Franchising and Licensing Two Powerful Ways to Grow Your Business in Any Economy_9 pptx

228 FRANCHISING AS A GROWTH STRATEGY Colombia At the present, Colombia has the third largest number of franchises in South America and is open to this kind of investment. It has several dangerous disadvantages, however, which include a high poverty rate (40 percent), the threat of guerilla and drug violence, and a small local market. Western Europe Franchising in Western Europe continues to grow at a steady rate. The United Kingdom is a common entry point into Europe for many U.S. and Canadian franchisors and has no pre-contract disclosure laws or really any specific franchisee legislation whatsoever. Franchisee systems in France, Germany, and Italy continue to flourish, both home-grown and foreign franchise sys- tems. Spain is emerging as a powerful force in European franchising; the number of franchisors operating in Spain has grown 150 percent over the past five years. Statistics recently released by the Spanish Franchise Associa- tion demonstrate that franchising sales now make up over 6 percent of total retail sales and employ over 8 percent of the nation’s workforce. Franchising in northern Europe has also grown at a slow but steady rate, particularly in Denmark, Belgium, and Switzerland, whose early-stage homegrown fran- chise systems are starting to expand into other parts of Europe and have their long-term eye on the North American market. Eastern Europe Eastern Europe continues to navigate through challenging economic times and has not been an attractive market for franchising in the past, but this may be changing. The region’s economy is stabilizing, governments are gradually lifting regulatory restrictions, disposable income is increasing, and the pub- lic is attracted to Western goods. It is apparent that the region will at some point be an excellent place for international franchisors, but the challenge is deciding when to enter this market, particularly now, when competition is limited. At the present, a barrier is that local entrepreneurs generally do not have access to the needed capital or experience to develop franchises; they understand their limitations and this leads them to be afraid of taking such an opportunity. Industries that are expected to succeed in this region are cleaning services, fast food, book and music retailing, professional training, hotels, and motels. The two countries in Europe that are most attractive are Russia and Poland. Hungary, the Czech Republic, Yugoslavia, and Bulgaria also promise to be attractive franchising markets in the future. Russia Russia boasts a very large consumer market with a population of 150 million. It has many negatives, however, that must be overcome. The economy is 10376$ CH11 10-24-03 09:38:11 PS 229 TAKING YOUR FRANCHISE PROGRAM OVERSEAS tainted by high crime rates, political problems, bribery, and poverty. Further- more, many Russian entrepreneurs and consumers are unfamiliar with and unconvinced of the advantages of franchising. This is further complicated by access to capital issues, which are very limited, and entrepreneurs are afraid to put their own money on the line for such a venture. Finally, government regulation has been unkind to franchisors and places many restrictions on them. Poland Poland is far more attractive. It is the second largest country in Eastern Eu- rope (population 40 million) and it welcomes franchising as a step toward its economic development. Locals are educated and are receptive to Western business and customs. There are some obstacles concerning land rights, tight investment loans, and high rental rates, but these can be overcome. Some of the emerging post-USSR nations are developing stable economies and a growing middle class, and may lend themselves to successful franchising in the not-too-distant future. Some U.S. franchise systems have already been established in the Ukraine, Azerbaijan, and Kazakhstan, including Yum! Brands systems such as KFC and Pizza Hut as well as Subway and Baskin- Robbins. Other types of franchise systems such as automotive care, home services, and business services franchise systems may flourish as these econ- omies stabilize. Regional Trade Agreements NAFTA On January 1, 1994, the North American Free Trade Agreement (NAFTA) among Canada, Mexico, and the United States began to take effect. NAFTA mandates the eventual elimination of all tariff and nontariff barriers to trade between Mexico and the United States over 15 years. Between 1993 and 1997, combined real U.S. manufactured exports to its NAFTA partners rose by 40 percent, with 34 percent and 54 percent increases to Canada and Mex- ico, respectively. MERCOSUR The MERCOSUR was created in March 1991 with the signing of the Treaty of Asuncion. MERCOSUR is, since January 1, 1995, a Customs Union, whereby the Member States (Argentina, Paraguay, Uruguay, and Brazil) have eliminated all tariff and nontariff barriers to reciprocal trade and adopted a common external tariff for third-party countries. In 1996, association agree- ments were signed with Chile and Bolivia establishing free trade areas with these countries on the basis of a ‘‘4 ם 1’’ formula. This regime is not, at present, fully in effect. The Member States of MERCOSUR negotiated what has come to be called an ‘‘Adaptation Regime,’’ by which some products 10376$ CH11 10-24-03 09:38:12 PS 230 FRANCHISING AS A GROWTH STRATEGY traded among the four countries will, for a time, continue to pay duties. Lists of exceptions to the common external tariff for a group of specific products also exist. The Customs Union will be in full effect on January 1, 2006. MER- COSUR as an international commitment is today something between NAFTA and the European Union. European Union (EU) The EU was set up after the Second World War. The process of European integration was launched on May 9, 1950, when France officially proposed to create ‘‘the first concrete foundation of a European federation.’’ Six countries (Belgium, Germany, France, Italy, Luxembourg, and the Netherlands) joined from the very beginning. Today, after four waves of accessions (1973: Den- mark, Ireland, and the United Kingdom; 1981: Greece; 1986: Spain and Por- tugal; 1995: Austria, Finland, and Sweden), the EU has 15 member states and is preparing for the accession of 13 eastern and southern European countries. The European Union, which has its origins in the 1957 Treaty of Rome, has traveled a long road of conciliation and negotiation in order to form today one single market, and is striving to adopt common policies inside and out- side Europe. ‘‘Single market’’ includes free movement of goods, free move- ment of workers, right of establishment, and freedom to provide services and free movement of capital. As of January 1, 2002, the EU launched the euro as its single currency goal, which has helped fuel the growth of franchising systems across Europe. 10376$ CH11 10-24-03 09:38:12 PS PART 3 F INANCIAL S TRATEGIES 10376$ PRT3 10-24-03 09:36:51 PS This page intentionally left blank C HAPTER 12 Business and Strategic Planning for the Growing Franchisor Owners and managers of growing franchisors have come to understand that meaningful and effective business planning is critical to the long-term suc- cess and viability of its underlying business and to its ability to raise capital. Before you read about the various methods of financing available to the grow- ing franchisor in Chapter 13, you must understand the key elements of a business plan. The Strategic Business Plan Regardless of the financing method or the type of capital to be raised, virtu- ally any lender, underwriter, venture capitalist, or private investor will expect to be presented with a meaningful business plan. A well-prepared business plan demonstrates the ability of the franchisor’s management team to focus on long-term achievable goals, provides a guide to effectively imple- ment the articulated goals once the capital has been committed, and consti- tutes a yardstick by which actual performance can be evaluated. Business plans should be used by newly formed franchisors as well as established franchisors. The following is a broad outline of the fundamental topics to be included in a typical franchisor’s business plan. Executive Summary This introductory section of the plan should explain the nature of the busi- ness and highlight the important features and opportunities offered by an investment in the company. The executive summary should be no longer than one to three pages and include (1) the company’s history and perform- ance to date, (2) distinguishing and unique features of the products and ser- vices offered to both consumers and franchisees, (3) an overview of the market, (4) a summary of the backgrounds of the leadership team, and (5) the amount of money sought and for what specific purposes. 233 10376$ CH12 10-24-03 09:38:06 PS 234 FINANCIAL STRATEGIES History and Operations of the Franchisor In this first full section, the history of the franchisor should be discussed in greater detail: its management team (with resumes included as an exhibit); the specific program, opportunity, or project being funded by the proceeds; the prototype; an overview of the franchisor’s industry, with a specific em- phasis on recent trends affecting the market demand for the franchises; as well as the products and services offered by the franchisee. Figure 12-1 pro- vides a list of questions to be addressed in this section. Many of these issues will be described in greater detail in later sections of the plan. Therefore, each topic should be covered summarily in two or three paragraphs. Marketing Research and Analysis This section must present to the reader all relevant and current information regarding the size and strength of the market for both franchisees and con- sumers, trends in the industry, marketing and sales strategies and tech- niques, assessments of the competition (direct and indirect), estimated market share and projected sales, pricing policies, advertising and public relations, strategies, and a description of sales personnel. The following is- sues should also be addressed: ❒ Describe the typical consumer. How and why is the consumer attracted to patronize the franchisee’s facility? What relevant market trends affect the consumer’s decision to purchase products and services from the fran- chisee’s facility? ❒ Describe the typical franchisee. How and why is the prospective fran- chisee attracted to the franchisor’s business format? What factors have influenced the prospect’s decision to purchase the franchise? What steps are being taken to attract additional candidates that meet these criteria? Figure 12-1. Questions to address in Section 1. 1. When and how was the prototype facility first developed? How has it performed? Will this be typical when the franchise system is built? 2. Why has the company decided to expand its market share through franchising? What other alterna- tives have been considered and why did the company select franchising? 3. What are the company’s greatest strengths and proprietary advantages with respect to its franchisees? Consumers? Employees? Shareholders? Competitors? 4. What are the nature, current status, and future prospects in the franchisor’s industry? 5. Has an economic model and pro forma been built to demonstrate the viability of the franchise system to both franchisor and franchisee? 6. Has the company selected its professional advisory system? 10376$ CH12 10-24-03 09:38:06 PS 235 BUSINESS AND STRATEGIC PLANNING FOR THE GROWING FRANCHISOR ❒ Describe the market. What is the approximate size of the total market for the services offered by the franchisee? The approximate market for fran- chisees? ❒ Describe the strategy. What marketing strategies and techniques have been adopted to attract franchisees and consumers? Where do referrals for pro- spective franchisees come from? Do existing franchisees make referrals? Why or why not? (Include sample promotional materials as an exhibit.) ❒ Describe the performance of the typical franchisee. Are current stores profitable? Why or why not? What factors influence their performance? Rationale for Franchising This section should explain the underlying rationale for selecting franchis- ing in lieu of the other growth and distribution strategies that may be avail- able. Discuss whether a dual distribution strategy will be pursued. Under what circumstances will company-owned units be established? Explain to the reader which method(s) of franchising will be selected: single units only? sales representatives? area developers? subfranchisees? Special risks and legal issues, which are triggered by the decision to franchise, should also be discussed. The Franchising Program This section should provide an overview of the franchising program with respect to key aspects of the franchise agreement, a description of the typical site, an overview of the proprietary business format and trade identity, the training program, operations manual, support services to franchisees, tar- geted markets and registration strategies, the offering of regional and area development agreements, and arrangements with vendors. A detailed analy- sis of sales and earnings estimates and personnel needed for a typical facility should be included. Discuss marketing strategies relevant to franchising such as trade shows, industry publications, and sales techniques. Explain the typi- cal length of time between the first meeting with a prospect through grand opening and beyond. What are the various steps and costs during this time period (from the perspective of both the franchisor and the franchisee)? Dis- cuss strategies for the growth and development of the franchising program over the next five to ten years. Corporate and Financial Matters This section should briefly describe the current officers, directors, and share- holders of the corporation. An overview of the capital contributed to the company thus far should be provided, along with an explanation of how these funds have been allocated. Discuss the anticipated monthly operating costs to be incurred by the corporation, both current and projected, not only 10376$ CH12 10-24-03 09:38:07 PS 236 FINANCIAL STRATEGIES for operating and managing the prototype facility but also for the administra- tive expenses incurred in setting up a franchise sales and services office. Discuss the pricing of the franchise fee, royalties, and promotional fund con- tributions. Discuss the payment histories of the franchisees thus far. Are they complying with their obligations under the franchise agreement? Why or why not? What portion of these fees collected from the franchisee will be net profit? Discuss the amount of capital that will be required for the corporation to meet its short-term goals and objectives. How much, if any, additional capital will be required to meet long-term objectives? What alternative struc- tures and methods are available for raising these funds? How will these funds be allocated? Provide a breakdown of expenses for personnel, advertising and marketing, acquisition of equipment or real estate, administration, pro- fessional fees, and travel. To what extent are these expenses fixed and to what extent will they vary depending on the actual growth of the company? Operations and Management Provide the current and projected organizational and management structure. Identify each position by title with a description of duties and responsibili- ties and compensation. Describe the current management team and antici- pated hiring requirements over the next three to five years. What strategies will be adopted to attract and retain qualified franchise professionals? Pro- vide a description of the company’s external management team (attorney, accountant, etc.). Exhibits Include exhibits in the presentation copies of the franchisor’s trademarks, marketing brochures, and press coverage, as well as in sample franchise agreements and area development agreements. The Ongoing Strategic Planning Process In a franchisor’s early stages, the emphasis is on the business plan—how do we properly launch the franchising program to attract qualified candidates and what resources will we need to sustain the program are all among the key concerns. But what happens later? Once a franchisor reaches 50 to 100 units or more, the focus shifts away from mere business planning and on to strategic planning. In the context of franchising, strategic planning is an on- going process that seeks to build and improve the following key areas: 1. The quality and performance of the franchisees 2. The quality and sophistication of the technology used by the franchisor to support the franchisees 10376$ CH12 10-24-03 09:38:07 PS 237 BUSINESS AND STRATEGIC PLANNING FOR THE GROWING FRANCHISOR 3. The quality and sophistication of the training and support systems 4. The value and recognition of the franchisor’s brand from a customer awareness perspective 5. The development and communication of the franchise system’s ‘‘best practices’’ throughout the system as well as general ‘‘best practices’’ in franchising overall 6. The exploration of new domestic and international markets 7. The organization of franchisee advisory councils, supplier councils, co- branding alliances, and other key strategic relationships 8. The development of strategies for multi-unit franchising, alternative sites, and related new market penetration strategies 9. The development of advanced branding and intellectual property pro- tection strategies Figure 12-2. Key strategic planning issues. • What are the common characteristics of our top 20 percent franchisees? • What can we do to attract more people like this in the recruitment and selection process? • What are the common characteristics of our bottom 20 percent franchisees? • How do we screen these out? What can we do to improve their performance? • What are the five greatest strengths of our system? • What is being done to build on these strengths? • What are the five biggest problems in our system? • What are we doing to resolve these problems? The strategic planning process should manifest itself in periodic meetings among the franchisor’s leadership, periodic strategic planning retreats, and a written strategic plan that should be updated annually. Some of the issues to be addressed are included in Figure 12-2. The strategic planning meetings and retreats could be focused on a specific theme, such as brand building and leveraging, rebuilding trust and value with the franchisees, litigation prevention and compliance, international opportunities in the global village, leadership and productivity issues, financial management and per-unit per- formance issues, the improved recruitment of women and minorities, tech- nology improvement and communications systems, alternative site and nontraditional location analysis, co-branding and brand-extension licensing, or building systems for improving internal communication. Any or all of these topics are appropriate for one meeting or for discussion on a continuing basis. The strategic planning meeting could be led by an outside facilitator, such as an industry expert, or by the franchisor’s senior management team. A model agenda for a general strategic planning retreat is set forth below. Model Strategic Planning Meeting Agenda I. Evaluating Our Strategic Assets and Relationships 1. Overview 10376$ CH12 10-24-03 09:38:08 PS [...]... quality and value ❒ Franchisor-customer communications ❒ Customer satisfaction surveys ❒ Exploring two- tier marketing strategies II Asset-Building Strategies 1 Building and Leveraging Brand Awareness ❒ Building overall brand awareness ❒ Brand leveraging strategies ❒ Building an arsenal of intangible assets 2 Co-Branding and Strategic Alliances ❒ Identifying goals and objectives ❒ Targeting and selecting... Reevaluate your internal and external management team Get rid of internal deadwood and don’t be afraid to demand more and better from your outside advisors Continue to evaluate your management team for any individuals who may be engaged in a course of action that is unproductive, hostile, or harassing to your current or prospective franchisees Ask your outside advisors, ‘‘What are you doing to help us grow and. .. page and forepart of the prospectus This includes summary information pertaining to the nature of the franchisor’s business, the terms of the offering, the determination of the offering price, dilution, plan of distribution, risk factors, and selected financial information ❒ Introduction to the Company This should include an overview of the company, its business, employees, financial performance, and principal... personal information relating to the prospective investor’s name, home and business address, telephone numbers, age, social security number, education, employment history, as well as investment and business experience The requested financial information will include the prospective investor’s tax bracket, income, and net worth The offeror must exercise reasonable care and diligence in confirming the truthfulness... for investment in growing companies on behalf of a group of passive investors Another major source of venture capital for growing franchisors is the Small Business Investment Company (SBIC) An SBIC is a privately organized investment firm that is specially licensed under the Small Business Investment Act of 1958 to borrow funds through the Small Business Administration, for subsequent investment in the... public requires considerable strategic planning and analysis from both a legal and a business perspective The planning and analysis process involves (1) a weighing of the costs and benefits of being a public company, (2) an understanding of the process and costs of becoming a public company, and (3) an understanding of the obligations of the company, its advisors, and its shareholders once the franchisor... we using computer and communications technologies such as email, intranets, interactive computer training, and private satellite networks to help us support and communicate with our franchisees? 5 A total devotion to excellent customer service • What systems do we have in place to ensure excellence in our interactions with targeted home and business customers? • Do we have a procedure for gathering... discussed in Chapter 4, may open up a new door for you in this area 14 Get active in industry groups and lobbying efforts that may affect the operations or profitability of your franchisees’ businesses 15 Use current and developing computer and communications technologies to enhance franchise sales and support, to gather demographics, to provide training, and to facilitate communication by and among... employees, insurance companies, and related financial institutions Many smaller businesses will turn to traditional sources of consumer credit, such as home equity loans, credit cards, and commercial finance companies to finance the growth of their business In addition to the Small Business Administration (SBA) loan programs, many state and local governments have created direct loan programs for small businesses... Factors A description of the operating and financial risk factors affecting the franchisor’s business with particular regard to the offering of the securities (such as depending on a single customer, supplier, or key personnel, the absence of operating history in the new areas of business that the franchisor wants to pursue, an unproven market for the products and services offered, or a lack of earnings . managers of growing franchisors have come to understand that meaningful and effective business planning is critical to the long-term suc- cess and viability of its underlying business and to its ability. accessions ( 197 3: Den- mark, Ireland, and the United Kingdom; 198 1: Greece; 198 6: Spain and Por- tugal; 199 5: Austria, Finland, and Sweden), the EU has 15 member states and is preparing for the. co-branding and brand-extension licensing, or building systems for improving internal communication. Any or all of these topics are appropriate for one meeting or for discussion on a continuing basis.