How To Franchise Your Business

By: Mark Siebert

CEO, The iFranchise Group

Copyright, The iFranchise Group, 2011 All rights reserved

About the iFranchise Group

• More hands-on experience than any other firm – 27 consultants with over 500 years of franchise experience – Our consultants have worked with 98 out of the top 200 franchise

companies worldwide

• More “senior level” experience – Former CEOs, CFOs, and EVPs of major franchise companies – C-Level Experience at 23 franchise companies – Experience with start-up franchise programs, not just established

franchisors

• Services and expertise in four functional areas – Strategic Planning – Quality Control – Marketing – Organizational Development and Training

• Sales Assistance through Franchise Dynamics

• Management Recruiting through Franchise Recruiters

Strategic Planning “Success (or Failure) Does Not Happen By Accident”

If you don’t know where you are going, then any road will take you there. The Adventures of Alice in Wonderland

Strategic Planning The Key to Success

• You are entering a new business

• Goals drive your business. Start with support and cost structure

• What do you need to do to help your franchisees succeed?

• Don’t rely on guesswork: The future of your business is at stake

• Financial analysis is essential

• Reverse engineer your success

Goal Driven Modeling

Goal Sell for $10M in 5 Years

Average Selling Price 6.7 times EBIT

Year Five Earnings $10M/6.7 or about $1.3M

Average Royalties $30,000 per franchise

Average Net Royalties $10,000 per franchise

Need to sell $1.3M/$10,000 = 130 Franchises

Goal Driven Planning

10 15

25

30

50

Year 1 2 3 4 5

Sales Hire Franchise Salespeople

Goal Driven Planning

10 15

25

30

50

Year 1 2 3 4 5

Sales Hire Field Reps

Goal Driven Planning

10 15

25

30

50

Year 1 2 3 4 5

Sales

Hire Support Staff

Goal Driven Planning

10 15

25

30

50

Year 1 2 3 4 5

Sales

Goal Driven Planning

10 15

25

30

50 Personnel

Marketing

Office Space

Year 1 2 3 4 5

Sales

Brochures

Risk of Failure

Speed of Growth

Competitive threat

Franchise Strategy

There is Risk Associated with Both Slow and Fast Growth

Cash Flow Modeling for Growth Aggressive Growth

$

Time

Hire Staff in Anticipation of Need and Advertise Aggressively

Royalty & Gross Margin Revenues

Fixed Costs = Salary + Advertising

Loss

Must rely on one of the following to fund payroll: 1. Adequate initial capitalization 2. Revenues from existing operations 3. Franchise sales (a worst practice)

Why Relying on Franchise Fees is a WORST Practice

$

Time

Royalty & Gross Margin Revenues

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Fixed Cost = Salaries + Advertising

Cash Flow Modeling for Growth Conservative Growth

$

Time

First Hire

Second Hire Royalty & Gross Margin Revenues

Only incremental cost is franchise marketing and that can be a variable cost after a start-up allocation

The Golden Rule: Grow No Faster Than Your Ability To Support Your Franchisees

Leverage Existing Staff and Minimal Advertising

Loss

Establishing Your Structure

Determining the Initial Fee

• Match fee to service performed • Fee determination methods

– Cost plus – Market comparables – Positioning – Financial analysis

• Average fee: $25,000 - $35,000 • Fee should not deter franchise

sales • Initial fee is a minor profit center

Initial Fee Minor Profit Center

Advertising $8,000 - $10,000 Sales commissions $3,000 - $7,000 Brochures & mailing $500 Legal $500 - $1,000 Site selection 0 - $5,000 Training at HQ $2,000 - $5,000 Field training & travel $2,000 - $4,000 Travel $1,000 Initial support $2,000 - $5,000 Totals $17,500 - $38,000

Can Leverage Off of Fixed Costs in Early Years of Franchising

Advertising $8,000 - $10,000 Sales commissions $3,000 - $7,000 Brochures & mailing $500 Legal $500 - $1,000 Site selection 0 - $5,000 Training at HQ $2,000 - $5,000 Field training $2,000 - $4,000 Travel $1,000 Initial support $2,000 - $5,000 Out of Pocket – Early Years $9,000 - $12,500

Royalty Determination

• “Me-too” is not a strategy – it is a recipe for disaster • Need to create win-win • Reverse engineering franchisee ROI • Need for sensitivity analysis

– What if . . . ???? – Look at progressively worse case scenarios

• The 1% rule – The importance of small numbers – How can 1% of $500,000 = $10 million?

Other Major Business Decisions Affecting Profitability

• Structure – Structure dictates support requirements and

responsibilities • Targeted franchisee

– Will dictate support requirements as well • Territory

– 10% mistake be a disaster • Support and Training

– Staffing is your primary expense as a franchisor – Cannot set fees without knowing expenses

Staffing Ratios for the Franchisor

The right staffing ratios for your company will depend on a variety of factors including:

The type of industry in which you operate

The complexity of your unit level operations

The speed at which your system is expanding

The geography over which you’re expanding

The types of franchises you are awarding

Your philosophy toward support

Typical Staffing Ratios

Franchise development staff

Single unit focus = 1 for each 12-25 deals

Multi-unit focus = 1 for each 5-8 deals

Field support staff

Single unit restaurant = 1 for each 20-25 units

Multi-unit restaurant = 1 for each 10-15 owner groups

Territory-based service system = 1 for each 30-35 owner territories

Overall staff to franchised locations (within a mature organization)

1 staff equivalent for each 9 to 11 locations

The Four Pillars Of Quality Control

The Quality Control Myth

• Many people think franchising means lower quality – Fast food reputation – Is McDonald’s “low quality” – Most cannot tell a company-owned from franchise – Consistency is the hallmark of quality

• High end brands are franchised – Ruth’s Chris Steakhouse – Ritz Carlton – Berlitz

The Franchise Trade-Off

• Franchisees can be more difficult to control – Contract vs. “At Will” – Termination more difficult

• Yet franchisees consistently outperform – Higher Caliber – More highly motivated – Longer term

• Studies and anecdotal evidence – 10% - 30% revenue increases – McDonald’s, Sterling Optical, Texaco, and more

Quality Control The Four Pillars of Quality

• Franchisee Selection

• Documentation & Training – the Tools

• Support

• Legal Documents and Compliance

Intelligence

Capitalization

Biggest reason for failure

Can cause franchisees to cut corners

Work Ethic

Personality Experience in leading a team Tendency toward being an entrepreneur Honesty and ethics Philosophy and cultural fit Nature (Confrontational or adaptive) Compatibility (you are “married” for the next 20 years)

“Job Specific” requirements

Five Critical Points of Qualification

The Tools

• A Best Practices Operations Manual comes first • Faster growth requires formal training programs

– For your staff – For franchisees

• Train-the-Trainer too – Franchisee will train their staff – Should have tools to do so

• Video pushes QC to lowest level of organization • On-line training decreases costs, increases quality, and can decrease

liability – Customized by employee – Document what is reviewed and test scores – Lowers on-site training time and costs for both the franchisor and

the franchisee

Real Estate

Pre-Opening Training

Construction

Ongoing Training

Supply Chain

Field Consulting

Brand and Local Marketing

Communications and Technology

Third-Party Supplier Support

Nine Primary Areas of Support

Not relevant to some service businesses

Building Blocks for Supporting Franchisees

Quality Control Comes at a Cost

• Franchisee Selection – Cost of walking away from a check – Higher costs of marketing

• Documentation & Training – First class tools, Intranet, video, etc. – More staff required for more training

• Support – Cost of Staffing – Frequency of visits (travel costs, etc.)

• Legal Documents and Compliance – Enforcement actions – Costs of losing a franchisee (even an

underperformer) If you are willing to pay the price, you can maintain and even improve quality through franchising

Marketing Your Franchise

Marketing Planning A Requisite for Rapid Growth

• Start locally, then regionally – Cluster support – More effective franchise advertising – Consumer advertising economies – Brand building – Buying economies

• Don’t expand faster than your support capability – Quality control is key – Nothing sells franchises as well as happy and successful

franchisees – Three hour drive time

Marketing Materials Essential for Speed

• Franchise marketing is very different from consumer marketing

• Franchise marketing is highly regulated

• Tools: – Your web page should be your

first concern

– Develop a mini-brochure for the sake of economy

– A full-sized brochure is essential for credibility

• Be sure to have your attorney and registration states review all materials

The Franchise Marketing Process

Publicity Print Trade Shows

Direct Contact

Internet Referral

Face-to-Face/Discovery Day

Close

Lead

Close Rate = 1% Median Cost Per Sale = $10,000 Average Cost Per Sale = $13.019 Source: Franchise Update 2010

Brokers

12 weeks

Historical Close Rate = 1% - 2% Median Cost Per Sale = $5,000 Average Cost Per Sale = $8.000

Publicity Print Trade Shows

Direct Mail

Internet Referral

Face-to-Face/Discovery Day

Close

Lead

12 weeks Brokers

Diagnosing Sales and Marketing Problems

High lead costs could indicate

media selection problems

Could indicate Sales problems

-Urgency -Setting Agenda -Closing Skills

Few leads could indicate lack of broker

confidence

Low conversions could indicate

Poor marketing materials

Could Indicate Concept Problems

Low conversions could indicate

poor sales skills or poor validation

In short, close analysis of various media-specific, marketing,

and sales statistics, can be indicative of where

problems may exist, allowing for appropriate corrective action.

Franchise Concept

Itself

Franchise Marketing Materials

Sales Process & Technique

Franchise Lead

Generation

• High unit investment • Financial performance • Look and feel • Franchise structure • Value proposition • Franchisee validation

• Media Selection • Media Mix • Message • Ad Spend • Target Audience • Timing

• Target Audience • Materials Used • Message • Inadequate differentiation • Design Quality • Production Quality

• Lead handling • Follow up • Effective Process • Sales Skills • Salesperson Motivation • Sales Tools • Staffing v. Goals

• Bad/No P.R. • Low unsolicited inquiries • Losing sales to competitors • Repeat objections not overcome • Prospects go dark after validation

• High lead costs • Low close rates • Message confusion • Few qualified prospects • Low quality lead sources predominate

• Bad/No P.R. • Low unsolicited inquiries • Losing sales to competitors • Repeat objections not overcome • Lose sales to market leader • Low application rate

• Low application rate • Low discovery day rate • Low close rate • Long “time to close” • Variances in salesperson close rates • Un- or under-worked leads • Few broker leads

• Evaluate design/construction model • Comparative financial analysis • Evaluate unit economics/ops • Contract comparison • Marketing comparison • Phone interviews of franchisees • Franchisee satisfaction surveys (web) • Evaluate real estate portfolio • Survey “lost” sales

Sales Factor Potential Problems Symptoms Diagnosis

• Historical vs. norms • Media specific analysis • Performance vs. competitors • Message vs. competitors • Franchisee or competitor surveys

• Review for best practices • Message based on surveys • Application rate vs. norms

• Historical vs. norms (close, speed, etc.) • Salesperson vs. salesperson • Historical vs. past performance • Develop sales process map • Mystery shop sales force • Leads per salesman • Sales per salesman • Broker validation calls

Identifying Sales and Marketing Problems

Franchise Concept

Itself

Franchise Marketing Materials

Sales Process & Technique

Franchise Lead

Generation

• Unit investment • Financial performance • Look and feel • Franchise structure • Value proposition • Franchisee validation • Real estate model

• Media Selection • Media Mix • Message • Ad Spend • Target Audience • Timing

• Target Audience • Materials Used • Message • Inadequate differentiation • Design Quality • Production Quality

• Lead handling • Follow up • Effective Process • Sales Skills • Salesperson motivation • Sales Tools • Staffing v. Goals

• Value engineer design and construction process • Suspend sales and work on business model, support, franchisee training • Retain design firm, consumer marketing firm, or PR firm as appropriate • Revise franchise business structure • Provide incremental value or reposition concept • Communications plan, FAC, address survey-specific concerns • Improve real estate process • Develop third-party financing programs

• Develop formal marketing plan based on survey results • Alter marketing mix to focus on higher-quality lead sources • Alter message based on survey results • Increase advertising expenditure based on goals • Optimize website and PPC campaigns • Develop and measure benchmarks; rotate bottom 10% quarterly

• Rewrite, redesign, and reprint materials as appropriate • Develop or revise standard sales correspondence • Rewrite and redesign web pages as appropriate • Add technology improvements (auto-responders, sales software, etc.) • Develop additional promotional tools (video, etc.)

• Develop and map effective sales process • Train sales staff and provide guidelines to non-sales staff • Replace poor sales personnel • Benchmark and measure performance • Alter compensation • Evaluate external resource opportunities (FSO, LQS, software solutions) • Add sales professionals, support staff, or both • Proactive broker programs

Sales Factor Confirmed Problem Potential Solutions

Problem Resolution – Phase Two

Awarding Your Franchise

The Franchise Sale

Unique process unlike any sale – Quit your job – Give up your benefits – Give me your life’s savings – Of course, there are no guarantees – AND I cannot tell you how much you will make

But it is a process – Good Concept – High Quality Marketing Materials & Message – Selecting Appropriate Media – Sales Skills – Advertising Budget

Averages Different strategic approaches Rule one: Be selective

Copyright, The iFranchise Group, 2011. All rights reserved.

Concept

Marketing Plan

Message

Spend

Sales Process

Selectivity

Training

Support

Communication

Validation

The Franchise Sales Cycle

Pre-Sale

Post-Sale

Copyright, The iFranchise Group, 2011. All rights reserved.

Concept

Marketing Plan

Message

Spend

Sales Process

Selectivity

Training

Support

Communication

Validation

How Fast Growth Can Derail The Cycle

Pre-Sale

Post-Sale

Franchise Sales Alternatives

Sell using existing staff – Training is essential – Highly regulated and significant penalties – Often how franchisors get started – Present value of a franchise

Recruit a franchise sales professional – Specialized franchise recruiters – Track record can be a predictor of future success – Beware of the “Order-Taker”

Franchise Sales Outsourcing – Eliminate the need for sales management, admin – Hire pros you might not otherwise afford or attract – Can be expensive – Beware of those that want a piece of your royalty

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MO 1 MO 2 MO 3 MO 4 MO 5 MO 6 MO 7 MO 8 MO 9 MO 10 MO 11 MO 12

Benchmarking

Initial Planning Session

Strategic Planning

Financial Sensitivity Analysis

Franchise Agreement

Disclosure Document

State Registration Process

Operations Manual

Training Program

Training Videos & LMS Content

Primary Research/Profiling

Franchise Marketing Plan

Develop/Print Brochure

Mini-Brochure

Franchise Sales Video

Web Site Optimization

Franchise Sales Training & Sales

Franchise Implementation Training

Implementation Consulting

Franchise Program for Aggressive Growth Approximate Development Activity Schedule

Strategy Legal Documents Quality Control Franchise Marketing Sales & Implementation

Legal to sell in 36 non-registration states

Legal to sell in all states

Legal Coordination

Conclusion

• Franchising is a means of duplicating success, not creating success

• Success in franchising is predictable when you have a good concept, plan properly, and execute

• Franchising thrives by creating win-win situations – make your franchisee successful and you will succeed

• You must be selective

• Franchising is a new and different business

• Is not the right solution for every business

• Provides one of the most powerful business expansion models ever developed

Questions