The Franchisees! - International Franchise Conference and

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Fundamentals of
Franchising
International Franchise Conference
November 2013
Abu Dhabi, U.A.E.
Presented by
John P. Hayes, Ph.D.
[email protected]
www.howtobuyafranchise.com
1
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
2
Franchise Statistics
• 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
3
Franchise Statistics
Worldwide Data is not available
Master Franchising
Area 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%.
4
What’s
Wrong
With
Franchising?
5
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.
6
Franchise Terms
Franchisor:
Creates & Owns the System
Sells Franchises
Trains & Supports Franchisees
Collects Fees & Royalties
Responsible for the ongoing
development of the franchise system.
7
Franchise Terms
Franchisee:
Operates the System
Owns one or more franchises
Pays Fees & Royalties
Responsible for following the system.
8
Franchise Terms
Master 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.
9
Franchise Terms
Area Development Franchisee:
Operates the System in a country or area
Operates multiple units
Pays Fees & Royalties
Responsible for following the system.
10
Safest Way To Start A Business
• Most independent, non-franchised
business start-ups fail in the U.S.
-- Most do not survive one year
-- Almost as many more fail within 5 years
• Most franchised businesses “survive”
-- You can determine failure rate upfront
-- You can determine satisfaction rate
upfront
11
Why Is Franchising Safe
and Successful?
• The franchisor
creates a SYSTEM
• The franchisor “tests”
the SYSTEM
• The franchisor
maintains & builds the
SYSTEM
• The franchisees buy
and follow the
SYSTEM
12
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!
13
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?
14
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?
15
The DISC Profile
• Test your compatibility with
franchising.
• Do you have the personality?
• Are you the DOMINANT personality?
• Are you the INFLUENCER personality?
• Are you the STEADY personality?
• Are you the COMPETENT personality?
Let’s find out…
16
There’s No WRONG Personality
Each of the DISC
Personalities can
own and operate
successful
franchises.
However, some
modifications may
be helpful.
17
Strengths, Weaknesses & Needs
Of Each Personality Type
Type
D
I
S
C
Strengths
Weaknesses
Needs
Problem Solvers
Decision Makers
Fulfills Goals
Fault Finders
Not Cautious
Run Over People
Control
Authority
Prestige
Communicators
Participants
Good-Finders
No Sense of Time
Lack Follow Up
Lack Objectivity
Recognition
Acceptance
Time To Talk
Loyal
Good Listener
Patient
Overly Possessive
Avoids Risk
Avoids Conflict
Appreciation
Security
Time
Analytical
Accurate
High Standards
Rigid
Procrastinators
Overly Critical
Precise Work
Time
Factual Info
18
How To
Identify DISC Personalities
D
Do you know people who are results-oriented and driven? They are
direct, to the point, confident, and competitive? These are
Dominants!
I
Friendly, outgoing and emotional people are the Influencers. Their
orientation is people first, results second. These people like to
combine food with talk. And they like to talk a lot!
S
Steadies 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.
C
Competent 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
19
orientation.
Select The Industry
• There are more
than 75+ primary
industries using
franchising.
• What’s going to
satisfy your
interests and
qualifications?
20
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?
21
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.
22
What’s HOT?
Buying
what’s HOT
is the
fastest way
to get
BURNED.
23
Searching For Opportunities
• Franchise Portals
www.franchiseexpo.com www.franchise.org
• Franchise Expos
International Franchise Expo
• Periodicals
Entrepreneur, USA Today and others
24
Money To Invest?
You can
spend a little
or a lot . . .
But how
much can
you afford to
spend?
25
Borrowing Money
•
•
•
•
Banks
Leasing Companies
Franchisors
Relatives & Friends
26
Focus On The Company
•
•
•
•
•
Request information
Evaluate the information
Visit with franchisors
Visit with franchisees
Consult with your advisors
27
Trust Begins With You
To get what you want,
give them what they want.
And tell the truth!
When franchisors discover that
applicants lied about information,
TRUST vanishes. Successful franchise
relationships are built on TRUST.
28
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?
29
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?
30
The System Is THE SYSTEM!
• That won’t work here!
• People here are different!
If either is true . . . PASS on this
opportunity. Find another one.
The franchisor will not CHANGE
the system and you will not be
able to change it either!
31
Ego vs System
Remember 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.
32
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.
33
Before You Visit The Franchisor
Prepare Your Questions . . . See
100+ Questions To Ask
Before You Invest In A
Franchise
34
Franchise Documents
Country Specific
•
•
•
•
Disclosure Document
Franchise Agreement
Master Franchise Agreement
Area Development Agreement
35
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.
36
The Disclosure Document
• 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.
37
The Disclosure Document
• 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.
38
The Disclosure Document
but not necessarily
easy to get!
Franchisors want to give it only
to QUALIFIED prospects.
39
How To Qualify
Complete the
Franchisor’s
Qualification
Report
or Application.
The document does
NOT
obligate you in any
way.
40
The Disclosure Document
Table of Contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
The Franchisor, Its Predecessors and Affiliates
Business Experience
Litigation
Bankruptcy
Initial Franchise Fee
Other Fees
Initial Investment
Restrictions on Sources of Products and Services
Franchisee’s Obligations
Financing
41
The Disclosure Document
Table of Contents (Cont)
11. Franchisor’s Obligations
12. Territory
13. Trademarks
14. Patents, Copyrights and Proprietary Information
15. Obligation to Participate in Operations
16. Restrictions on what Franchisee May Sell
17. Renewal, Termination, Transfer And Dispute Resolution
18. Public Figures
19. Financial Performance Representations
20. List of Outlets
21. Financial Statements
EXHIBITS: Franchise Agreement, Contracts, Financial Statements, Receipt,
Area Development Agreements, Operations Manual Table of Contents . . .
42
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!
43
How Much Money Can I Make?
• The franchisor
may not tell you.
• Most franchisors
do not file
Financial
Performance
Representations.
44
So Ask Those Who Know!
The Franchisees!
“If I invest X,
how soon can I
expect to
earn Y?”
45
The Fees!
– The Franchise Fee
– Royalty
– Advertising or
Marketing Fund
46
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
47
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 a
franchise fee?
Only you can decide.
48
The Royalty Fee
• Usually a
percentage of
gross sales
• Paid weekly or
monthly
• Used to fund the
franchisor’s
operation,
including profits!
49
Is It Justifiable?
• Ask the
Franchisees!
• The Brand Name
alone may be worth
the royalty
• Research &
Development is
important
• Marketing prowess
• Buying Power
50
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?
51
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?
52
The Initial Investment?
In addition to
the franchise
fee, the royalty,
the advertising
fund fee, what
other costs will
you incur as a
franchisee?
53
Item 7: Initial Investment
Expenditures
Estimated
Amount
When
Payable
Payment
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
54
Money To Live?
• How are you going
to live without a
paycheck?
• How long until the
business makes
money?
• Alternatives?
• Ask the
Franchisees!
55
Create A Business Plan
• Franchisor may
require it
• Browse to
www.sba.gov and
click on Starting
Your Business
• Get professional
assistance
56
Worth The Risk?
Look at the
numbers and ask:
• Does it make sense,
financially, to invest
in this business?
• Will I get a
satisfactory return
on my money?
57
Ask For Help!
• Consult your
ADVISORS . . .
with caution!
• Accountant
• Lawyer
• Franchise Broker
• Franchisor
• Franchisees
58
Homework Finished?
• Negotiate any
open items with
the franchisor
• Go for it!
• Sign the franchise
agreement
• Congratulations,
you’re a
franchisee!
59
The A to Zs of
Selecting a Franchise
International Franchise Conference
November 2013
Abu Dhabi, U.A.E.
Presented by
John P. Hayes, Ph.D.
[email protected]
www.howtobuyafranchise.com
60
Overview of Topics
•
•
•
•
•
•
•
Selection Process
Franchising Myths
Franchise Warning Signs
International Franchising Data
Small vs. Large Franchisors
Questions for Franchisees
Questions for Franchise Advisors
61
Selection Process
For the Franchisor
• Advertise
• Filter
• Select
62
Selection Process
For the Franchisee
• Seek
• Filter
• Select
63
Franchisee Seeks
Satisfying Business
64
Franchisee Seeks
Market Adaptable Business
65
Franchisee Seeks
Proven System
66
Franchisee Seeks
Trustworthy Franchisor
67
Franchisor Seeks
Educated Candidate
68
Franchisor Seeks
Capable of following the System
69
Franchisor Seeks
Qualified Financially
70
Franchisor Seeks
Trustworthy Franchisee
71
Franchising Myths
Myth #1
“When you buy a franchise,
you’re buying yourself a job.”
72
Franchising Myths
Myth #2
“Buying a franchise works because
it’s like flying a plane on auto pilot.”
73
Franchising Myths
Myth #3
“United States Government surveys
found that 97% of franchises succeed.”
74
Franchising Myths
Myth #4
“Franchisors make it easy to buy a
franchise, but then make it impossible
for you to sell your franchise.”
75
Franchising Myths
Myth #5
“Franchisors make all their money from
the upfront franchise fee. They don’t
care if franchisees succeed.”
76
Franchising Myths
Myth #6
“All successful franchisees
are risk takers.”
77
Franchise Warning Signs
An unresponsive franchisor.
78
Franchise Warning Signs
An overly eager franchisor.
79
Franchise Warning Signs
Delayed Disclosure.
80
Franchise Warning Signs
Uncooperative Franchisees.
81
Franchise Warning Signs
Numerous (repeated) Lawsuits.
82
Franchise Warning Signs
Delayed Openings.
83
Franchise Warning Signs
Feeling Pressured.
84
Franchise Warning Signs
Little interest in You.
85
International
Franchising
• 500+ U.S. Franchisors sold
international licenses
• Original franchise concepts in 40
countries . . . also sold internationally
• Master franchisees worldwide: 5,000
86
International
Franchising
• No association for master franchising
• Training primarily by franchisors
• Little research conducted to date
87
International
Franchising
2005 Master Franchisee Database:
2,000 in 60 countries
representing 100
franchise concepts
88
International
Franchising
Master Franchisee Survey:
53% did not belong to a franchise
association, but 94% said they desired
more interaction and education.
89
International
Franchising
Master Franchisee Survey:
30% planned to buy an additional
franchise license.
90
International
Franchising
Master Franchisee Survey:
64% had been operating
for more than 5 years.
91
International
Franchising
Master Franchisee Survey:
License Fee
36% paid up to $250,000
21% paid up to $500,000
17% paid more than $500,000
92
International
Franchising
Master Franchisee Survey:
Greatest Need
57% Sales/Marketing Help
30% Operations/Training Help
93
International
Franchising
Master Franchisee Survey:
Greatest Need
57% Sales/Marketing Help
30% Operations/Training Help
94
Small vs Large
Franchisors
The Small (Under 50 Units) Franchisor
Advantage:
Time
Still something to prove
95
Small vs Large
Franchisors
The Small (Under 50 Units) Franchisor
Disadvantage:
Money
International Experience
Expertise
96
Small vs Large
Franchisors
The Large (Over 200 Units) Franchisor
Advantage:
Money
International Experience
Expertise
97
Small vs Large
Franchisors
The Large (Over 200 Units) Franchisor
Disadvantage:
Time
Believe their own PR
98
Questions for
Franchisees
Q #1
“Knowing what you know now, would
you buy this same franchise again?”
99
Questions for
Franchisees
Q #2
“Do you find the business as satisfying
today as when you first
started?”
100
Questions for
Franchisees
Q #3
“What’s the secret to the success
of the top franchisees?”
101
Questions for
Franchisees
Q #4
“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?”
102
Questions for
Franchisees
Q #5
“Why do some franchisees succeed,
and others fail?”
103
Questions for Advisors
Q #1
“How is this franchise agreement
different from other good franchise
agreements that you have reviewed?”
104
Questions for Advisors
Q #2
“If you were purchasing this franchise,
what concessions, if any, would you
ask for?”
105
Questions for Advisors
Q #3
“If you were purchasing this franchise,
what concessions, if any, would you
ask for?”
106
Questions for Advisors
Q #4
“What’s your evaluation of the
company’s financial condition?”
107
Questions for Advisors
Q #5
“What’s your evaluation of the
company’s international expertise?”
108
Ultimately YOU Decide
Franchising is not for everyone, and
it may not be for you. Ultimately
only you can decide.
109
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