1 fundamentals of franchising international franchise conference november 2013 abu dhabi, u.a.e....

Fundamentals ofFranchising

International Franchise ConferenceNovember 2013

Abu Dhabi, U.A.E.

Presented by

John P. Hayes, Ph.D.John@hayesworldwide.com

www.howtobuyafranchise.com

Franchise Statistics

• 900,000+ franchised small businesses in 75+ primary industries in the USA

• Franchising contributes more than $2.3 trillion to the American economy

• Franchises account for more than 40 percent of all U.S. Retail Sales

• Franchising provides 23 million+ jobs• 3% of America’s GDP in 2012

International Franchise Association, www.franchise.org

• 40,000+ franchised small businesses in the UK (compared to 18,300 5 years ago)

• 929 brands operating in the UK (compared to 379 5 years ago)

• Franchising contributes more than £13.4 billion to the British economy (compared to £5 billion 5 years ago)

• Franchising provides 594,000 jobs• 91% of operating units are profitable

British Franchise Association, www.thebfa.org

Worldwide Data is not available

Master FranchisingArea Development Franchising

MIDDLE EAST AND NORTH AFRICA FRANCHISE ASSOCIATION: The franchise industry in the Middle East and North Africa is worth over $30 billion today.

The annual growth of the Middle East franchising sector is around 27%.

What’s Wrong

With Franchising?Franchising?

First Things First• Read about franchising.• Understand that

franchising is NOT for everyone; it may not be for you.

• Franchising is a system of distribution.

• The franchisor creates the system; franchisees follow it.

• A franchise is a license.

Franchise TermsFranchisor:

Creates & Owns the System

Sells Franchises

Trains & Supports Franchisees

Collects Fees & Royalties

Responsible for the ongoing

development of the franchise system.

Franchise TermsFranchisee:

Operates the System

Owns one or more franchises

Pays Fees & Royalties

Responsible for following the system.

Franchise TermsMaster Franchisee:

Operates the System in a country or area

Sells franchises

Trains & Supports Franchisees

Collects & Pays Fees & Royalties

Responsible for ongoing development and following the system.

Franchise TermsArea Development Franchisee:

Operates the System in a country or area

Operates multiple units

Pays Fees & Royalties

Responsible for following the system.

Safest Way To Start A Business

• Most independent, non-franchised Most independent, non-franchised business start-ups business start-ups failfail in the U.S. in the U.S.

-- Most do not survive one year

-- Almost as many more fail within 5 years

• Most franchised businesses “survive”Most franchised businesses “survive”

-- You can determine failure rate upfront

-- You can determine satisfaction rate upfront

Why Is Franchising Safe and Successful?

• The franchisor The franchisor creates a creates a SYSTEMSYSTEM

• The franchisor “tests” The franchisor “tests” the the SYSTEMSYSTEM

• The franchisor The franchisor maintains & builds the maintains & builds the SYSTEMSYSTEM

• The franchisees buy The franchisees buy and follow the and follow the SYSTEMSYSTEM

The #1 Rule For Buyers

Make sure the franchisor really does have a system that works, and make sure that you are compatible with the system, and that you will enjoy following and operating the system for as long as you intend to own the business!

Focus On You• How do you want to

spend the next ten or more years of your life?

• Test your franchise compatibility.

• Most franchisors require franchisees to be owners/operators; not absentee owners.

• Do you plan to work alone or with others?

Why Do You Want To Own A Franchise?

• What do you really hope to accomplish?

• Are you looking for a job or a career?

• A way to produce a paycheck? Or wealth?

• Do you plan to build and then sell the business?

The DISC Profile

• Test your compatibility with franchising.

• Do you have the personality?

• Are you the DOMINANTDOMINANT personality?

• Are you the INFLUENCERINFLUENCER personality?

• Are you the STEADYSTEADY personality?

• Are you the COMPETENTCOMPETENT personality?Let’s find out…

There’s No WRONG Personality

Each of the DISC Personalities can own and operate successful franchises.

However, some modifications may be helpful.

Strengths, Weaknesses & NeedsOf Each Personality Type

Type Strengths Weaknesses Needs

DProblem SolversDecision Makers

Fulfills Goals

Fault FindersNot Cautious

Run Over People

ControlAuthorityPrestige

ICommunicators

ParticipantsGood-Finders

No Sense of TimeLack Follow UpLack Objectivity

RecognitionAcceptance

Time To Talk

SLoyal

Good ListenerPatient

Overly PossessiveAvoids Risk

Avoids Conflict

AppreciationSecurity

CAnalyticalAccurate

High Standards

RigidProcrastinatorsOverly Critical

Precise WorkTime

Factual Info

How To

Identify DISC Personalities

DDo you know people who are results-oriented and driven? They are direct, to the point, confident, and competitive? These are DominantsDominants!

IFriendly, outgoing and emotional people are the InfluencersInfluencers. Their orientation is people first, results second. These people like to combine food with talk. And they like to talk a lot!

SSteadiesSteadies are sincere, loyal people who are cooperative. They are the peace keepers. They like people, but they are most interested in how to get along. They like to feel secure, and liked if not loved.

CCompetentCompetent people do it all “by the book.” These are folks who analyze any situation before they commit to it. They look before they cross the street. They walk before they run. Quality is their orientation.

Select The Industry• There are more

than 75+ primary industries using franchising.

• What’s going to satisfy your interests and qualifications?

Industry Questions• Why does this industry appeal to me?

• What’s the future of this industry?

• Do I have the money to own and operate a business in this industry?

• Am I going to need additional education to work in this industry?

• Who do I know to question about this industry?

Select A Business• There are 3,000+

opportunities just in

North America.• What’s going to

make you happy?• Select a business

that is satisfying and profitable.

What’s HOT?

Buying what’s HOT is the fastest way to get

BURNEDBURNED.

Searching For Opportunities

• Franchise Portals www.franchiseexpo.com www.franchise.org

• Franchise Expos

International Franchise Expo

• Periodicals

Entrepreneur, USA Today and others

Money To Invest?

You can spend a little or a lot . . . But how much can you afford to spend?

Borrowing Money

• Banks

• Leasing Companies

• Franchisors

• Relatives & Friends

Focus On The Company

• Request information

• Evaluate the information

• Visit with franchisors

• Visit with franchisees

• Consult with your advisors

Trust Begins With You

To To getget what you want, what you want,

givegive them what they want. them what they want.

And tell the truth!And tell the truth!When franchisors discover that applicants lied about information, TRUST vanishes. Successful franchise relationships are built on TRUST.

Potential For Your Market?

• Do people use this product or service?

• Do they use it the way the franchise company sells it?

• What barriers of entry will I encounter with this business?

Potential For Your Market?

• Is there competition?

• Has the franchise opened here and failed?

• Where’s the best location to open this business?

• Are there multiple good locations?

The System Is THE SYSTEM!

• That won’t work here!• People here are different!

If either is true . . . PASS on thisopportunity. Find another one.

The franchisor will not CHANGEthe system and you will not beable to change it either!

Ego vs SystemRemember the #1 Rule For BuyersRemember the #1 Rule For Buyers

If the franchisor has a proven SYSTEM, you won’t have to debate the size of a territory. Unless, of course, you need to feed your EGO! The SYSTEM dictates the size of the territory.

Visit The Franchisor

• Some franchisors require you to visit.

• You WANT to visit the franchisor in person.

• If the franchisor has a DISCOVERY DAY be sure to attend.

Before You Visit The Franchisor

Prepare Your Questions . . . See

100+ Questions To Ask 100+ Questions To Ask Before You Invest In A Before You Invest In A

FranchiseFranchise

Franchise Documents

Country Specific

• Disclosure Document• Franchise Agreement• Master Franchise Agreement• Area Development Agreement

The Disclosure Document

• Franchisor is required to disclose terms but not in all countries. And not to all buyers.

• Plain English explanation of the Franchise Agreement.

• Every US franchisor is required by Federal Law to update this document annually.

• It is YOUR most valuable piece of information about a franchise offering.

• Almost everything you need to know is in the Disclosure Document.

• YOU need to read it carefully – a couple of times.

• Also called the Franchise Disclosure Document, or FDD.

• Includes 21 Items plus Exhibits: contracts, financial statements, and receipts. Mirrors the Franchise Agreement.

• Must be presented to you at first serious discussion about buying the franchise, or upon your request.

but not necessarily easy to get!

Franchisors want to give it onlyto QUALIFIED prospects.

How To QualifyComplete the Franchisor’s

Qualification Report

or Application.

The document does NOT

obligate you in any way.

Table of ContentsTable of Contents1. The Franchisor, Its Predecessors and Affiliates2. Business Experience3. Litigation4. Bankruptcy5. Initial Franchise Fee6. Other Fees7. Initial Investment8. Restrictions on Sources of Products and Services9. Franchisee’s Obligations10. Financing

The Disclosure DocumentTable of ContentsTable of Contents (Cont)

11. Franchisor’s Obligations12. Territory13. Trademarks14. Patents, Copyrights and Proprietary Information15. Obligation to Participate in Operations16. Restrictions on what Franchisee May Sell17. Renewal, Termination, Transfer And Dispute Resolution18. Public Figures19. Financial Performance Representations20. List of Outlets21. Financial Statements

EXHIBITS: Franchise Agreement, Contracts, Financial Statements, Receipt, Area Development Agreements, Operations Manual Table of Contents . . .

Call & Visit Franchisees

• See FDD Item 20, List of Outlets

• Names, addresses, phone numbers of active franchisees

• Same information for terminated or canceled franchisees

Call the franchisees!

Visit at least one franchisee!

How Much Money Can I Make?

• The franchisor may not tell you.

• Most franchisors do not file Financial Performance Representations.

So Ask Those Who Know!

The Franchisees!

“If I invest X,

how soon can I expect to

earn Y?”

The Fees!– The Franchise Fee

– Royalty

– Advertising or Marketing Fund

The Franchise Fee• Upfront, lump sum

payment• Your “right of entry”• Gives you access to

THE SYSTEM• In return, you get to

use the franchisor’s brand name and expertise

Is It A Bargain?Franchisor says: “In return for a fee, I’ll give you a system for operating a business, and I’ll teach you and train you how to follow the system, and if you listen to me and work the system, you will build a rewarding business.”

Is that not worth afranchise fee?

Only you can decide.

The Royalty Fee• Usually a

percentage of gross sales

• Paid weekly or monthly

• Used to fund the franchisor’s operation, including profits!

Is It Justifiable?• Ask the

Franchisees!• The Brand Name

alone may be worth the royalty

• Research & Development is important

• Marketing prowess• Buying Power

Royalty Free Franchising?

Does such a thing exist?

If the franchisor says

NO ROYALTY

the question you want to ask is:

How do YOU make a profit?

The Advertising Fee• Typically 1% to 3%

of gross sales• Used to underwrite

marketing for franchisees

• Paid monthly• Money belongs to

the franchisees• Is it worth it?

The Initial Investment?

In addition to the franchise fee, the royalty, the advertising fund fee, what other costs will you incur as a franchisee?

Item 7: Initial InvestmentExpenditures Estimated

AmountWhen

PayablePayment Method

Refundable

Franchise Fee $40,000 Upon Signing Cash Yes

Leasehold Improvements

$0-$3,000 As agreed As agreed As agreed

Signage $0-$1,200 Opening Cash No

Furniture $5,000-$10,000 Opening Cash No

Supplies $1,700-$2,400 Opening Cash No

Advertising $5,000 Opening Cash No

Training Expense

$1,400-$2,500 Pre-Opening Cash No

Funds 3 Mths $48,000-$125,000

As needed Cash No

TOTAL $101,100-$189,100

Money To Live?• How are you going

to live without a paycheck?

• How long until the business makes money?

• Alternatives?• Ask the

Franchisees!

Create A Business Plan

• Franchisor may require it

• Browse to www.sba.gov and click on Starting Your Business

• Get professional assistance

Worth The Risk?

Look at theLook at the

numbers and ask:numbers and ask:• Does it make sense,

financially, to invest in this business?

• Will I get a satisfactory return on my money?

Ask For Help!• Consult your

ADVISORS . . . with caution!

• Accountant

• Lawyer

• Franchise Broker

• Franchisor

• Franchisees

Homework Finished?• Negotiate any open

items with the franchisor

• Go for it!• Sign the franchise

agreement• Congratulations,

you’re a franchisee!

The A to Zs ofSelecting a Franchise

International Franchise ConferenceNovember 2013

Abu Dhabi, U.A.E.

Presented by

John P. Hayes, Ph.D.John@hayesworldwide.com

www.howtobuyafranchise.com

Overview of Topics• Selection Process

• Franchising Myths

• Franchise Warning Signs

• International Franchising Data

• Small vs. Large Franchisors

• Questions for Franchisees

• Questions for Franchise Advisors

Selection ProcessFor the Franchisor

• Advertise

• Filter

• Select

Selection ProcessFor the Franchisee

• Seek

• Filter

• Select

Franchisee Seeks

Satisfying Business

Franchisee Seeks

Market Adaptable Business

Franchisee Seeks

Proven System

Franchisee Seeks

Trustworthy Franchisor

Franchisor Seeks

Educated Candidate

Franchisor Seeks

Capable of following the System

Franchisor Seeks

Qualified Financially

Franchisor Seeks

Trustworthy Franchisee

Franchising Myths

Myth #1

“When you buy a franchise,

you’re buying yourself a job.”

Franchising Myths

Myth #2

“Buying a franchise works because

it’s like flying a plane on auto pilot.”

Franchising Myths

Myth #3

“United States Government surveys found that 97% of franchises succeed.”

Franchising Myths

Myth #4

“Franchisors make it easy to buy a franchise, but then make it impossible

for you to sell your franchise.”

Franchising Myths

Myth #5

“Franchisors make all their money from the upfront franchise fee. They don’t

care if franchisees succeed.”

Franchising Myths

Myth #6

“All successful franchisees

are risk takers.”

Franchise Warning Signs

An unresponsive franchisor.

An overly eager franchisor.

Delayed Disclosure.

Uncooperative Franchisees.

Numerous (repeated) Lawsuits.

Delayed Openings.

Feeling Pressured.

Little interest in You.

International Franchising

• 500+ U.S. Franchisors sold international licenses

• Original franchise concepts in 40 countries . . . also sold internationally

• Master franchisees worldwide: 5,000

• No association for master franchising

• Training primarily by franchisors

• Little research conducted to date

2005 Master Franchisee Database:

2,000 in 60 countries

representing 100

franchise concepts

Master Franchisee Survey:

53% did not belong to a franchise association, but 94% said they desired

more interaction and education.

30% planned to buy an additional franchise license.

64% had been operating

for more than 5 years.

License Fee

36% paid up to $250,000

21% paid up to $500,000

17% paid more than $500,000

Greatest Need

57% Sales/Marketing Help

30% Operations/Training Help

Greatest Need

57% Sales/Marketing Help

30% Operations/Training Help

Small vs Large Franchisors

The Small (Under 50 Units) Franchisor

Advantage:

Still something to prove

The Small (Under 50 Units) Franchisor

Disadvantage:

International Experience

Expertise

The Large (Over 200 Units) Franchisor

Advantage:

International Experience

Expertise

The Large (Over 200 Units) Franchisor

Disadvantage:

Believe their own PR

Questions for Franchisees

“Knowing what you know now, would you buy this same franchise again?”

“Do you find the business as satisfying

today as when you first

started?”

“What’s the secret to the success

of the top franchisees?”

“If I invest the money, and work the

business like you have, how much

money can I expect to earn my

first year as a franchisee? The third year? The fifth year?”

“Why do some franchisees succeed,

and others fail?”

Questions for Advisors

“How is this franchise agreement different from other good franchise

agreements that you have reviewed?”

“If you were purchasing this franchise, what concessions, if any, would you

ask for?”

“If you were purchasing this franchise, what concessions, if any, would you

ask for?”

“What’s your evaluation of the company’s financial condition?”

“What’s your evaluation of the company’s international expertise?”

Ultimately YOU Decide

Franchising is not for everyone, and it may not be for you. Ultimately

only you can decide.

1 fundamentals of franchising international franchise conference november 2013 abu dhabi, u.a.e....

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