Franchising in the USA
the Stagecoach Theatre
Arts experience
• Introduction and background
• How to enter the US
• What are the legal requirements
• Ongoing legal requirements
• Further Advice
Introduction
Presentation by Richard
Dawson
1. Chartered Accountant, KPMG
2. BoS Corporate Finance
3. Co-founded Internet Shopping
Website
4. Group Finance Director,
Stagecoach Theatre Arts plc –
appointed 2001
5. CEO, StageCoach Theatre Arts
Background
Stagecoach Theatre Arts
• Founded in 1988 by Stephanie Manuel and David
Sprigg in Surrey, UK
• Franchisor of part-time performing arts schools
• Children aged 6 to 16 attend for 3 hours per week,
learning:
Dance
Drama
Singing
• Emphasis on confidence-building, creativity, life skills
• 31 May 07 Financial Year: £26.5 million network
turnover, 39,200 students worldwide and £310,000
profit
Statistics - last Financial
YearUSA German Other
UK
y
Network turnover, £
24.2m
0.4m
0.5m
1.4m
Commenced
franchising
1994
2004
2005
2000
Franchisees
261
10
8
39
34,974
542
725 2,957
Profit
Breakeven
Loss Profit
60m
300m
Students
Company profit, £
Population
GDP/Capita $ (IMF)
35k (11th)
82m
n/a
43k(4th) 31k(17th
n/a
Direct Franchising from UK
• Medium risk, medium reward. Costs are significantly
higher than a UK franchise because of travel (as
expected) and local legal, accountancy and tax
advice (higher than expected). eg Spain and Ireland
• Stagecoach’s direct franchises outside the UK have
developed organically as UK staff have emigrated.
They are happy to continue to deal direct with the
UK.
• Success is dependant upon both the UK Head Office
and local franchisee
• But to truly develop a country I believe a local
operation within that country will be needed
Licensing
• Low risk. Low reward.
• This has proved to be the correct vehicle for
Stagecoach to develop a territory that is small or
inaccessible and to which one must commit limited
resources in order to achieve a return eg Malta
• A strategic method of protecting trade marks and
copyright materials ready for later expansion eg
Canada
• Success is heavily dependent on the Licensee
Master Franchise
• Medium risk, low reward
• The correct vehicle for Stagecoach to develop a
Territory that is inaccessible and/or where one
would not wish to run company-owned
operations or to joint venture eg Australia
• The Master Franchisee takes on the risk and
deserves the majority of the rewards
• Success is heavily dependant on the Master
Franchisee
Joint Ventures
• Medium risk, medium reward
• JV’s have been an essential part of
Stagecoach’s successful overseas expansion eg
initially in Germany and USA
• They reduce capital requirements and
management commitment in the initial stages
• But are they the correct vehicle for the longterm?
• For the long-term the type of Joint Venture
partner may need to change
Direct Franchising via Subsidiary
• High cost, high risk, high reward. We
believe that Stagecoach can be just as
successful in North America and the
major European markets as it has been in
the UK
• Prior to the IPO Stagecoach did not have
the resources to develop these markets
• Post IPO Stagecoach has invested in
those markets where it expects to achieve
the greatest return eg USA
Managed units or franchise units?
• Managed units are an important part of
franchising – testing new concepts,
current experience, quality control
• Cost – money and management time
• Different States
• Short-term/long-term strategy
Conclusion –on how to enter the
US
• Overseas expansion should be driven by
long-term strategy
• Appropriate resources must be devoted to
it
• However, for smaller companies, a low
cost start-up strategy may be the only
option
• Arrangements should be kept flexible to
take advantage of longer term
opportunities
Legal requirements for
franchising in USA:
• You will need a franchising lawyer!
• Federal Trade Commission (FTC)
• State Specific laws on franchising
• Uniform Franchise Disclosure Document
(until recently called the Uniform Franchise
Offer Document, UFOC)
Uniform Franchise Disclosure
Document Contents:
1. The Franchisor and any Parents, Predecessors and Affiliates
2. Business Experience
3. Litigation
4. Bankruptcy
5. Initial Fees
6. Other Fees
7. Estimated Initial Investment
8. Restrictions on Sources of Products and Services
9. Franchisee’s Obligations
10. Financing
11. Franchisor’s Assistance, Advertising, Computer Systems and
Training
12. Territory
13. Trademarks
Contents continued
14. Patents, Copyrights and Proprietary Information
15. Obligation to Participate in the Actual Operation of the Franchise
Business
16. Restrictions on What the Franchisee may sell
17. Renewal, Termination, Transfer and Dispute Resolution
18. Public Figures
19. Financial Performance Representations
20. Outlets and Franchisee Information
21. Financial Statements
22. Contracts
23. Receipts
Exhibits
A. Franchise Agreement
Addenda
B. Subsequent Franchise Agreements
C. Financing Documents
D. Ownership Agreement
Uniform Franchise Disclosure
Document (UFDD)
• 2007 Franchise Rule adopted by the FTC in January 2007 –
after a 12 years Regulatory Review
• New requirements for franchisors preparing franchise
disclosure documents (offering circulars)
• Follows closely the old UFOC Guidelines
• Some areas the 2007 Franchise Rule omits or streamlines the
UFOC Guidelines (eg broker disclosures, cover page risk
factors and detailed computer requirements).
• Some new areas (eg parent company disclosures, Franchisor
initiated litigations, confidentiality clauses)
• The biggest change appears to be more statistical information
to be provided on franchise and managed outlets over the last
3 years
Registration States
• Registration States – since 1993, 15 States (the
Registration States) require franchisors to prepare
UFOC’s to comply with their State Laws
• Many States have additional State specific
requirements (we found Illinois particularly
challenging and time consuming)
• Franchisors may continue to file and use in the
Registration States Franchise Disclosure
Documents prepared under the UFOC Guidelines
until July 1 2008
Other documents required by the
Registration States:
A.
B.
C.
D.
E.
F.
G.
H.
I.
Uniform Franchise Registration Application Page
Supplemental Information page(s)
Certification page
Uniform Consent to Service of Process
Sales Agent Disclosure Form
If the applicant is a corporation or partnership or limited
liability company, an authorising resolution if the application
is verified by a person other than applicant’s officer or
general partner
Uniform Franchise Offering Circular or Uniform Franchise
Disclosure Document
Application Fee (varies by state)
Auditor’s consent (or a photocopy of the consent) to the use
of the latest audited financial statements in the offering
circular
Marketing
• UFDD is not a ‘natural’ marketing tool
• 3 stage interview process (product,
financials + legals) using the UFDD as
part of this process can be helpful
• Some states require pre-approval of
additional marketing materials
• New York requires additional disclosure
note on all adverts
Cost of Entry
• Franchising, Joint Venture or Licencing?
Cost/benefits analysis
• Franchise Consultants
• Initial Legal Costs
• You need a good Franchise Lawyer
(I recommend Mary Beth Brody at Faerge &
Benson, MN)
• Audited Accounts required
• State Application Fees
Cost of the Uniform Franchise
Disclosure Document
Factors effecting the cost:
• Is there already an existing franchise agreement or can the
existing one be simply “Americanized”?
• Whether any kind of franchise disclosure document has
been used for other countries (eg Australia)
• The complexities of the business model (a straight forward
restaurant/retail model or more complex services concept)
• Use of area developers or sales representatives
• Up to $50,000
• In total,with legal, accounting, state filing, flights, expenses
etc - do not expect any change from $100,000
• Allow up to 6 months planning and implementation
Ongoing requirements:
• Annual submission of the UFDD (UFOC)
• State specific requirements
• Marketing – updating the Earnings
Estimate
• Issuing new Franchise Agreements,
addendums, termination agreements etc
• In-house Franchising expertise to keep
legal costs down
Further advice?
For more information on the legal
requirements:
1. Speak to a US Franchise Lawyer (eg Mary
Beth Brody at Faegre & Benson,
mbrody@faegre.com, www.faegre.com)
2. Visit the NASSA website (North American
Administration Association Inc.) for some
useful FAQ’s:
http://www.ftc.gov/bcp/franchise/amendedrule-faqs-shtml