John Dring
Executive Vice President
Instant Imprints Franchising, Inc.
San Diego, CA
and
Carl E. Zwisler
Principal
Gray, Plant, Mooty, Mooty & Bennett, P.A.
Washington, DC
International Symposium on Franchising
Global Expansion for Diversification and Growth
November 5-6, 2008
Los Angeles, California
Estimating Market Potential
 Evaluate Macro Factors
 Political stability
 Economic stability
 Currency stability
 GDP – purchasing power for system products / services
 Ease of doing business
 Corruption reputation
 Taxation of fees
 Enforceability of obligations
 Existing and announced competitors
 Religious and cultural acceptance of business concept and
products/services
Compare Home Market Unit
Economics Against Target Market
Home
Average unit volume
Average unit profit
Direct unit support cost
Indirect / allocated unit support cost
Average sale
Average profit per sale
Average number of customers / week
Average sales / square foot or square meter
Average number of qualified customers in a
single store (outlet) market area
Target 1 Target 2
Evaluating a Franchisor’s Initial and
Ongoing Costs of Entering a New Market
 Initial Expenses
 Market research
 Travel
 Recruiting
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Advertising
Brokers
Consultants
Travel
Expos
Due diligence
US Commercial Services
Franchise association dues
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Training
 at Franchisor’s headquarters
 at Franchisee’s location
 Training manuals
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modification
translation
creation (if no prior master franchise experience)
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Operations Manuals
 modification
 translation
 creation (if no master franchise or area development
manual exists)
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Pre-Opening Assistance
 Adaptation of site selection criteria
 Sourcing
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contractors
equipment
supplies
inventory
information technology
 Imports
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transportation costs
restrictions
duties
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Pre-Opening Assistance
 Advertising and marketing program to launch new business
 Translation costs
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agreements
manuals
operating procedures
web pages
recruiting materials
advertising
equipment (electric current, POS systems)
other software
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Insurance
 franchise operations
 general liability
 dram shop
 product liability
 political risk
 Remote Support
 training all departments to support international operations and
recruiting
 developing language compatibility
 extended hours / days of operation
Evaluating a Franchisor’s Initial and Ongoing
Costs of Entering a New Market
 Field Support
 Financing
 Banking
 Accounting
 Taxes
 Legal
Preliminary Legal Costs of Entering
a New Market
 Legal issues memorandum
 Trademark, domain name and IP searches and
registrations
 Due diligence on prospective “partner” to satisfy USA
Patriot Act
Pre Closing Legal Costs of Entering
a New Market
 Letter of intent
 Franchise registration
 Create / modify for transaction and all appropriate
jurisdictions:
 Unit franchise agreement
 Area developer agreement (multi-unit)
 Area representative / development agreement
 Master franchise agreement
 Joint venture
Pre Closing Legal Costs of Entering
a New Market
 Draft ancillary agreements
 Software licenses
 Conditional lease assignments
 Financing agreements
 Equipment leases
 Noncompete/nondisclosure agreements
 Customer agreements
 Supplier agreements
 Cooperative advertising agreements
 Customer finance agreements
 Privacy agreements/releases
 Personal guarantees
 Letters of credit
 Option agreements
Ongoing Expenses in a New
Market
 Franchise Recruiting
 Site selection
 Training
 Product development
 Advertising
 Operations support
Ongoing Expenses in a New
Market
 Communications
 Field visits
 Meetings
 Banking
 Taxes
 Accounting
 Legal
Ongoing Legal Expenses in a New
Market
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Maintain franchise registrations
Update disclosures
Negotiate agreements
File agreements
Negotiate/approve ancillary agreements
Advise about enforcement and other legal issues
Ongoing Legal Expenses in a New
Market
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Enforce agreements
Defend against claims
Monitor trademark, domain name and other
registrations
File security agreements
Advise regarding payment, tax, import and other issues
Advise regarding operations manual changes
Enforcement of Franchise
Agreements in a New Territory
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Nonpayment
Operating standards
Covenants (non-compete, nondisclosure)
Performance standards
Unapproved transfers
Intellectual property infringement
Defense of Claims in a New
Territory
 Vicarious liability
 Franchise sales laws
 Contract breach
 Relationship law breach
 Good faith
 Intellectual property infringement
Creating a Fee Formula
The Big Picture
 Objective: For franchisor, franchisee and (if applicable)
master franchisee to achieve market rate profits within
the plan period
 Income – Expenses – Taxes = Profit
Can we make a profit within our
planning period?
 Factors Affecting Income
 relative price of our services and products to end user v. competitors’
prices
 relative price of our (std) franchise v. price of competitive franchises
 relative value / desirability of our products and services v. competitors’
in our segment
 relative value of our franchise brand v. our competitors
 average turnover (gross sales) of competitors in target market
 our relative gross sales compared to competitors in markets where we
already compete
Can we make a profit within our
planning period?
 How many customers do we need to support a profitable unit?
 How many units / outlets are in a natural market / territory?
 How to define a territory or market
a country
group of contiguous countries
group of culturally similar countries
a television or radio markets (ADI, DMA)
a metropolitan statistical area (MSA)
the area surrounding the home of a prospective franchisee which can be
supplied, promoted and serviced efficiently while achieving economies of scale
 the area which a prospect’s resources will permit it to adequately service over
the term of a franchise agreement
 the area requested by a prospective franchisee who is willing to pay a
substantial initial fee regardless of his actual capacity to develop the market in
an orderly manner
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Can we make a profit within our
planning period?
 What limitations exist on profits we can take?
 IVA taxes (value added)
 income taxes
 withholding taxes
 currency restrictions
 processing fees
 usury restrictions, e.g. Sharria
 other collection related issues, e.g., banking, approval
 If the franchisor is franchising internationally for the first
time, or if it is using a franchising format for the first time,
the franchisor will incur additional capital expenses which
may need to be recaptured in the initial franchise
program. They include:
 Prototype international agreements
 Prototype international disclosure documents
 International training programs
 International training manuals
 Master franchise or area developer operations manuals
Setting the Initial Franchise Fee
 Following research, estimate each initial cost and allocate to number
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of units projected during plan period.
Evaluate risks, delays and impact on cash flow and net profits of
withholding taxes and other “macro factors “ outlined on Slide I.
Compare costs, risks and tax implications with opportunities in other
markets.
Determine initial fee which must be charged to recoup required
expenses, adjusted for risks, cash flow and taxes in the market over
the plan period.
Compare with fees charged by competitors and evaluate whether
proposed fees must be equal to or less than theirs.
Setting Ongoing Fees
 Compare ongoing marginal support costs with cost in home market
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or other international market.
Allocate fixed costs related to supporting each franchisee in the
market based upon the number of franchisees projected over the
plan period.
Evaluate how costs would vary depending upon franchising strategy
used.
Compare costs against projected returns, incorporating calculations
set out on Slide 2.
Add projected revenues from all profit centers.
Add enforcement / defense cost factor based upon experience on
home market or comparable markets.
Estimate annual cost returns per year over plan period multiplied by
number of operating unit months in plan.
Setting Ongoing Fees
 Determine what development rate is required to meet plan return target.
 Determine how different strategies would change returns, e.g., use of
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development agreement, collecting significant initial fee, but lower fees
when each unit opens; or use of master franchise where duties to unit
franchisees (and costs) are allocated between franchisor and master
franchisee, and fees also are shared.
Evaluate impact of exchange controls, withholding taxes and other
approvals upon net returns and cash flow.
Quantify minimum fees required to meet revenue targets over plan period.
If using master franchising, compare master franchisee’s cost of servicing
franchisees against the fees it must collect to make minimum acceptable
profit.
Determine relationship of total fees to competitors fees in the market.
Evaluate whether market rate fees or higher fees may be charged.
Fee Sharing in a Master Franchise
Relationship
 Master franchising involves three parties:
 Franchisor
 Master Franchisee
 Unit Franchisee
 Fees paid by the unit franchisees must cover all direct and allocated
transaction, translation, adaptation, and fixed expenses of the franchisor
and the master franchisee and allow both to achieve at least market rate
profits over a plan period.
 Franchisor and master franchisee must efficiently allocate duties to unit
franchisees so that they will both be profitable.
 The efficient allocation of duties, including legal compliance and contract
enforcement must be completed before a master franchise agreement is
signed, and will have a large role in determining the franchisor’s and
master franchisee’s share of fees collected from unit franchisees.
Total
1.
Initial Expenses
a. Market research
b. Travel
c. Recruiting
i. Advertising
ii. Brokers
iii. Consultants
iv. Travel
v. Expos
vi. Due diligence
vii. US Commercial Services
Franchisor
Share
Master
Franchisee
Share
Total
2.
Training
a. at Franchisor’s headquarters
b. at Franchisee’s location
c. Training manuals
i. modification
ii. translation
iii. creation (if no prior master
franchise experience)
Franchisor
Share
Master
Franchisee
Share
Total
3.
Pre-Opening Assistance
a. Adaptation of site selection criteria
b. Sourcing
i. contractors
ii. equipment
iii. supplies
iv. inventory
v. information technology
c. Imports
i. transportation costs
ii. restrictions
iii. duties
Franchisor
Share
Master
Franchisee
Share
Total
d.Advertising and Marketing program to
launch and support launch of new business
e. Translation costs
i. agreements
ii. manuals
iii. operating procedures
iv. web pages
v. recruiting materials
vi. advertising
vii. equipment (electric current, POS
systems)
viii. other software
Franchisor
Share
Master
Franchisee
Share
Total
4.
5.
Insurance
a. franchise operations
b. general liability
c. dram shop
d. product liability
e. political risk
Remote Support Costs
a. Training all departments to support
international operations and recruiting
b. Developing language compatibility
c. Extended hours / days of operation
Master
Franchisee
Share
Unit
Franchisee
Share
Franchisor Share
6.
Field Support Costs
7.
Financing Costs
8.
Banking Costs
9.
Accounting Costs
10.
Taxes
11.
Legal Costs
Master
Franchisee
Share
Unit
Franchisee
Share
 Of the fees which may be allocated, franchisors generally will want to provide some or
all of the following services, and will need to collect enough of fees charged to cover
costs of such services in fees charged to their franchisees:
 Market research
 Initial recruiting
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advertising
travel
expos
due diligence
US Commercial Services fee
 Initial training
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at Franchisor’s headquarters
at Franchisee’s location
 Training manuals
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modifications to unit market
creation of a master franchise agreement
translations
 Adaptation of site selection criteria
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sources
imports
Advertising and marketing to launch new business
Translations (at least review)
Home office support
Field support
Taxes
Legal costs
 Although some of the costs may be shared, others may be allocated
directly to the master franchisee or paid from the initial master
franchise fee.
 If duties shift over time, fees associated with those duties may be
reflected in the master franchise agreement.
Sources of Information
General Market Information
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US Commercial Services
CIA World Fact Book
Economist country briefings
American Chambers of Commerce
Local franchise and trade associations
Prospective franchisees
International banks
Multinational suppliers
Law and accounting firms
MAPIC
International Council of Shopping Centers
Specific Information
 Competitors’ fees, product mix, profits
 franchisor websites
 franchise directories and websites
 US Commercial Services
 expo directories
 franchise disclosure documents
 industry publications
 market research professionals
General Market Information
 Real Estate
 real estate brokers
 International Council of Shopping Centers
 mall managers
 Taxes
 www.worldwide-tax.com
 accountants, e.g., Deloitte International Tax and Business Guides
 law firms
 Customs and Duties
 World Tariff
 international trade lawyers
 www.export.gov
General Market Information
 Speed of setting up business
 Doing Business
 Currency exchange controls
 US Commercial Services
 law firms
 Legal compliance
 Getting the Deal Through - IBA
 International Franchise Sales Laws - ABA
General Market Information
 IP protection
 law firms
 Enforcement costs
 law firms
 US Commercial Services
 American Chambers of Commerce
 national franchise associations
 Doing Business