How To Franchise Your Business

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
Hire Franchise Salespeople
Sales
50
30
25
15
10
Year
1
2
3
4
5
Goal Driven Planning
Hire Field Reps
Sales
50
30
25
15
10
Year
1
2
3
4
5
Goal Driven Planning
Hire Support Staff
Sales
50
30
25
15
10
Year
1
2
3
4
5
Goal Driven Planning
Sales
50
30
25
15
10
Year
1
2
3
4
5
Goal Driven Planning
Sales
50
Personnel
Marketing
Office Space
30
Brochures
25
15
10
Year
1
2
3
4
5
There is Risk Associated with Both Slow and Fast Growth
Risk
of
Failure
Franchise
Strategy
Competitive threat
Speed of Growth
Cash Flow Modeling for Growth
Aggressive Growth
$
Fixed Costs = Salary + Advertising
Hire Staff in Anticipation of Need and Advertise Aggressively
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)
Royalty & Gross Margin Revenues
Time
Time
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Franchise Fees
Why Relying on Franchise Fees is a WORST Practice
$
Fixed Cost = Salaries + Advertising
Royalty & Gross Margin Revenues
Cash Flow Modeling for Growth
Conservative Growth
$
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
Second Hire
Royalty & Gross Margin Revenues
Leverage Existing Staff
and Minimal Advertising
First Hire
Loss
Time
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
Sales commissions
Brochures & mailing
Legal
Site selection
Training at HQ
Field training & travel
Travel
Initial support
Totals
$8,000 - $10,000
$3,000 - $7,000
$500
$500 - $1,000
0 - $5,000
$2,000 - $5,000
$2,000 - $4,000
$1,000
$2,000 - $5,000
$17,500 - $38,000
Can Leverage Off of Fixed Costs in
Early Years of Franchising
Advertising
Sales commissions
Brochures & mailing
Legal
Site selection
Training at HQ
Field training
Travel
Initial support
$8,000 - $10,000
$3,000 - $7,000
$500
$500 - $1,000
0 - $5,000
$2,000 - $5,000
$2,000 - $4,000
$1,000
$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
Five Critical Points of Qualification

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
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
Building Blocks for Supporting Franchisees
Nine Primary Areas of Support
Third-Party Supplier Support
Communications and Technology
Brand and Local Marketing
Field Consulting
Supply Chain
Ongoing Training
Pre-Opening Training
Construction
Real Estate
Not relevant to some service businesses
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
Lead
Face-to-Face/Discovery Day
Brokers
12 weeks
Close
Historical
Close Rate = 1% - 2%
Median Cost Per Sale = $5,000
Average Cost Per Sale = $8.000
Close Rate = 1%
Median Cost Per Sale = $10,000
Average Cost Per Sale = $13.019
Source: Franchise Update 2010
Diagnosing Sales and Marketing Problems
Publicity
Brokers
Print
Trade
Shows
Direct
Mail
Internet
High Lead
lead
costs
Could
Indicate
could indicate
Concept
Problems
media selection problems
Low conversions
Face-to-Face/Discovery
Day
could
indicate
In short,
closeCould
analysis
of
indicate
Poorvarious
marketing
materials marketing,
media-specific,
Sales problems
and sales statistics,
-Urgency
can
beconversions
indicative
of where
Low
Few
leads
-Setting
Agenda
problems
may
could
indicate
Closeexist, allowing
could
indicate
-Closing Skills
for appropriate
corrective
action.
poorof
sales
skills
or
lack
broker
poor validation
confidence
Referral
12 weeks
Identifying Sales and Marketing Problems
Sales Factor
Franchise
Concept
Itself
Potential Problems
•
•
•
•
•
•
High unit investment
Financial performance
Look and feel
Franchise structure
Value proposition
Franchisee validation
Symptoms
Diagnosis
•
•
•
•
•
Bad/No P.R.
Low unsolicited inquiries
Losing sales to competitors
Repeat objections not overcome
Prospects go dark after validation
•
•
•
•
•
•
•
•
•
Evaluate design/construction model
Comparative financial analysis
Evaluate unit economics/ops
Contract comparison
Marketing comparison
Phone interviews of franchisees
Franchisee satisfaction surveys (web)
Evaluate real estate portfolio
Survey “lost” sales
Franchise
Lead
Generation
•
•
•
•
•
•
Media Selection
Media Mix
Message
Ad Spend
Target Audience
Timing
•
•
•
•
•
High lead costs
Low close rates
Message confusion
Few qualified prospects
Low quality lead sources predominate
•
•
•
•
•
Historical vs. norms
Media specific analysis
Performance vs. competitors
Message vs. competitors
Franchisee or competitor surveys
Franchise
Marketing
Materials
•
•
•
•
•
•
Target Audience
Materials Used
Message
Inadequate differentiation
Design Quality
Production Quality
•
•
•
•
•
•
Bad/No P.R.
Low unsolicited inquiries
Losing sales to competitors
Repeat objections not overcome
Lose sales to market leader
Low application rate
•
•
•
Review for best practices
Message based on surveys
Application rate vs. norms
•
•
•
•
•
•
•
Lead handling
Follow up
Effective Process
Sales Skills
Salesperson Motivation
Sales Tools
Staffing v. Goals
•
•
•
•
•
•
•
Low application rate
Low discovery day rate
Low close rate
Long “time to close”
Variances in salesperson close rates
Un- or under-worked leads
Few broker leads
Sales
Process &
Technique
•
•
•
•
•
•
•
•
Historical vs. norms (close, speed, etc.)
Salesperson vs. salesperson
Historical vs. past performance
Develop sales process map
Mystery shop sales force
Leads per salesman
Sales per salesman
Broker validation calls
Problem Resolution – Phase Two
Sales Factor
Franchise
Concept
Itself
Confirmed Problem
•
•
•
•
•
•
•
Unit investment
Financial performance
Look and feel
Franchise structure
Value proposition
Franchisee validation
Real estate model
Potential Solutions
•
•
•
•
•
•
•
•
Value engineer design and construction process
Suspend sales and work on business model, support, franchisee training
Retain design firm, consumer marketing firm, or PR firm as appropriate
Revise franchise business structure
Provide incremental value or reposition concept
Communications plan, FAC, address survey-specific concerns
Improve real estate process
Develop third-party financing programs
Franchise
Lead
Generation
•
•
•
•
•
•
Media Selection
Media Mix
Message
Ad Spend
Target Audience
Timing
•
•
•
•
•
•
Develop formal marketing plan based on survey results
Alter marketing mix to focus on higher-quality lead sources
Alter message based on survey results
Increase advertising expenditure based on goals
Optimize website and PPC campaigns
Develop and measure benchmarks; rotate bottom 10% quarterly
Franchise
Marketing
Materials
•
•
•
•
•
•
Target Audience
Materials Used
Message
Inadequate differentiation
Design Quality
Production Quality
•
•
•
•
•
Rewrite, redesign, and reprint materials as appropriate
Develop or revise standard sales correspondence
Rewrite and redesign web pages as appropriate
Add technology improvements (auto-responders, sales software, etc.)
Develop additional promotional tools (video, etc.)
•
•
•
•
•
•
•
Lead handling
Follow up
Effective Process
Sales Skills
Salesperson motivation
Sales Tools
Staffing v. Goals
•
•
•
•
•
•
•
•
Develop and map effective sales process
Train sales staff and provide guidelines to non-sales staff
Replace poor sales personnel
Benchmark and measure performance
Alter compensation
Evaluate external resource opportunities (FSO, LQS, software solutions)
Add sales professionals, support staff, or both
Proactive broker programs
Sales
Process &
Technique
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
The Franchise Sales Cycle
Concept
Marketing Plan
Validation
Pre-Sale
Communication
Message
Spend
Support
Post-Sale
Training
Sales Process
Selectivity
Copyright, The iFranchise Group, 2011. All
rights reserved.
How Fast Growth Can Derail The Cycle
Concept
Marketing Plan
Validation
Pre-Sale
Communication
Message
Spend
Support
Post-Sale
Training
Sales Process
Selectivity
Copyright, The iFranchise Group, 2011. All
rights reserved.
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
Franchise Program for Aggressive Growth
Approximate Development Activity Schedule
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
Legal
Coordination
Legal to sell in 36
non-registration states
Strategy
Legal Documents
Quality Control
Franchise Marketing
Sales & Implementation
Disclosure Document
Legal to sell in all states
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
44
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