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1 Fundamentals of Franchising International Franchise Conference November 2013 Abu Dhabi, U.A.E. Presented by John P. Hayes, Ph.D.

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Presentation on theme: "1 Fundamentals of Franchising International Franchise Conference November 2013 Abu Dhabi, U.A.E. Presented by John P. Hayes, Ph.D."— Presentation transcript:

1 1 Fundamentals of Franchising International Franchise Conference November 2013 Abu Dhabi, U.A.E. Presented by John P. Hayes, Ph.D.

2 2 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,

3 3 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,

4 4 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%.

5 5 What’s Wrong Franchising? With Franchising?

6 6 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.

7 7 Franchise Terms Franchisor: Creates & Owns the System Sells Franchises Trains & Supports Franchisees Collects Fees & Royalties Responsible for the ongoing development of the franchise system.

8 8 Franchise Terms Franchisee: Operates the System Owns one or more franchises Pays Fees & Royalties Responsible for following the system.

9 9 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.

10 10 Franchise Terms Area Development Franchisee: Operates the System in a country or area Operates multiple units Pays Fees & Royalties Responsible for following the system.

11 11 Safest Way To Start A Business Most independent, non-franchised business start-ups fail in the U.S.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”Most franchised businesses “survive” -- You can determine failure rate upfront -- You can determine satisfaction rate upfront

12 12 Why Is Franchising Safe and Successful? The franchisor creates a SYSTEMThe franchisor creates a SYSTEM The franchisor “tests” the SYSTEMThe franchisor “tests” the SYSTEM The franchisor maintains & builds the SYSTEMThe franchisor maintains & builds the SYSTEM The franchisees buy and follow the SYSTEMThe franchisees buy and follow the SYSTEM

13 13 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!

14 14 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?

15 15 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?

16 16 The DISC Profile Test your compatibility with franchising. Do you have the personality? DOMINANTAre you the DOMINANT personality? INFLUENCERAre you the INFLUENCER personality? STEADYAre you the STEADY personality? COMPETENTAre you the COMPETENT personality? Let’s find out…

17 17 There’s No WRONG Personality Each of the DISC Personalities can own and operate successful franchises. However, some modifications may be helpful.

18 18 Strengths, Weaknesses & Needs Of Each Personality Type TypeStrengthsWeaknessesNeeds D Problem Solvers Decision Makers Fulfills Goals Fault Finders Not Cautious Run Over People Control Authority Prestige I Communicators Participants Good-Finders No Sense of Time Lack Follow Up Lack Objectivity Recognition Acceptance Time To Talk S Loyal Good Listener Patient Overly Possessive Avoids Risk Avoids Conflict Appreciation Security Time C Analytical Accurate High Standards Rigid Procrastinators Overly Critical Precise Work Time Factual Info

19 19 How To Identify DISC Personalities D Dominants Do you know people who are results-oriented and driven? They are direct, to the point, confident, and competitive? These are Dominants! I Influencers 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 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 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 orientation.

20 20 Select The Industry There are more than 75+ primary industries using franchising. What’s going to satisfy your interests and qualifications?

21 21 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?

22 22 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.

23 23 What’s HOT? Buying what’s HOT is the fastest way to get BURNED BURNED.

24 24 Searching For Opportunities Franchise Portals Franchise Expos International Franchise Expo Periodicals Entrepreneur, USA Today and others

25 25 Money To Invest? You can spend a little or a lot... But how much can you afford to spend?

26 26 Borrowing Money Banks Leasing Companies Franchisors Relatives & Friends

27 27 Focus On The Company Request information Evaluate the information Visit with franchisors Visit with franchisees Consult with your advisors

28 28 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.

29 29 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?

30 30 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?

31 31 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!

32 32 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.

33 33 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.

34 34 Before You Visit The Franchisor Prepare Your Questions... See 100+ Questions To Ask Before You Invest In A Franchise

35 35 Franchise Documents Country Specific Disclosure Document Franchise Agreement Master Franchise Agreement Area Development Agreement

36 36 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.

37 37 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.

38 38 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.

39 39 The Disclosure Document but not necessarily easy to get! Franchisors want to give it only to QUALIFIED prospects.

40 40 How To Qualify Complete the Franchisor’s Qualification Report or Application. The document does NOT obligate you in any way.

41 41 The Disclosure Document Table of Contents 1.The Franchisor, Its Predecessors and Affiliates 2.Business Experience 3.Litigation 4.Bankruptcy 5.Initial Franchise Fee 6.Other Fees 7.Initial Investment 8.Restrictions on Sources of Products and Services 9.Franchisee’s Obligations 10.Financing

42 42 The Disclosure Document Table of Contents 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...

43 43 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!

44 44 How Much Money Can I Make? The franchisor may not tell you. Most franchisors do not file Financial Performance Representations.

45 45 So Ask Those Who Know! The Franchisees! “If I invest X, how soon can I expect to earn Y?”

46 46 The Fees! –The Franchise Fee –Royalty –Advertising or Marketing Fund

47 47 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

48 48 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.

49 49 The Royalty Fee Usually a percentage of gross sales Paid weekly or monthly Used to fund the franchisor’s operation, including profits!

50 50 Is It Justifiable? Ask the Franchisees! The Brand Name alone may be worth the royalty Research & Development is important Marketing prowess Buying Power

51 51 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?

52 52 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?

53 53 The Initial Investment? In addition to the franchise fee, the royalty, the advertising fund fee, what other costs will you incur as a franchisee?

54 54 Item 7: Initial Investment ExpendituresEstimated Amount When Payable Payment Method Refundable Franchise Fee$40,000Upon SigningCashYes Leasehold Improvements $0-$3,000As agreed Signage$0-$1,200OpeningCashNo Furniture$5,000-$10,000OpeningCashNo Supplies$1,700-$2,400OpeningCashNo Advertising$5,000OpeningCashNo Training Expense $1,400-$2,500Pre-OpeningCashNo Funds 3 Mths$48,000- $125,000 As neededCashNo TOTAL$101,100- $189,100

55 55 Money To Live? How are you going to live without a paycheck? How long until the business makes money? Alternatives? Ask the Franchisees!

56 56 Create A Business Plan Franchisor may require it Browse to and click on Starting Your Business Get professional assistance

57 57 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?

58 58 Ask For Help! Consult your ADVISORS... with caution! Accountant Lawyer Franchise Broker Franchisor Franchisees

59 59 Homework Finished? Negotiate any open items with the franchisor Go for it! Sign the franchise agreement Congratulations, you’re a franchisee!

60 60 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.

61 61 Overview of Topics Selection Process Franchising Myths Franchise Warning Signs International Franchising Data Small vs. Large Franchisors Questions for Franchisees Questions for Franchise Advisors

62 62 Selection Process For the Franchisor Advertise Filter Select

63 63 Selection Process For the Franchisee Seek Filter Select

64 64 Franchisee Seeks Satisfying Business

65 65 Franchisee Seeks Market Adaptable Business

66 66 Franchisee Seeks Proven System

67 67 Franchisee Seeks Trustworthy Franchisor

68 68 Franchisor Seeks Educated Candidate

69 69 Franchisor Seeks Capable of following the System

70 70 Franchisor Seeks Qualified Financially

71 71 Franchisor Seeks Trustworthy Franchisee

72 72 Franchising Myths Myth #1 “When you buy a franchise, you’re buying yourself a job.”

73 73 Franchising Myths Myth #2 “Buying a franchise works because it’s like flying a plane on auto pilot.”

74 74 Franchising Myths Myth #3 “United States Government surveys found that 97% of franchises succeed.”

75 75 Franchising Myths Myth #4 “Franchisors make it easy to buy a franchise, but then make it impossible for you to sell your franchise.”

76 76 Franchising Myths Myth #5 “Franchisors make all their money from the upfront franchise fee. They don’t care if franchisees succeed.”

77 77 Franchising Myths Myth #6 “All successful franchisees are risk takers.”

78 78 Franchise Warning Signs An unresponsive franchisor.

79 79 Franchise Warning Signs An overly eager franchisor.

80 80 Franchise Warning Signs Delayed Disclosure.

81 81 Franchise Warning Signs Uncooperative Franchisees.

82 82 Franchise Warning Signs Numerous (repeated) Lawsuits.

83 83 Franchise Warning Signs Delayed Openings.

84 84 Franchise Warning Signs Feeling Pressured.

85 85 Franchise Warning Signs Little interest in You.

86 86 International Franchising 500+ U.S. Franchisors sold international licenses Original franchise concepts in 40 countries... also sold internationally Master franchisees worldwide: 5,000

87 87 International Franchising No association for master franchising Training primarily by franchisors Little research conducted to date

88 88 International Franchising 2005 Master Franchisee Database: 2,000 in 60 countries representing 100 franchise concepts

89 89 International Franchising Master Franchisee Survey: 53% did not belong to a franchise association, but 94% said they desired more interaction and education.

90 90 International Franchising Master Franchisee Survey: 30% planned to buy an additional franchise license.

91 91 International Franchising Master Franchisee Survey: 64% had been operating for more than 5 years.

92 92 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

93 93 International Franchising Master Franchisee Survey: Greatest Need 57% Sales/Marketing Help 30% Operations/Training Help

94 94 International Franchising Master Franchisee Survey: Greatest Need 57% Sales/Marketing Help 30% Operations/Training Help

95 95 Small vs Large Franchisors The Small (Under 50 Units) Franchisor Advantage: Time Still something to prove

96 96 Small vs Large Franchisors The Small (Under 50 Units) Franchisor Disadvantage: Money International Experience Expertise

97 97 Small vs Large Franchisors The Large (Over 200 Units) Franchisor Advantage: Money International Experience Expertise

98 98 Small vs Large Franchisors The Large (Over 200 Units) Franchisor Disadvantage: Time Believe their own PR

99 99 Questions for Franchisees Q #1 “Knowing what you know now, would you buy this same franchise again?”

100 100 Questions for Franchisees Q #2 “Do you find the business as satisfying today as when you first started?”

101 101 Questions for Franchisees Q #3 “What’s the secret to the success of the top franchisees?”

102 102 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?”

103 103 Questions for Franchisees Q #5 “Why do some franchisees succeed, and others fail?”

104 104 Questions for Advisors Q #1 “How is this franchise agreement different from other good franchise agreements that you have reviewed?”

105 105 Questions for Advisors Q #2 “If you were purchasing this franchise, what concessions, if any, would you ask for?”

106 106 Questions for Advisors Q #3 “If you were purchasing this franchise, what concessions, if any, would you ask for?”

107 107 Questions for Advisors Q #4 “What’s your evaluation of the company’s financial condition?”

108 108 Questions for Advisors Q #5 “What’s your evaluation of the company’s international expertise?”

109 109 Ultimately YOU Decide Franchising is not for everyone, and it may not be for you. Ultimately only you can decide.

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