Copyright 2009 MSA
                                                           72
Typical franchisor support




Copyright 2009 MSA                                          73




   System operational requirements


          Define the services provided to franchisees
          Define the procedures to provide these services
          Define the initial personnel requirements
          Determine when additional staff is required
          Define the relationship and obligations of the
          franchisor and franchisee – by class



Copyright 2009 MSA
                                                                 74
Compliance and Monitoring

          Ensures locations operate to brand standards
          Supports franchisee to improve performance
          Examines marketability of products and services
          Reviews financial and other reporting
          The type and depth of compliance and
          monitoring depends on:
            the amount of control required/desired
            the areas which need to be controlled
            the rights and obligations of the franchisee to
            manage the day-to-day affairs of franchise

Copyright 2009 MSA
                                                              75




   Compliance and Monitoring

          Areas of monitoring may include:
             Site approval development
             Financial performance
             Operational standards
             Product and service quality
             Supply chain
             Marketing and advertising
             Pricing strategies


Copyright 2009 MSA
                                                              76
Compliance and Monitoring
          Areas of compliance and monitoring will not
          include
              Human resources including pay scale, hiring
              and firing policies, benefits, etc.
              Selection of outside contractors including but
              not limited to tradesman, lawyers,
              accountants, etc.
              Banking and finance
              Other areas of the franchisee’s day-to-day
              management responsibilities for their
              business

Copyright 2009 MSA
                                                               77




   Field Support

          Field support should be organized and visits
          should be structured
          Field staff should be experienced, trained,
          disciplined and supported
          Field staff should
             Ensure system compliance
             Consult to improve unit performance.
             Promote a sense of unity and belonging and
             demonstrate brand culture throughout system


Copyright 2009 MSA
                                                               78
Manuals


          The policies and procedures manual is the
          blueprint of the system - defining its shape and
          structure
          It is a tool for marketing a franchise
          It should be complete and graphically appealing
          It should be understandable by each reader
          It is frequently electronic and searchable


Copyright 2009 MSA
                                                             79




   Manuals

          The manual should
            Segment the operations of the business into
            an organized, logical set of guidelines and
            procedures
            Reflect the franchisor’s culture
            Reflect the requirements of the legal
            documents
            Be an element of the training program
            Support the necessary monitoring
            mechanisms

Copyright 2009 MSA
                                                             80
Manuals

          A manual library for a franchisor and its
          franchisees can be printed or online and include:
             Unit operations manual
          Real estate selection and development
          Start-up
          Marketing and advertising
          Field services
          Headquarters
          Multi-unit operators, Area representatives,
          Master franchisee, among others

Copyright 2009 MSA
                                                              81




   Training

          Your franchisees, headquarters and field staff
          must be prepared to meet the challenge of
          operating within the system
          Define the scope and curriculum for the
          system's training programs
            Headquarters and field support organization
            Franchisee, management and staff initial and
            continual training
            Multi-unit and Master franchisee operations
            Company owned operations

Copyright 2009 MSA
                                                              82
Training

          Appropriate for each level of personnel
          Determine approach including length, location
          and instructors
          Identify and train to the skills, abilities, and
          knowledge required for the personnel
          Determine training methods: classroom, web-
          based, OJT, video/DVD, blended
          Develop testing and requirements for passing


Copyright 2009 MSA
                                                              83




   Franchise development

          Prescribe and prioritize the expansion goals
          Identify the profiles of franchisees
          Define the markets, critical mass and mix of
          strategies appropriate for the system
          Determine the franchisee recruitment and
          selection process
          Evaluation the use of a retrofranchising strategy
          Define territorial rights, if any, to be granted


Copyright 2009 MSA
                                                              84
The franchisee profile


          Serves as a set of guidelines to select
          candidates most suitable for the franchise
          Is the foundation for the development of the
          franchisee recruitment and selection program
          Determines where and how you need to market
          your franchise
          Determines the budget you need to meet your
          growth requirements


Copyright 2009 MSA
                                                          85




   Search/Screen/Approval/Close
         Search: Appropriate sources for recruiting
         franchisees that best fit profile
         Screen: Methodology for evaluating
         franchisees (financial, personal, etc.)
         Approval: Procedures for approving franchisees
         - initial assessments, deposit agreements,
         verification procedures, committee approval
         procedures, etc.
         Close: Administrative, compliance and signing
         procedures.

Copyright 2009 MSA
                                                          86
Market analysis and strategy

          Analysis of the franchise relative to the
          competition
            Positioning of the concept against the
            competition
            Determination of the most effective means of
            market entry given the profile of your
                 franchisee, real estate requirements, concept,
                 etc.


Copyright 2009 MSA
                                                                  87




   Positioning
          Strengths and weakness of products and
          service at the retail level
          Capabilities of system to deliver brand
          personality to consumers
          Operating environment including management
          and labor availability
          Financial resources of franchisees
          Other elements i.e. real estate, etc.

      Positioning gives you a basis to build your growth
                           approach
Copyright 2009 MSA
                                                                  88
Market entry


          Review the strengths and weaknesses of the
          alternative methods of expansion available
          Determine the best mix of strategies for the
          company and by market if appropriate
          Segment markets into the targeted mix – i.e.
          company – franchised – mass gathering
          Prioritize according to overall strategy



Copyright 2009 MSA
                                                             89




   Financial Modeling

          Necessary to
             Project start up costs and capital required
             Determine break even, cash flow, return on
             investment
             Establish fees – franchise fee, royalty, ala-
             carte charges, multi-unit fee structure,
             advertising, etc.
          Should be done for franchisor and each class of
          franchisee


Copyright 2009 MSA
                                                             90
Financial Modeling

          Unit economics
          Franchisor economics
          Projected rate of growth for the franchise system
          Projected rate of growth for company-owned
          system
          “Cost out" of each material operational, training,
          legal and marketing obligation included in legal
          documents
          Define what needs to be measured and reported
          Assess and determine exit strategies

Copyright 2009 MSA
                                                               91




   Business overlay



          Necessary to build strategic plan and document
          in manuals, training programs, marketing
          strategies, franchise disclosure documents and
          legal agreements




Copyright 2009 MSA
                                                               92
Business overlay



          Directs legal counsel regarding the business
          decisions reached by management
          Shapes the franchisor - franchisee relationship
          Defines the rights and obligations, policies,
          procedures, monitoring and contractually
          obligated support services



Copyright 2009 MSA
                                                                     93




   Business overlay
          Threshold Analysis            Management of the
          Gap Analysis                  franchisor
          Competitive Analysis          Bankruptcy and litigation
                                        history
          Assessment of each
                                        Initial investment for
          available route to market
                                        franchisor and franchisee
          Description of the risks
                                        Initial fees and structure
          and advantages of the
                                        Royalty and other
          expansion models
                                        ongoing fees
          selected
                                        Advertising fees
          Definition of the franchise   Ala-carte fees
          business and offering


Copyright 2009 MSA
                                                                     94
Business overlay
          Financial proforma for      Termination rights
          franchisor and              Resale and assignment
          franchisees by class        rights
          Duration of franchise       Real estate selection and
          Successor rights            development
                                      Lease/sublease policies
          Termination rights
                                      Territorial exclusivity
          Resale and assignment
                                      Trade marks and service
          rights
                                      marks
          Duration of franchise       Trade secrets
          Successor rights            Financial, other audit and
                                      inspection rights

Copyright 2009 MSA
                                                                   95




   Business overlay
          Brand standards for         Restrictions on sources,
          operations                  suppliers and supplies
          Unit management and         Approval process for new
          staffing                    products, services and
          Obligations of franchisee   suppliers
          or designee to operate      Performance criteria
          business                    Initial and ongoing
                                      training
          Franchisee's reporting
                                      Pre-opening obligations
          requirements                Continuing obligations
          Supply chain                Financing programs



Copyright 2009 MSA
                                                                   96
Business overlay
          Marketing and               In-term and post term
          advertising fees,           covenants
          limitations and             Public figure
          requirements                determination
          Grand opening support       Evaluation of including a
          and advertising
                                      financial performance
          Process to approve          representation (FPR)
          franchisee developed
          advertising                 Developed FPR
                                      Overview of unique
          Franchisee and
          franchisor rights and       industry related laws
          obligations                 Planning and allocation


Copyright 2009 MSA
                                                                  97




   Business overlay
          Visual merchandising        Franchisee recruitment
          Plan-o-gram                 Franchise program
          requirements                development
          POS and IT                  Brochures and content
          Web site development        Franchise recruitment
          Multi-unit organizational   coordination and
          requirements                documentation
          Pricing strategies          Chain management – low
          Brand fund and usage        performing unit
          Packaging issues            assistance
          Consumer feedback           Other legal issues,
                                      documentation, etc.

Copyright 2009 MSA
                                                                  98
Implementation

          Development of
            Legal documents
            Manual library
            Training programs
            Website
            Franchisee recruitment collateral
            Franchisee support requirements
            Forms and procedures
            All the rest of it


Copyright 2009 MSA
                                                       99




   Investment Required


          Franchise Consulting
          Repairing the Gaps
          Manual library
          Training Program
          Franchise Recruitment Material
          Website
          Development of the required infrastructure


Copyright 2009 MSA
                                                       100
Investment Required

          Trademark Registration
          Franchise disclosure, legal agreements and
          other legal documents
          Regulatory costs
          Financial audit
          Sales and compliance training
          Average time to complete franchise
          development - Four to Five Months


Copyright 2009 MSA
                                                                                                         101




      Common franchise terms
                 Acknowledgement of Receipt – Item 23 of the Franchise Disclosure Document
                 (FDD) that is signed by the prospective franchisee and provided to the franchisor
                 (in hard copy or electronically signed) as proof of the date the FDD was received
                 by the prospect.
                 Advertising Fee - An amount paid by the franchisee to the franchisor as a
                 contributions to the franchise system’s advertising fund. The fund is typically
                 established to pay for the creation and placement of advertising and used to
                 offset the franchisors administrative costs relating to “retail”/”brand” advertising.
                 Payments are typically calculated as a percentage of gross sales.
                 Agent- A party that has implied or express (oral or written) authority to act on
                 the behalf of another.
                 Approved Advertising Materials – Materials provided by franchisor for the
                 franchisee’s use in their local market or materials created by the franchisee
                 which the franchisor has approved for use.




Copyright 2009 MSA                                                                                       102
Common franchise terms
                 Approved Products – Specified products which a franchisee must buy for use
                 in their business. Franchisor may also specify an authorized supplier (see
                 authorized supplier definition below). Generally established to control the quality
                 of the products used or sold by the franchisee in conducting their business.
                 Approved Site – A location that the franchisor determines will satisfactorily meet
                 its criteria. Site approval by franchisor is generally not an indication of the sales
                 potential or success of the location.
                 Arbitration– A method of resolving disputes.
                 Area Franchise - a franchise relationship which allows the franchisee to open
                 multiple locations, usually in a defined territory on a pre-agreed time line. Area
                 franchisees usually pay an area fee for the rights granted by the franchisor.
                 Authorized/Designated Supplier - A supplier of products and/or services used
                 in the operation of the franchise who has been approved by the franchisor to sell
                 to franchisees. May be the franchisor or an affiliate company.




Copyright 2009 MSA                                                                                       103




      Common franchise terms
                 Broker - an outside salesman or firm which undertakes for a fee or commission
                 the sale of franchises for a franchisor. Some brokers like to call themselves
                 franchise consultants but this is a misnomer. See franchise consultant.
                 Business Format Franchising (BFF) - A franchise occurs when a business
                 (the franchisor) licenses its trade name (the brand) and its operating methods
                 (its system of doing business) to a person or group (the franchisee) who agrees
                 to operate according to the terms of a contract (the franchise agreement). The
                 franchisor provides the franchisee with support and, in some cases, exercises
                 some control over the way the franchisee operates under the brand. In
                 exchange, the franchisee usually pays the franchisor an initial fee (called a
                 franchise fee) and a continuing fee (known as a royalty) for the use of the trade
                 name and operating methods. BFF describes the system of delivery, not the
                 specific product or service associated with the delivery as in Product or
                 Trademark Franchising.
                 Business Plan – A planning document that details the objectives for the
                 business and establishes processes and measures for meeting those objectives.




Copyright 2009 MSA                                                                                       104
Common franchise terms
                 Capital Required – The initial investment or required amount of investment
                 necessary to conduct the business.
                 Certification – Program by which franchisor or its franchisee may test and
                 attest to the ability of an employee to perform certain job functions within the
                 franchisee’s business to the franchisor’s standards. Certification can generally
                 be revoked if the employee fails to maintain standards in performing the job
                 function.
                 Churning – A failing location acquired by the franchisor and resold to a
                 franchisee even though the franchisor felt that the location had a high chance of
                 failure regardless of ownership. While churning is not a common occurrence in
                 franchising today, it does occur and sometimes a single location may be churned
                 several times. Churning is not the same as retrofranchising. (See
                 retrofranchising).
                 Company Owned Location - Locations, owned and operated by the franchisor,
                 usually identical in appearance and operations, to those of the systems
                 franchises.




Copyright 2009 MSA                                                                                   105




      Common franchise terms
                 Copyright - the right to use and license others to use intellectual property such
                 as system manuals or other published materials.
                 Continuous Training - training provided by franchisors to its franchisees, unit
                 management and staff, subsequent to the initial training provided.
                 Conversion Franchising - the conversion of an existing business within the
                 franchisors industry into the franchise system. Sometimes includes experienced
                 operators without operating locations.
                 Culture of Compliance – Company culture whereby franchisees and staff do
                 what is right for the system based on a feeling or knowledge that it is the right
                 thing to do within the company philosophy rather than because it is in the
                 agreement or someone is watching.
                 Days – Unless otherwise stated, days generally refer to calendar days.
                 Day-to-Day Management - As an independent owner the franchisee is
                 obligated to manage the day-to-day affairs of their business to meet the
                 franchisor’s brand standards.




Copyright 2009 MSA                                                                                   106
Common franchise terms
                 Default– The failure of either party to meet the terms of the agreement. In
                 franchising certain defaults are enumerated and some can be cured in a defined
                 period while others may not be curable.
                 Design - the trade dress used by the franchise system for the franchise
                 locations including layout, color scheme, signage, logo etc.
                 Disclosure Document - Also known as the Franchise Disclosure Document
                 (FDD) (formerly known as the Uniform Franchise Offering Circular (UFOC)).
                 The format of the FDD is specified by The FTC and NASAA (Federal and State
                 regulators) and provides information about the franchisor, the obligations of the
                 franchisor and the franchise, fees, start up costs, and other required information
                 about the franchise system. Includes a listing of current and former franchisees.
                 In addition to the disclosure portion of the FDD, the document will contain the
                 franchise and other agreements and exhibits.
                 Distributorships – The right granted by a manufacturer to sell their products.




Copyright 2009 MSA                                                                                    107




      Common franchise terms
                 Exclusive (protected) Territory - A geographic area which provides the
                 franchisee with certain rights, which may include exclusive operation.
                 Franchisor’s may include carve out provisions within an exclusive territory which
                 define an excluded type of location (malls, airports, stadiums, arenas,
                 supermarkets, hospitals, etc.)
                 Feasibility Study - an examination of the potential of a company to franchise or
                 of the potential success of a unit within a specific market or specific location.
                 Federal Trade Commission – The FTC is the agency of the U.S. Government
                 which regulates franchising under FTC Rule 436.
                 Field Representative - Typically an employee of the franchisor responsible for
                 ensuring compliance by the franchisee with system standards. Also responsible
                 for providing assistance to franchisees in the operation of their businesses. May
                 be a commissioned Area Representative.
                 Financial Performance Representation – Formerly known as an Earnings
                 Claim an FPR is the Item 19 representation of unit performance by a franchisor.




Copyright 2009 MSA                                                                                    108
Common franchise terms
                 Footprint– Layout of a location including placement of all furniture, fixture and
                 equipment.
                 Franchise - A relationship, as defined by the FTC and various states which
                 typically includes three basic elements: (1) the granting of the right to use the
                 systems mark, (2) substantial assistance or control provided by the franchisor to
                 the franchisee, (3) the payment of a fee (in excess of $500 during a period of
                 time six months before or six months following the commencement of the
                 relationship.
                 Franchise Agreement - the agreement between the franchisor and franchisee
                 which specifies the obligations of each party to the other during and following the
                 franchise relationship.
                 Franchise Attorney - A lawyer specializing in, or with significant knowledge of
                 the laws, regulations and customs governing franchising.
                 Franchise Consultant - a business specialist with significant knowledge of the
                 design, development and operation of franchising and the underlying franchise
                 relationship. Not to be confused with a Broker which is a sales agent for the
                 franchisor. (See definition of Broker above)



Copyright 2009 MSA                                                                                     109




      Common franchise terms
                 Franchise Fee - the initial fee paid by the franchisee to the franchisor, usually
                 upon signing the franchise agreement, as consideration for joining the system.
                 Is typically a flat payment as opposed to a percentage royalty and is used to
                 offset franchisor’s franchisee start up costs, marketing for franchisee’s and other
                 corporate expenses.
                 Franchisee - the person or company who is granted the rights (license) to do
                 business under the trademark and trade name by the franchisor.
                 Franchisee in Good Standing - Franchisee is operating their location and
                 business in material compliance with franchisor’s operating standards and is
                 current with all payments owed to franchisor and key suppliers.
                 Franchising - a indirect method of distribution; in other words a method of
                 growth.
                 Franchisor - a person or company which grants the license to a third party for
                 the conducting of a business under their marks.




Copyright 2009 MSA                                                                                     110
Common franchise terms
                 Gray Marketing – Franchisee purchases under franchisor’s negotiated
                 agreements and uses product or merchandise in another business or sells
                 products or merchandise to another company.
                 Gross Sales – When used in franchising, generally the total sales of the
                 business, before the collection of any sales taxes and after specified deductions.
                 Generally used as the basis for percentage royalty calculations.
                 Initial Investment - the total estimated cost for establishing the business
                 including: franchise fee, initial fixed assets and leasehold improvements,
                 inventory, deposits, other fees and costs and the working capital required during
                 the initial start up period (three months).
                 International Franchise Association - The industry trade association
                 representing franchising. The IFA is based in Washington, DC.
                 www.franchise.org.
                 Internet Sales – Any sale initiated and completed on the world wide web.
                 Inquiry – Anyone requesting information about the franchise opportunity
                 whether via the web, by telephone, by fax or other methods.




Copyright 2009 MSA                                                                                     111




      Common franchise terms
                 Key Supplier or Vendor – Supplier with whom franchisor has negotiated pricing
                 or product availability and whose products or services are an integral part of the
                 franchise system.
                 Lead – An inquiry that is prequalified after the initial interview with a member of
                 the franchisor’s development staff as meeting the minimum criteria to become a
                 franchisee and is invited to submit a franchise application.
                 Location - the site of the franchised or company owned operation.
                 Manuals - the reference literature, published by the franchisor which specifies
                 the method of operating the business under the mark. The operations manual
                 enables the franchisor to alter and evolve the business.
                 Market Introduction Program – Marketing, advertising and public relations
                 activities used to launch the franchisee’s location.
                 Master Franchisee - a franchise relationship which is granted for the
                 development of a specified area and which allows the master franchisee to sub-
                 franchise to other franchisees within the specified territory.




Copyright 2009 MSA                                                                                     112
Common franchise terms
                 Multi Unit Developer – A franchisee who agrees to open two or more locations
                 generally in a defined market over an agreed upon period of time.
                 Operating Principal – Franchises owned by other than an individual that
                 appoints a single individual authorized to make decisions on behalf of the
                 franchisee. This person is the operating principal and is usually the person with
                 whom the franchisor consults in regarding the operation and conduct of the
                 franchise.
                 Product and Trade name Franchising - the licensing of a franchisee/dealer to
                 sell or distribute a specific product using the franchisors trademark, trade name
                 and logo. (Automobile dealerships, Truck dealerships, Farm equipment, Mobile
                 homes, Gasoline service stations, Automobile accessories, Soda, Beer, Bottling.
                 Describes the specific product or service associated with the delivery not the
                 system of delivery as is Business Format Franchising.
                 Protected or Exclusive Territory – Protection or exclusivity granted to
                 franchisee by franchisor against the opening of company, franchisee or other
                 locations within the territory assigned to a franchisee.




Copyright 2009 MSA                                                                                     113




      Common franchise terms
                 Prospect – A person who has expressed interest in continuing the approval
                 process by completing and submitting the franchise application and whose
                 application has been preliminarily approved by the approval committee or the
                 development director.
                 Quality Standards - The standards specified by the franchisor for the operation
                 of the business. Quality standards are specified in the manuals for the benefit of
                 the franchise system and its franchisees.
                 Registration - A requirement to submit the franchisors disclosure document
                 prior to the approval to offer franchises within some states. There is no
                 requirement to register a franchise at the Federal level.
                 Registration states – The various states that require franchisors to submit their
                 FDD for approval prior to offering franchises. The registration states are
                 members of NASAA.
                 Retrofranchising or refranchising – Retrofranchising is not the same as
                 churning. Existing locations that may or may not have ever been franchised,
                 currently operated by the franchisor, offered for sale to prospects. Different than
                 churning the franchisor has an expectation that the business will be successful.



Copyright 2009 MSA                                                                                     114
Common franchise terms

                 Royalty fee - Typically a percentage of gross sales paid by the franchisee to the
                 franchisor on a regular basis. May also be a fixed or other fee basis.
                 Service Mark - A mark used to identify the services of one company as
                 distinguished from the services of another. Service Marks are afforded similar
                 protection under the law.
                 Single Unit Franchisee – Franchisee who owns and operates a single location.
                 Start-up Costs (Initial Investment) – The initial investment that the franchisee
                 will make in becoming a franchisee. It is also known as an Item 7 disclosure.
                 Generally includes the franchise fee, the cost of fixed assets, leasehold
                 improvements, inventory, deposits, other fees and costs and working capital
                 required during the start-up period.
                 Successor agreement – Franchisee’s ability to continue in the business for
                 additional terms following a successful completion of their initial term.




Copyright 2009 MSA                                                                                    115




      Common franchise terms

                 Success - As used in franchising, the absence of failure or closing of a location.
                 Does not relate to unit sales or profitability.
                 System Brand Fund – A fund established and managed by franchisor to which
                 all franchised and usually all company-owned units contribute monies to be
                 spent on promoting and protecting the franchisor’s brand. Frequently called an
                 advertising fund.
                 Royalty fee - Typically a percentage of gross sales paid by the franchisee to the
                 franchisor on a regular basis. May also be a fixed or other fee basis.
                 Trademark - The mark, name, and logo which identifies the franchisor and
                 which is licensed by the franchisor for use by the franchisee.
                 Turn-key - A term used to describe a location which is provided to a franchisee
                 fully equipped and ready to operate.




Copyright 2009 MSA                                                                                    116
Strategic Advice & Guidance
                                              Based on Real World Experience




                 94 Mohegan Drive,
                 West Hartford, CT 06117
                 www.msaworldwide.com

                 Michael Seid              Kay Ainsley
                 (860) 523-4257            (770) 794-0746
                 mseid@msaworldwide.com    kainsley@msaworldwide.com




Copyright 2009 MSA                                                             117

More Related Content

Similar to Fundamentals

DMA Win-back Keynote
DMA Win-back KeynoteDMA Win-back Keynote
DMA Win-back Keynotee-Dialog
 
Home Helpers
Home HelpersHome Helpers
Home Helpersactillar
 
Intellectual Property Study
Intellectual Property StudyIntellectual Property Study
Intellectual Property Studycalancom
 
Mezzanine Finance by Dominic Reilly (JLL)
Mezzanine Finance by Dominic Reilly (JLL)Mezzanine Finance by Dominic Reilly (JLL)
Mezzanine Finance by Dominic Reilly (JLL)missfaa
 
Keynote - Cloud Transformation, Guus Krabbenborg
Keynote - Cloud Transformation, Guus KrabbenborgKeynote - Cloud Transformation, Guus Krabbenborg
Keynote - Cloud Transformation, Guus Krabbenborgdynamicscom
 
RBC Dexia Pension Symposium Nov 2011
RBC Dexia Pension Symposium Nov 2011RBC Dexia Pension Symposium Nov 2011
RBC Dexia Pension Symposium Nov 2011Brad Taylor
 
DMA Win-back Examples
DMA Win-back ExamplesDMA Win-back Examples
DMA Win-back Examplese-Dialog
 
Coffee - Top 10 Global Markets
Coffee - Top 10 Global MarketsCoffee - Top 10 Global Markets
Coffee - Top 10 Global MarketsReportLinker.com
 
Nordstrom Case Study Presentation
Nordstrom Case Study PresentationNordstrom Case Study Presentation
Nordstrom Case Study PresentationKat Wilson
 
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)Stas Khirman
 
Jeremiah Caron, Context, Google+ for businesses and brands
Jeremiah Caron, Context, Google+ for businesses and brandsJeremiah Caron, Context, Google+ for businesses and brands
Jeremiah Caron, Context, Google+ for businesses and brandsCommunicate Magazine
 
5530: Chapter 5
5530: Chapter 55530: Chapter 5
5530: Chapter 5bodo-con
 
Yacht Charter Reservation August 2009
Yacht Charter Reservation August 2009Yacht Charter Reservation August 2009
Yacht Charter Reservation August 2009Latitude 26
 
Communications-Based Process Automation (CBPA)
Communications-Based Process Automation (CBPA)Communications-Based Process Automation (CBPA)
Communications-Based Process Automation (CBPA)Mundo Contact
 
7 ra conference powerpoint 11.11
7 ra conference powerpoint 11.117 ra conference powerpoint 11.11
7 ra conference powerpoint 11.117 Rivers Alliance
 
M&A. Where are the money tree roots for investors?
M&A. Where are the money tree roots for investors?M&A. Where are the money tree roots for investors?
M&A. Where are the money tree roots for investors?Darius Radkevicius
 

Similar to Fundamentals (20)

DMA Win-back Keynote
DMA Win-back KeynoteDMA Win-back Keynote
DMA Win-back Keynote
 
MaFI Lead Firms Synthesis, ver15dec11
MaFI Lead Firms Synthesis, ver15dec11MaFI Lead Firms Synthesis, ver15dec11
MaFI Lead Firms Synthesis, ver15dec11
 
Home Helpers
Home HelpersHome Helpers
Home Helpers
 
Intellectual Property Study
Intellectual Property StudyIntellectual Property Study
Intellectual Property Study
 
A2 manendra
A2 manendraA2 manendra
A2 manendra
 
Mezzanine Finance by Dominic Reilly (JLL)
Mezzanine Finance by Dominic Reilly (JLL)Mezzanine Finance by Dominic Reilly (JLL)
Mezzanine Finance by Dominic Reilly (JLL)
 
Keynote - Cloud Transformation, Guus Krabbenborg
Keynote - Cloud Transformation, Guus KrabbenborgKeynote - Cloud Transformation, Guus Krabbenborg
Keynote - Cloud Transformation, Guus Krabbenborg
 
RBC Dexia Pension Symposium Nov 2011
RBC Dexia Pension Symposium Nov 2011RBC Dexia Pension Symposium Nov 2011
RBC Dexia Pension Symposium Nov 2011
 
December_2011
December_2011December_2011
December_2011
 
DMA Win-back Examples
DMA Win-back ExamplesDMA Win-back Examples
DMA Win-back Examples
 
Midterm questions
Midterm questionsMidterm questions
Midterm questions
 
Coffee - Top 10 Global Markets
Coffee - Top 10 Global MarketsCoffee - Top 10 Global Markets
Coffee - Top 10 Global Markets
 
Nordstrom Case Study Presentation
Nordstrom Case Study PresentationNordstrom Case Study Presentation
Nordstrom Case Study Presentation
 
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)
Saeed Amidi keynote at TEC International Startup Conference (Dec 6,2011)
 
Jeremiah Caron, Context, Google+ for businesses and brands
Jeremiah Caron, Context, Google+ for businesses and brandsJeremiah Caron, Context, Google+ for businesses and brands
Jeremiah Caron, Context, Google+ for businesses and brands
 
5530: Chapter 5
5530: Chapter 55530: Chapter 5
5530: Chapter 5
 
Yacht Charter Reservation August 2009
Yacht Charter Reservation August 2009Yacht Charter Reservation August 2009
Yacht Charter Reservation August 2009
 
Communications-Based Process Automation (CBPA)
Communications-Based Process Automation (CBPA)Communications-Based Process Automation (CBPA)
Communications-Based Process Automation (CBPA)
 
7 ra conference powerpoint 11.11
7 ra conference powerpoint 11.117 ra conference powerpoint 11.11
7 ra conference powerpoint 11.11
 
M&A. Where are the money tree roots for investors?
M&A. Where are the money tree roots for investors?M&A. Where are the money tree roots for investors?
M&A. Where are the money tree roots for investors?
 

Recently uploaded

Digital Marketing Training Program skills s
Digital Marketing Training Program skills sDigital Marketing Training Program skills s
Digital Marketing Training Program skills sgodxzyrox
 
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)CXO 2.0 Conference
 
PHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPanhandleOilandGas
 
Presented by Sabri international .......
Presented by Sabri international .......Presented by Sabri international .......
Presented by Sabri international .......SABRI INTERNATIONAL
 
Strategic Resources Corporate Presentation - March 2024 Update
Strategic Resources Corporate Presentation - March 2024 UpdateStrategic Resources Corporate Presentation - March 2024 Update
Strategic Resources Corporate Presentation - March 2024 UpdateAdnet Communications
 
NVIDIA's overall business overview Presentation.pptx
NVIDIA's overall business overview Presentation.pptxNVIDIA's overall business overview Presentation.pptx
NVIDIA's overall business overview Presentation.pptxKrutik Rakade
 
14 march 2024-capital-markets-update eni.pdf
14 march 2024-capital-markets-update eni.pdf14 march 2024-capital-markets-update eni.pdf
14 march 2024-capital-markets-update eni.pdfEni
 
How The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersHow The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersFlyyx Tech
 
ICv2 Hobby Games White Paper 2024 - State of the Industry
ICv2 Hobby Games White Paper 2024 - State of the IndustryICv2 Hobby Games White Paper 2024 - State of the Industry
ICv2 Hobby Games White Paper 2024 - State of the IndustryDennisViau
 
Olympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeOlympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeStephenKim86
 
Mist Cooling & Fogging System Company in Saudi Arabia
Mist Cooling & Fogging System Company in Saudi ArabiaMist Cooling & Fogging System Company in Saudi Arabia
Mist Cooling & Fogging System Company in Saudi Arabiaopstechsanjanasingh
 
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities ppt
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities pptBus Eth ch3 ppt.ppt business ethics and corporate social responsibilities ppt
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities pptendeworku
 
EPC Contractors aspects Presentation.pdf
EPC Contractors  aspects Presentation.pdfEPC Contractors  aspects Presentation.pdf
EPC Contractors aspects Presentation.pdfGiuseppe Tommasone
 
L-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersL-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersPlan Writers
 
10 Tips for Great Teams CSUN Conference 2024
10 Tips for Great Teams CSUN Conference 202410 Tips for Great Teams CSUN Conference 2024
10 Tips for Great Teams CSUN Conference 2024Nate Evans
 
Wallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loanWallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loansujat8807
 
Unleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan BusinessUnleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan Businesstompeter3736
 
We are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionWe are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionRight Direction Aero
 
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfCORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfLouis Malaybalay
 
A Comprehensive Case Study on the IL&FS Crisis (final).pptx
A Comprehensive Case Study on the IL&FS Crisis (final).pptxA Comprehensive Case Study on the IL&FS Crisis (final).pptx
A Comprehensive Case Study on the IL&FS Crisis (final).pptxShainaMaheshwari1
 

Recently uploaded (20)

Digital Marketing Training Program skills s
Digital Marketing Training Program skills sDigital Marketing Training Program skills s
Digital Marketing Training Program skills s
 
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)
CXO 2.0 Conference (Event Information Deck | Dec'24-Mar'25)
 
PHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 Final
 
Presented by Sabri international .......
Presented by Sabri international .......Presented by Sabri international .......
Presented by Sabri international .......
 
Strategic Resources Corporate Presentation - March 2024 Update
Strategic Resources Corporate Presentation - March 2024 UpdateStrategic Resources Corporate Presentation - March 2024 Update
Strategic Resources Corporate Presentation - March 2024 Update
 
NVIDIA's overall business overview Presentation.pptx
NVIDIA's overall business overview Presentation.pptxNVIDIA's overall business overview Presentation.pptx
NVIDIA's overall business overview Presentation.pptx
 
14 march 2024-capital-markets-update eni.pdf
14 march 2024-capital-markets-update eni.pdf14 march 2024-capital-markets-update eni.pdf
14 march 2024-capital-markets-update eni.pdf
 
How The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersHow The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K Subscribers
 
ICv2 Hobby Games White Paper 2024 - State of the Industry
ICv2 Hobby Games White Paper 2024 - State of the IndustryICv2 Hobby Games White Paper 2024 - State of the Industry
ICv2 Hobby Games White Paper 2024 - State of the Industry
 
Olympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeOlympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness Gauge
 
Mist Cooling & Fogging System Company in Saudi Arabia
Mist Cooling & Fogging System Company in Saudi ArabiaMist Cooling & Fogging System Company in Saudi Arabia
Mist Cooling & Fogging System Company in Saudi Arabia
 
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities ppt
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities pptBus Eth ch3 ppt.ppt business ethics and corporate social responsibilities ppt
Bus Eth ch3 ppt.ppt business ethics and corporate social responsibilities ppt
 
EPC Contractors aspects Presentation.pdf
EPC Contractors  aspects Presentation.pdfEPC Contractors  aspects Presentation.pdf
EPC Contractors aspects Presentation.pdf
 
L-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersL-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan Writers
 
10 Tips for Great Teams CSUN Conference 2024
10 Tips for Great Teams CSUN Conference 202410 Tips for Great Teams CSUN Conference 2024
10 Tips for Great Teams CSUN Conference 2024
 
Wallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loanWallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loan
 
Unleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan BusinessUnleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan Business
 
We are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionWe are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right Direction
 
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfCORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
 
A Comprehensive Case Study on the IL&FS Crisis (final).pptx
A Comprehensive Case Study on the IL&FS Crisis (final).pptxA Comprehensive Case Study on the IL&FS Crisis (final).pptx
A Comprehensive Case Study on the IL&FS Crisis (final).pptx
 

Fundamentals

  • 1. Strategic Advice & Guidance Based on Real World Experience Elements of Successful Franchising Copyright 2009 MSA 1 What is franchising Franchising is simply a method of expansion and distribution Copyright 2009 MSA 2
  • 2. Company’s use franchising To Achieve: Rapid Expansion Brand Recognition Consistency in the delivery of Brand Promise Copyright 2009 MSA 3 A franchise is a form of a license Grants to franchisee the right to use marks Establishes Brand Standards Based on a financial relationship between the franchisor and franchisee Copyright 2009 MSA 4
  • 3. Franchising in the economy Over 100 different industries Over 900,000 US locations Over 4% of U.S. private-sector economy Indirectly over 11% of private-sector economy Over 8% of all private sector jobs Indirectly over 12% of private sector jobs Employs more people than durable goods manufacturing, financial activities and construction Copyright 2009 MSA 5 Franchising statistics (US) Estimated 1,500 different franchisors from more than 120 industry sub-sets Over 900,000 establishments – franchisors and franchisees 11 Million jobs – 8.1% of all private sector jobs 3.3% of all small businesses Copyright 2009 MSA 6
  • 4. Franchising statistics (US) Over $880 billion (4.4%) of total U.S. private sector economy – direct impact Over $2.3 trillion (11.4%) of private sector economy – direct and indirect impact Franchised establishments grew by 18.5% during the period 2001 through 2005 Copyright 2009 MSA 7 Two types of franchises Product distribution franchising Business format franchising Copyright 2009 MSA 8
  • 5. Product distribution franchising Products are typically made by the franchisor for sale by franchisee Products usually require some preparation and post sale service. Copyright 2009 MSA 9 Product distribution franchising Strong identification with brand Soft drinks, beer, bottling, automobiles and trucks, mobile homes, auto accessories, gasoline, farm equipment etc. Copyright 2009 MSA 10
  • 6. Business format franchising The system of delivery is more important in business format franchise than in a product distribution franchise Restaurants, hospitality, automotive aftermarket, travel, consumer products and services Copyright 2009 MSA 11 The franchise relationship Based on a contract between the franchisor and the franchisee Detailed in the Franchise Disclosure Document, agreements, other licenses and operating manuals Copyright 2009 MSA 12
  • 7. The franchise relationship Partners There is no fiduciary relationship between a franchisor and a franchisee Franchisors generally work closely with their franchisees so there is often a feeling of a partnering relationship The franchisor and the franchisee have their roles in the relationship and they are interdependent of each other Copyright 2009 MSA 13 The franchise relationship Parent and Child It sometimes feels that way Early guidance, training and support But - franchisees are not children Franchisees are independent business people responsible for the day-to-day operation of their business Franchising is a contractual relationship Copyright 2009 MSA 14
  • 8. The franchise relationship Dictator For true entrepreneurs, the restrictions of being a franchisee can be overwhelming Franchisees need to be “entrepreneur lite” Franchisees voluntarily agree to follow a system but are responsible for the day-to-day operation of their business Copyright 2009 MSA 15 Ownership Structures Used in Franchising Copyright 2009 MSA 16
  • 9. Single unit franchisee One location owned and operated by one franchisee under single unit agreement Location generally supervised by franchisee In their own right, franchisee is not a significant economic force Historically the most common relationship - Mom and Pop franchising Copyright 2009 MSA 17 Single unit franchisee Weaknesses Slower growth for system More franchisees to work with Franchisee may be less sophisticated Financial condition of franchisee may cause less risk taking Tends to increase cost of managing and servicing system Copyright 2009 MSA 18
  • 10. Single unit franchisee Franchisor Single Unit Franchisee Copyright 2009 MSA 19 Developer/multi-unit franchisee Multiple locations owned by one franchisee. Generally each location has a single unit agreement. Developer generally has the right and the obligation to develop locations Fixed Number of units Set time for development Typically in a defined area Copyright 2009 MSA 20
  • 11. Developer/multi-unit franchisee Can have significant advantages - if done right Lower per location cost of acquisition Better controlled growth in markets Fewer franchisees to work with Franchisees are usually more sophisticated Franchisees financial condition are generally stronger – able to make business decisions Can reduce cost to support each location Copyright 2009 MSA 21 Developer/multi-unit franchisee Franchisor Development Developer Owned Single Agreement Unit Franchises Copyright 2009 MSA 22
  • 12. Master franchisee Master franchisee is granted the right and obligation to seek sub-franchisees Fixed number of units Set time for development Typically in a defined area Master franchisee typically required to own and operates at least one location Copyright 2009 MSA 23 Master franchisee Typically collect royalties and fees Fees are generally split between franchisor and master franchisee Typically provides services to “sub-franchisees” Training Site selection Field support, etc. Has fallen into some disfavor domestically Is still frequently used internationally Copyright 2009 MSA 24
  • 13. Master franchisee Franchisor Master Franchise Agreement Master Franchisee Single of Multi-Unit “Sub” Franchises Copyright 2009 MSA 25 Area representative Provides franchise sales and support based on a commission structure Fees typically are split between franchisor and area representative Area representative may be responsible for Site development Opening and continuing assistance Training and other local management duties Area Representative typically owns a franchises Copyright 2009 MSA 26
  • 14. Area representative Franchisor Area Single or Representative Multi-Unit Agreement Agreements Area Representative Solicits and supports franchisees No Contractual Relationship Single or Multi-Unit Franchises Copyright 2009 MSA 27 Conversion or experienced Nonaffiliated operator converts to franchisor’s brand Terms of relationship may differ from greenfield franchises: Fees Training Location Conversion often not complete – initially Can create some difficulties in consistency Copyright 2009 MSA 28
  • 15. Conversion or experienced Benefits for franchisee by converting: Improved brand identity and protection against competitors Economies of scale – purchases Benefits for franchisor: Useful in consolidating market Useful in real-estate constrained market National accounts servicing Copyright 2009 MSA 29 Non-traditional/mass gathering Franchisee may be a company that holds the rights to mass gathering locations May have terms that are different than traditional franchise offered to other franchisees Types of mass gathering locations Airports, train stations, hospitals, college campuses, convenience stores, sports stadiums, ballparks, food courts, portable kiosks in parks, etc Traffic generated by high traffic locations with captured audience Copyright 2009 MSA 30
  • 16. Dual branding Two or more franchise concepts operate in one location Reasons for using May utilize labor more efficiently May improve return on real estate May expand a location’s day part Allows for shared common space Copyright 2009 MSA 31 Retrofranchising Company owned locations sold to franchisees Popular reorganization and expansion strategy Useful in reshuffling inventory of owned operations Can be used to incentivize critical mass by franchisee Franchisor obtains capital from the sale Proceeds used for debt reduction or other uses Copyright 2009 MSA 32
  • 17. Retrofranchising Eliminate local operations and personnel Reduces field management, home office administration and finance Continues existing distribution system Passive revenue (franchise fee, royalty, etc.) Not to be confused with churning Copyright 2009 MSA 33 Alternative distribution strategies Company owned operations Joint ventures Cooperatives Licensing Distributorships/Dealerships Telemarketing Copyright 2009 MSA 34
  • 18. Strategic Advice & Guidance Based on Real World Experience Why do companies franchise Copyright 2009 MSA 35 Advantages for franchisors Control The franchisor does not control the day-to-day management of the franchisee’s location Franchisor sets brand standards Products and services Consumer brand management/promise Marketing Less than company owned operations - generally greater than independent dealers Copyright 2009 MSA 36
  • 19. Advantages for franchisors Unit investment and operating costs are transferred to franchisee Accelerates expansion No contingent liability on expansion capital No contingent liability on real estate No equity dilution Copyright 2009 MSA 37 Advantages for franchisors Market penetration Increased brand recognition as locations open Enables penetration of smaller markets Accelerates market dominance over local competitors Improves location availability from landlords As system expands value of brand, at the franchisor and franchisee level increases Copyright 2009 MSA 38
  • 20. Advantages for franchisors Collective buying power Reduces costs for products, equipment, etc because of system purchasing capacity Shared resources Warehouses, production and distribution Brand marketing though system marketing fund Copyright 2009 MSA 39 Advantages for franchisors Franchisee manages the day-to-day activities of their local business to system standards Franchisee responsible to execute to brand standards Franchisee manages labor, etc. Reduces company per unit cost of support Franchisees harder to unionize Franchisee liable for local operations – substantially reduces risk of vicarious liability Copyright 2009 MSA 40
  • 21. Advantages for franchisors Franchisee motivated to succeed Long term view of customer service Motivated to work longer hours Able to react quicker to local opportunities Knowledgeable about local markets Source of new product and service ideas Franchisee at risk for unit performance Copyright 2009 MSA 41 Advantages for franchisors Revenue Franchise fee upon signing agreement Development fee from multi-unit developers Continuing royalties typically based on gross sales Contributes to advertising and marketing Additional revenue opportunities Reduced costs because of purchasing power Franchisor does not share directly in unit losses Copyright 2009 MSA 42
  • 22. Advantages for franchisees Tested system of operations Brand standard product and services Franchisor’s brand (if established) Site selection and development assistance Training Headquarters and field support Support from other franchisees Copyright 2009 MSA 43 Advantages for franchisees Reduced start up costs Reduced costs of goods Marketing assistance National accounts As part of system better able to compete with local and national competitors May provide exit strategy Copyright 2009 MSA 44
  • 23. Disadvantages for franchisor Cost of franchise system development Professional fees Consulting Legal Accounting Registration and filing fees Preparation of financial performance representation Enterprise costs - staff and overhead Franchisee recruitment Copyright 2009 MSA 45 Disadvantages for franchisor Control Franchisees are independent business owners executing a licensed system Franchisees are responsible for day-to-day management of their business Inability/limitations on setting pricing Reduces location selection flexibility Changes in business direction may be limited due to agreements with franchisees Authority over system is limited to rights and obligations included in franchise agreement Copyright 2009 MSA 46
  • 24. Disadvantages for franchisor Maintaining good franchisee relations Time consuming Often politicized Diminishes management independence Substandard franchisee performance Long term relationship – contractual terms Difficulty in terminating relationship Potential litigation Copyright 2009 MSA 47 Disadvantages for franchisor Fees Generally can’t be changed during the term Can be dependent on Competition Anticipated and realistic growth projection for system Cost of services offered to franchisees Return on investment for franchisee and franchisor Copyright 2009 MSA 48
  • 25. Disadvantages for franchisees Loss of independence – localization of business Over-dependence on franchisor Performance of other franchisees Unrealistic expectations Territorial restrictions Risk of termination Restrictions on transfers to buyers Ability to continue and terms of successor agreements Continuing costs of being in system Copyright 2009 MSA 49 Strategic Advice & Guidance Based on Real World Experience Threshold Analysis - Feasibility Copyright 2009 MSA 50
  • 26. Franchisability Every business can be franchised, but Not every business should be franchised Copyright 2009 MSA 51 Prototype Having a great idea is not enough The franchisor should have profitably operated the business being franchised Better yet, they should have done it more than once Copyright 2009 MSA 52
  • 27. Prototype The business should be able to define Criteria for locations Location layout – interior decor, exterior design, signage, etc Construction and development costs Seasonality and competition Brand personality Marketing Pricing strategy and operating costs Training Supply chain, etc, etc, etc, etc, etc, etc, etc. Copyright 2009 MSA 53 Profitable prototype The business - even after franchise fees and debt service is profitable in a reasonable period of time The business can breakeven and become cash positive in a reasonable period of time Return on investment will be acceptable for each class of franchise being offered Copyright 2009 MSA 54
  • 28. Proven product or service The business is based on a well-established consumer demand The business can distinguish itself from the competition. The business has a high return customer base The company has ownership of its trade and service marks Recognizable brand Copyright 2009 MSA 55 Proven product or service Types of businesses that generally lend themselves to franchising sale at retail of goods and services restaurants (most) margins that allow for fees and leave adequate return on investment lower regulations stable market low technology Copyright 2009 MSA 56
  • 29. Operating systems The business: Is based on an organized concept Can be systematized and codified in manuals and training programs Is simple to operate Can be consistently executed Has been in operation for a sufficient time to project its future If in a fragmented industry is a plus Copyright 2009 MSA 57 Desire to expand rapidly The company has: Realistic expansion goals Can financially support growth and operations through break even Has sufficient management band-width Can support locations in multiple markets? Copyright 2009 MSA 58
  • 30. Teachable Franchisees: Can be taught to manage the business in a reasonable period of time Will be able to manage the day-to-day operation of the business to brand standards after training Will be able to recruit sufficient staff with the education and skills required Copyright 2009 MSA 59 Return on investment The cash investment is reasonable and affordable for the franchisee profile The investment is financeable Does not have serious cash flow deficiencies or cash calls that create barriers Will meet the ROI goals of the anticipated classes of franchisees Copyright 2009 MSA 60
  • 31. Franchisor operations The franchisor can provide Training Headquarters and field support Competent advice to franchisees Product and service enhancements Evolve the business to meet competition over time Copyright 2009 MSA 61 Marketable Someone - besides Mom and Dad – has requested a franchise There is sufficient number of potential franchisees That meet the profile Who have the capital Who are likely to invest in the franchise The concept will support fees necessary to provide required franchisor services Copyright 2009 MSA 62
  • 32. Strategic Advice & Guidance Based on Real World Experience Development Of A Franchise Program Copyright 2009 MSA 63 The five realities One: Every company that desires to expand by franchising should not necessarily become a franchisor. Copyright 2009 MSA 64
  • 33. The five realities Two: Each company is unique, and fungible development or legal strategies rarely work Copyright 2009 MSA 65 The five realities Three: Franchising is governed by laws and regulations, but it is first a method of conducting business. Copyright 2009 MSA 66
  • 34. The five realities Four: Business decisions should direct the structure and relationships of the franchise system. Copyright 2009 MSA 67 The five realities Five: The legal documents need to be well drafted and clearly convey the determinations made in developing the business system within the rules, regulations and case law governing franchising. Copyright 2009 MSA 68
  • 35. Strategic design components Operational Training Marketing Financial Legal Each element of a franchise system is interdependent on each other Copyright 2009 MSA 69 The initial steps Franchisability Review of potential alternative expansion strategies Advantages and disadvantages for franchisor and franchisee Availability of human and financial resources Assemblage of required outside professionals Copyright 2009 MSA 70
  • 36. Industry analysis and background Every franchisor has two levels of competition For the end-user consumer For the potential franchisees Copyright 2009 MSA 71 The franchisor’s operations Understand the existing operations Determine how the franchisee is supposed to operate Determine the support programs andorganization needed to meet these requirements Copyright 2009 MSA 72
  • 37. Typical franchisor support Copyright 2009 MSA 73 System operational requirements Define the services provided to franchisees Define the procedures to provide these services Define the initial personnel requirements Determine when additional staff is required Define the relationship and obligations of the franchisor and franchisee – by class Copyright 2009 MSA 74
  • 38. Compliance and Monitoring Ensures locations operate to brand standards Supports franchisee to improve performance Examines marketability of products and services Reviews financial and other reporting The type and depth of compliance and monitoring depends on: the amount of control required/desired the areas which need to be controlled the rights and obligations of the franchisee to manage the day-to-day affairs of franchise Copyright 2009 MSA 75 Compliance and Monitoring Areas of monitoring may include: Site approval development Financial performance Operational standards Product and service quality Supply chain Marketing and advertising Pricing strategies Copyright 2009 MSA 76
  • 39. Compliance and Monitoring Areas of compliance and monitoring will not include Human resources including pay scale, hiring and firing policies, benefits, etc. Selection of outside contractors including but not limited to tradesman, lawyers, accountants, etc. Banking and finance Other areas of the franchisee’s day-to-day management responsibilities for their business Copyright 2009 MSA 77 Field Support Field support should be organized and visits should be structured Field staff should be experienced, trained, disciplined and supported Field staff should Ensure system compliance Consult to improve unit performance. Promote a sense of unity and belonging and demonstrate brand culture throughout system Copyright 2009 MSA 78
  • 40. Manuals The policies and procedures manual is the blueprint of the system - defining its shape and structure It is a tool for marketing a franchise It should be complete and graphically appealing It should be understandable by each reader It is frequently electronic and searchable Copyright 2009 MSA 79 Manuals The manual should Segment the operations of the business into an organized, logical set of guidelines and procedures Reflect the franchisor’s culture Reflect the requirements of the legal documents Be an element of the training program Support the necessary monitoring mechanisms Copyright 2009 MSA 80
  • 41. Manuals A manual library for a franchisor and its franchisees can be printed or online and include: Unit operations manual Real estate selection and development Start-up Marketing and advertising Field services Headquarters Multi-unit operators, Area representatives, Master franchisee, among others Copyright 2009 MSA 81 Training Your franchisees, headquarters and field staff must be prepared to meet the challenge of operating within the system Define the scope and curriculum for the system's training programs Headquarters and field support organization Franchisee, management and staff initial and continual training Multi-unit and Master franchisee operations Company owned operations Copyright 2009 MSA 82
  • 42. Training Appropriate for each level of personnel Determine approach including length, location and instructors Identify and train to the skills, abilities, and knowledge required for the personnel Determine training methods: classroom, web- based, OJT, video/DVD, blended Develop testing and requirements for passing Copyright 2009 MSA 83 Franchise development Prescribe and prioritize the expansion goals Identify the profiles of franchisees Define the markets, critical mass and mix of strategies appropriate for the system Determine the franchisee recruitment and selection process Evaluation the use of a retrofranchising strategy Define territorial rights, if any, to be granted Copyright 2009 MSA 84
  • 43. The franchisee profile Serves as a set of guidelines to select candidates most suitable for the franchise Is the foundation for the development of the franchisee recruitment and selection program Determines where and how you need to market your franchise Determines the budget you need to meet your growth requirements Copyright 2009 MSA 85 Search/Screen/Approval/Close Search: Appropriate sources for recruiting franchisees that best fit profile Screen: Methodology for evaluating franchisees (financial, personal, etc.) Approval: Procedures for approving franchisees - initial assessments, deposit agreements, verification procedures, committee approval procedures, etc. Close: Administrative, compliance and signing procedures. Copyright 2009 MSA 86
  • 44. Market analysis and strategy Analysis of the franchise relative to the competition Positioning of the concept against the competition Determination of the most effective means of market entry given the profile of your franchisee, real estate requirements, concept, etc. Copyright 2009 MSA 87 Positioning Strengths and weakness of products and service at the retail level Capabilities of system to deliver brand personality to consumers Operating environment including management and labor availability Financial resources of franchisees Other elements i.e. real estate, etc. Positioning gives you a basis to build your growth approach Copyright 2009 MSA 88
  • 45. Market entry Review the strengths and weaknesses of the alternative methods of expansion available Determine the best mix of strategies for the company and by market if appropriate Segment markets into the targeted mix – i.e. company – franchised – mass gathering Prioritize according to overall strategy Copyright 2009 MSA 89 Financial Modeling Necessary to Project start up costs and capital required Determine break even, cash flow, return on investment Establish fees – franchise fee, royalty, ala- carte charges, multi-unit fee structure, advertising, etc. Should be done for franchisor and each class of franchisee Copyright 2009 MSA 90
  • 46. Financial Modeling Unit economics Franchisor economics Projected rate of growth for the franchise system Projected rate of growth for company-owned system “Cost out" of each material operational, training, legal and marketing obligation included in legal documents Define what needs to be measured and reported Assess and determine exit strategies Copyright 2009 MSA 91 Business overlay Necessary to build strategic plan and document in manuals, training programs, marketing strategies, franchise disclosure documents and legal agreements Copyright 2009 MSA 92
  • 47. Business overlay Directs legal counsel regarding the business decisions reached by management Shapes the franchisor - franchisee relationship Defines the rights and obligations, policies, procedures, monitoring and contractually obligated support services Copyright 2009 MSA 93 Business overlay Threshold Analysis Management of the Gap Analysis franchisor Competitive Analysis Bankruptcy and litigation history Assessment of each Initial investment for available route to market franchisor and franchisee Description of the risks Initial fees and structure and advantages of the Royalty and other expansion models ongoing fees selected Advertising fees Definition of the franchise Ala-carte fees business and offering Copyright 2009 MSA 94
  • 48. Business overlay Financial proforma for Termination rights franchisor and Resale and assignment franchisees by class rights Duration of franchise Real estate selection and Successor rights development Lease/sublease policies Termination rights Territorial exclusivity Resale and assignment Trade marks and service rights marks Duration of franchise Trade secrets Successor rights Financial, other audit and inspection rights Copyright 2009 MSA 95 Business overlay Brand standards for Restrictions on sources, operations suppliers and supplies Unit management and Approval process for new staffing products, services and Obligations of franchisee suppliers or designee to operate Performance criteria business Initial and ongoing training Franchisee's reporting Pre-opening obligations requirements Continuing obligations Supply chain Financing programs Copyright 2009 MSA 96
  • 49. Business overlay Marketing and In-term and post term advertising fees, covenants limitations and Public figure requirements determination Grand opening support Evaluation of including a and advertising financial performance Process to approve representation (FPR) franchisee developed advertising Developed FPR Overview of unique Franchisee and franchisor rights and industry related laws obligations Planning and allocation Copyright 2009 MSA 97 Business overlay Visual merchandising Franchisee recruitment Plan-o-gram Franchise program requirements development POS and IT Brochures and content Web site development Franchise recruitment Multi-unit organizational coordination and requirements documentation Pricing strategies Chain management – low Brand fund and usage performing unit Packaging issues assistance Consumer feedback Other legal issues, documentation, etc. Copyright 2009 MSA 98
  • 50. Implementation Development of Legal documents Manual library Training programs Website Franchisee recruitment collateral Franchisee support requirements Forms and procedures All the rest of it Copyright 2009 MSA 99 Investment Required Franchise Consulting Repairing the Gaps Manual library Training Program Franchise Recruitment Material Website Development of the required infrastructure Copyright 2009 MSA 100
  • 51. Investment Required Trademark Registration Franchise disclosure, legal agreements and other legal documents Regulatory costs Financial audit Sales and compliance training Average time to complete franchise development - Four to Five Months Copyright 2009 MSA 101 Common franchise terms Acknowledgement of Receipt – Item 23 of the Franchise Disclosure Document (FDD) that is signed by the prospective franchisee and provided to the franchisor (in hard copy or electronically signed) as proof of the date the FDD was received by the prospect. Advertising Fee - An amount paid by the franchisee to the franchisor as a contributions to the franchise system’s advertising fund. The fund is typically established to pay for the creation and placement of advertising and used to offset the franchisors administrative costs relating to “retail”/”brand” advertising. Payments are typically calculated as a percentage of gross sales. Agent- A party that has implied or express (oral or written) authority to act on the behalf of another. Approved Advertising Materials – Materials provided by franchisor for the franchisee’s use in their local market or materials created by the franchisee which the franchisor has approved for use. Copyright 2009 MSA 102
  • 52. Common franchise terms Approved Products – Specified products which a franchisee must buy for use in their business. Franchisor may also specify an authorized supplier (see authorized supplier definition below). Generally established to control the quality of the products used or sold by the franchisee in conducting their business. Approved Site – A location that the franchisor determines will satisfactorily meet its criteria. Site approval by franchisor is generally not an indication of the sales potential or success of the location. Arbitration– A method of resolving disputes. Area Franchise - a franchise relationship which allows the franchisee to open multiple locations, usually in a defined territory on a pre-agreed time line. Area franchisees usually pay an area fee for the rights granted by the franchisor. Authorized/Designated Supplier - A supplier of products and/or services used in the operation of the franchise who has been approved by the franchisor to sell to franchisees. May be the franchisor or an affiliate company. Copyright 2009 MSA 103 Common franchise terms Broker - an outside salesman or firm which undertakes for a fee or commission the sale of franchises for a franchisor. Some brokers like to call themselves franchise consultants but this is a misnomer. See franchise consultant. Business Format Franchising (BFF) - A franchise occurs when a business (the franchisor) licenses its trade name (the brand) and its operating methods (its system of doing business) to a person or group (the franchisee) who agrees to operate according to the terms of a contract (the franchise agreement). The franchisor provides the franchisee with support and, in some cases, exercises some control over the way the franchisee operates under the brand. In exchange, the franchisee usually pays the franchisor an initial fee (called a franchise fee) and a continuing fee (known as a royalty) for the use of the trade name and operating methods. BFF describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising. Business Plan – A planning document that details the objectives for the business and establishes processes and measures for meeting those objectives. Copyright 2009 MSA 104
  • 53. Common franchise terms Capital Required – The initial investment or required amount of investment necessary to conduct the business. Certification – Program by which franchisor or its franchisee may test and attest to the ability of an employee to perform certain job functions within the franchisee’s business to the franchisor’s standards. Certification can generally be revoked if the employee fails to maintain standards in performing the job function. Churning – A failing location acquired by the franchisor and resold to a franchisee even though the franchisor felt that the location had a high chance of failure regardless of ownership. While churning is not a common occurrence in franchising today, it does occur and sometimes a single location may be churned several times. Churning is not the same as retrofranchising. (See retrofranchising). Company Owned Location - Locations, owned and operated by the franchisor, usually identical in appearance and operations, to those of the systems franchises. Copyright 2009 MSA 105 Common franchise terms Copyright - the right to use and license others to use intellectual property such as system manuals or other published materials. Continuous Training - training provided by franchisors to its franchisees, unit management and staff, subsequent to the initial training provided. Conversion Franchising - the conversion of an existing business within the franchisors industry into the franchise system. Sometimes includes experienced operators without operating locations. Culture of Compliance – Company culture whereby franchisees and staff do what is right for the system based on a feeling or knowledge that it is the right thing to do within the company philosophy rather than because it is in the agreement or someone is watching. Days – Unless otherwise stated, days generally refer to calendar days. Day-to-Day Management - As an independent owner the franchisee is obligated to manage the day-to-day affairs of their business to meet the franchisor’s brand standards. Copyright 2009 MSA 106
  • 54. Common franchise terms Default– The failure of either party to meet the terms of the agreement. In franchising certain defaults are enumerated and some can be cured in a defined period while others may not be curable. Design - the trade dress used by the franchise system for the franchise locations including layout, color scheme, signage, logo etc. Disclosure Document - Also known as the Franchise Disclosure Document (FDD) (formerly known as the Uniform Franchise Offering Circular (UFOC)). The format of the FDD is specified by The FTC and NASAA (Federal and State regulators) and provides information about the franchisor, the obligations of the franchisor and the franchise, fees, start up costs, and other required information about the franchise system. Includes a listing of current and former franchisees. In addition to the disclosure portion of the FDD, the document will contain the franchise and other agreements and exhibits. Distributorships – The right granted by a manufacturer to sell their products. Copyright 2009 MSA 107 Common franchise terms Exclusive (protected) Territory - A geographic area which provides the franchisee with certain rights, which may include exclusive operation. Franchisor’s may include carve out provisions within an exclusive territory which define an excluded type of location (malls, airports, stadiums, arenas, supermarkets, hospitals, etc.) Feasibility Study - an examination of the potential of a company to franchise or of the potential success of a unit within a specific market or specific location. Federal Trade Commission – The FTC is the agency of the U.S. Government which regulates franchising under FTC Rule 436. Field Representative - Typically an employee of the franchisor responsible for ensuring compliance by the franchisee with system standards. Also responsible for providing assistance to franchisees in the operation of their businesses. May be a commissioned Area Representative. Financial Performance Representation – Formerly known as an Earnings Claim an FPR is the Item 19 representation of unit performance by a franchisor. Copyright 2009 MSA 108
  • 55. Common franchise terms Footprint– Layout of a location including placement of all furniture, fixture and equipment. Franchise - A relationship, as defined by the FTC and various states which typically includes three basic elements: (1) the granting of the right to use the systems mark, (2) substantial assistance or control provided by the franchisor to the franchisee, (3) the payment of a fee (in excess of $500 during a period of time six months before or six months following the commencement of the relationship. Franchise Agreement - the agreement between the franchisor and franchisee which specifies the obligations of each party to the other during and following the franchise relationship. Franchise Attorney - A lawyer specializing in, or with significant knowledge of the laws, regulations and customs governing franchising. Franchise Consultant - a business specialist with significant knowledge of the design, development and operation of franchising and the underlying franchise relationship. Not to be confused with a Broker which is a sales agent for the franchisor. (See definition of Broker above) Copyright 2009 MSA 109 Common franchise terms Franchise Fee - the initial fee paid by the franchisee to the franchisor, usually upon signing the franchise agreement, as consideration for joining the system. Is typically a flat payment as opposed to a percentage royalty and is used to offset franchisor’s franchisee start up costs, marketing for franchisee’s and other corporate expenses. Franchisee - the person or company who is granted the rights (license) to do business under the trademark and trade name by the franchisor. Franchisee in Good Standing - Franchisee is operating their location and business in material compliance with franchisor’s operating standards and is current with all payments owed to franchisor and key suppliers. Franchising - a indirect method of distribution; in other words a method of growth. Franchisor - a person or company which grants the license to a third party for the conducting of a business under their marks. Copyright 2009 MSA 110
  • 56. Common franchise terms Gray Marketing – Franchisee purchases under franchisor’s negotiated agreements and uses product or merchandise in another business or sells products or merchandise to another company. Gross Sales – When used in franchising, generally the total sales of the business, before the collection of any sales taxes and after specified deductions. Generally used as the basis for percentage royalty calculations. Initial Investment - the total estimated cost for establishing the business including: franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, other fees and costs and the working capital required during the initial start up period (three months). International Franchise Association - The industry trade association representing franchising. The IFA is based in Washington, DC. www.franchise.org. Internet Sales – Any sale initiated and completed on the world wide web. Inquiry – Anyone requesting information about the franchise opportunity whether via the web, by telephone, by fax or other methods. Copyright 2009 MSA 111 Common franchise terms Key Supplier or Vendor – Supplier with whom franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system. Lead – An inquiry that is prequalified after the initial interview with a member of the franchisor’s development staff as meeting the minimum criteria to become a franchisee and is invited to submit a franchise application. Location - the site of the franchised or company owned operation. Manuals - the reference literature, published by the franchisor which specifies the method of operating the business under the mark. The operations manual enables the franchisor to alter and evolve the business. Market Introduction Program – Marketing, advertising and public relations activities used to launch the franchisee’s location. Master Franchisee - a franchise relationship which is granted for the development of a specified area and which allows the master franchisee to sub- franchise to other franchisees within the specified territory. Copyright 2009 MSA 112
  • 57. Common franchise terms Multi Unit Developer – A franchisee who agrees to open two or more locations generally in a defined market over an agreed upon period of time. Operating Principal – Franchises owned by other than an individual that appoints a single individual authorized to make decisions on behalf of the franchisee. This person is the operating principal and is usually the person with whom the franchisor consults in regarding the operation and conduct of the franchise. Product and Trade name Franchising - the licensing of a franchisee/dealer to sell or distribute a specific product using the franchisors trademark, trade name and logo. (Automobile dealerships, Truck dealerships, Farm equipment, Mobile homes, Gasoline service stations, Automobile accessories, Soda, Beer, Bottling. Describes the specific product or service associated with the delivery not the system of delivery as is Business Format Franchising. Protected or Exclusive Territory – Protection or exclusivity granted to franchisee by franchisor against the opening of company, franchisee or other locations within the territory assigned to a franchisee. Copyright 2009 MSA 113 Common franchise terms Prospect – A person who has expressed interest in continuing the approval process by completing and submitting the franchise application and whose application has been preliminarily approved by the approval committee or the development director. Quality Standards - The standards specified by the franchisor for the operation of the business. Quality standards are specified in the manuals for the benefit of the franchise system and its franchisees. Registration - A requirement to submit the franchisors disclosure document prior to the approval to offer franchises within some states. There is no requirement to register a franchise at the Federal level. Registration states – The various states that require franchisors to submit their FDD for approval prior to offering franchises. The registration states are members of NASAA. Retrofranchising or refranchising – Retrofranchising is not the same as churning. Existing locations that may or may not have ever been franchised, currently operated by the franchisor, offered for sale to prospects. Different than churning the franchisor has an expectation that the business will be successful. Copyright 2009 MSA 114
  • 58. Common franchise terms Royalty fee - Typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. May also be a fixed or other fee basis. Service Mark - A mark used to identify the services of one company as distinguished from the services of another. Service Marks are afforded similar protection under the law. Single Unit Franchisee – Franchisee who owns and operates a single location. Start-up Costs (Initial Investment) – The initial investment that the franchisee will make in becoming a franchisee. It is also known as an Item 7 disclosure. Generally includes the franchise fee, the cost of fixed assets, leasehold improvements, inventory, deposits, other fees and costs and working capital required during the start-up period. Successor agreement – Franchisee’s ability to continue in the business for additional terms following a successful completion of their initial term. Copyright 2009 MSA 115 Common franchise terms Success - As used in franchising, the absence of failure or closing of a location. Does not relate to unit sales or profitability. System Brand Fund – A fund established and managed by franchisor to which all franchised and usually all company-owned units contribute monies to be spent on promoting and protecting the franchisor’s brand. Frequently called an advertising fund. Royalty fee - Typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. May also be a fixed or other fee basis. Trademark - The mark, name, and logo which identifies the franchisor and which is licensed by the franchisor for use by the franchisee. Turn-key - A term used to describe a location which is provided to a franchisee fully equipped and ready to operate. Copyright 2009 MSA 116
  • 59. Strategic Advice & Guidance Based on Real World Experience 94 Mohegan Drive, West Hartford, CT 06117 www.msaworldwide.com Michael Seid Kay Ainsley (860) 523-4257 (770) 794-0746 mseid@msaworldwide.com kainsley@msaworldwide.com Copyright 2009 MSA 117