Franchise Fundamentals for Eco=
nomic Development[1]<=
/span>
Prepared
by Stephen Keel
http://Wel-= fi.com
Basic
National Master Franchisee Activities.
Organizational
Structure for a National Master Franchisee.
Marketing
to the Prospective Franchisees
The
franchisee brochure (or presentation booklet)
Marketing
to the Product or Service End User (customer)
The
Feasibility Study - the "Plan for Success.
Key
Personnel – Sales, Operations, Training.
Area
Developer and Franchisees Operations Manuals.
Area
Developer and Franchisee Training Manuals.
Training
Directors and Managers
Pert
Chart (Evaluation Timeline)
Break-even
Analysis, Ratio Analysis and Taxes.
The
Area Developer and Franchisee’s Advisory Councils.
A national program assumes the existence of a Franc=
hisor,
a National Master Franchisee (NMF), numerous Area Developers (AD) and hundr=
eds
or thousands of individual entrepreneurs who are known as franchisees.
The Franchisor is the company or agency that has origi= nated the business opportunity. It is responsible for maintaining standards and communicating strategies for successful operations. The Franchisor licenses= the use of all brand names.
The NMF must have a staffed office of competent manage=
rs who
serve both the Area Developers and the entrepreneurs. The Area Developers a=
ct
as a coordinating agency. The AD may be an independent agency or assigned s=
taff
of an existing ministry, mission organization or established cooperative.
A franchise is complete business opportunity that is provides management, accounting, finance, economics, quantitative analysis,= and marketing components. Additionally, franchisees enjoy bulk purchasing arrangements. Franchisees share a = common accounting system which is able to measure and compare the success and profitability of different units.
“Business format franchising” permits the franchisee t= o use the franchisor's products and services, trade name, trademark, and most importantly, the prescribed business format. The franchisee or a coordinating agency known as a “Area Developer” = has direct responsibility for the day-to-day details and problems of the busine= ss, including: hiring, staffing, planning, developing facilities, sales, paying business taxes and obtaining permits.
Business format franchising provides the franchisee/en= trepreneur with great depth of knowledge and information concerning a great breadth of business activities including: marketing, promotion, site selection, price suggestions, start-up activities, management, operations, training, financi= ng, accounting systems, and legal support.
1) Overs=
ee Operations,
Including Training
(This re= quires the development and distribution of an operation manual for Area Developers= and for Franchisees.)
(2) Mark=
eting
(This re=
quires brochures
to attract Area Developers, a franchise prospectus and marketing strategies=
to
attract Area Developers, franchisees and customers.)
(3) Lega=
l
(This in= cludes but is not limited to the Unif= orm Franchise Offering Circular (UFOC) and the Franchise Agreement)[2]
The UFOC will provide detailed information about initi= al fee requirements and monthly royalty payments including advertising payments an= d/or lease payments in addition to the regular royalty payment.
The stakeholders need to be aware of the legal require= ments necessary to establish a franchise. Typically, there exist both federal and state laws which the stakeholders must be awar= e of and adhere to in the development of their franchising programs.
The Master Franchisee’s headquarters’ organization sho= uld be divided into three major sections: (1) operations (2) sales/marketing and (= 3) training.
Ideally, the following officers will oversee targeted activities:
Vice President of Operat=
ions
Vice President of Sale/M=
arketing
Vice President of Traini=
ng
In
There are three primary target markets for the NMF including:
(1)&=
nbsp; The
prospective franchisee
(2)&=
nbsp; The
prospective Area Developer
(3)&=
nbsp; The end user or customer of the product =
or
service being sold
The NMF needs to develop marketing programs, advertisi= ng, sales promotions, and public relations aimed at soliciting prospective Area Developers and franchisee/entrepreneurs. The NMF needs to develop a sales management team.
This is basically a printed booklet provided to a prospec=
tive
franchisee that has responded to the franchisor's advertisements and seeks
further information. The brochure and information should explain the
products/services offerings of the franchisor while identifying the steps or
processes one needs to follow to become a franchisee in this particular
system.
The franchise prospectus se= nt to a prospective franchisee generally contains a brochure of information about t= he general operations of the franchise, a copy of the franchisor's Uniform Franchise Offering Circular (UFOC), a franchise agreement, and an individual franchise application. It also includes:
1) a letter from the franch= isor discussing the franchisor's objectives,
(2) a brief history or expl= anation of the franchise firm,
(3) estimated start-up capi= tal or investment required of a potential franchisee,
(4) personal qualifications= which a potential franchisee must have, and
(5) anticipated benefits and responsibilities in becoming a franchisee.
Almost all franchisee prosp= ectuses, in addition to the prospectus brochure, UFOC and franchisee agreement will = also contain a personal and confidential franchisee application form. This form = will basically be divided into the following areas:
(1) personal informa= tion
(2) references
(3) education
(4) military service=
(5) current employme= nt
(6) previous employm= ent
(7) job descriptions= /history
(8) reason for choos= ing this franchise
(9) personal financi= al statements
The flow chart should outli= ne those steps which a prospective franchisee needs to undertake to:
(1) be accepted as an prosp= ective franchisee,
(2) be interviewed and eval= uated as a prospective franchisee,
(3) be assigned as a franchisee,
(4) be trained as a franchi= see, and
(5) be authorized to open a= nd operate a new franchise unit.
The NMF will also need to develop the marketing and advertising necessary to promote the products and services to the end consu= mer or customer. The advertising and promotion will bring the customers in the first time but it is the operatio= ns which will bring the customers back for repeat business.
Franchising is the sharing of a vision. This vision is one of growth and opportunity. The vision must be sh= ared by the franchisor with the franchisee and also with the staff of both the f= ranchisor organization and the franchisee organization. The vision provides the opportunity for growth and success in an established business experience.
Franchisors are providing franchisees the opportunity = to work in a proven and successful business situation. They provide start-up assistance which includes franchisee training, as well as managerial training prior to the opening of any franchise unit. This start-up assistance and training assistance will help the franchisee to lea= rn all aspects of the business before actually starting or operating the business.
The franchisor also provides well planned and developed marketing and advertising programs on the local, regional, and national levels. This marketing program pro= vides continuous added value to the franchising system.
The very first step in the establishment of success is to determine t=
he
feasibility of developing a potential or existing business into a franchise
system. The feasibility study should contain that information in the follow=
ing
five areas which will help the franchisor make a "go or no-go"
decision:
(1) Marketing,
(2) Management, (3) Accounting, (4) Finance (5) lega=
l
The feasibility study contains six content sections including:
A. Company name, address and contact person=
.
B. Type of Business -
C. Company Description
D. Key Personnel
E. Start-up schedule
F. Competition
G. Funds needed and/or requested
H. Fund Use Statement
I. Fund Repayment - (how money borrowed wil=
l be
repaid)
Marketing Objectives and Goals
Products/Services
Customer Promotion/Marketing/Advertising
Pricing Strategy
Site Selection Criteria
Start Up PLAN
CUSTOMER ADVERTISING
The sales
manager, operations manager and training manager need to be distinct and
different people. In addition, there may be other staff members
(trainers, sales people, field staff and marketers) who are the key personn=
el
in the development of the franchise system.
On the area
organizational level, there must be a sales manager who focuses on developi=
ng
new business units.
The franch=
isee
benefit from having a sales director in their geographic area who is focuse=
d on
selling products and or services to the end user.
The
operations manuals should explain how to run every aspect and operation of =
the
business. This is a time consuming=
task
and is best handled by those people who are actually involved in the day-to=
-day
operations of the business. Ultimately, the Area Developer and/or franchisee
must develop their own operations manuals based on the manuals provided to
them.
The=
manuals
generally explain how much training and what kind of training the NMF will
offer not just to the franchisee but also to the franchisee managers, assis=
tant
managers, and staff people.
Th=
e NMF training
director will be responsible for explaining specific job duties, policies,
procedures, and the handling of each task within the business. In addition,=
the
NMF training director must be able to inspire confidence, a feeling of rapp=
ort,
and respect for the business operation. The training manager should possess
personal expertise and all the practical aspects of the operation, as well =
as
being able to develop a sense of confidence for the franchisee and their
employees.
(1) Pre-start-up training,
Introduction
Mar=
keting
Operations
Ser=
vice
production
Management of personnel
Fin=
ance
(2) Start-up training
Th=
e NMF's
representative(s) will generally stay for one to three weeks after startup =
and
assist the Area Developer and the franchisees and their staff during the st=
art-up
of the business. This allows the headquarters' organization to help overcome
any unexpected problems or difficult circumstances which may occur during t=
he
initial start-up period.
(3) Continuing (post-opening) training.
Tr=
aining
is provided by field representatives or staff members who visit each franch=
ise
unit either on a monthly or quarterly basis. These franchisor field
representatives may deliver training programs to the franchisee and their s=
taff
members.
Pert is an acro= nym for project, evaluation, review, technique. The pert chart is a simple delineated set of related events presente= d in sequence of their happening. Gener= ally time periods are identified to reflect the time requirements for each activ= ity or event. By identifying all the t= ime required, the franchisor would be able to develop a critical path which all= ows sufficient time to complete all the tasks of the project. The pert chart is a simple useful tool = which the NFM should use in establishing a franchise unit. These charts illustrate the required st= eps from the initiation of the franchise idea to the "grand opening" of the first unit by a franchisee.
The=
records
may be broken into the following sections: start-up or turnkey costs, funds
available, equity available and investment cash, pro forma income statement,
pro forma balance sheets, pro forma cash flow statements, break-even analys=
is,
ratio analysis, and provisions for taxation.
These records need to be developed for both the NMF, the Area Develo=
per as
well as for the individual franchisee unit system.
The
major accounting records kept by a franchisor and a franchisee at the very
least would include:
(1) income statement (profit and loss statement)
(2) balance sheet
(3) cash flow statement
The break-even analysis refers to that point in the franchise business when revenues (inco= me) exactly equal expenses (costs of doing business). This financial position is often expres= sed in mathematical equations or in line graphs with separate lines representing variable costs, fixed costs, and total revenues of the firm. At the point of the intersection of the= total costs and revenue lines, the business is neither making nor losing money an= d is referred to as the break-even point.
The
franchisor should also look at provisions for taxes which must be paid. These taxes should include federal, sta=
te,
social security, workman's compensation, sales taxes, business taxes, prope=
rty
taxes, and employer related taxes. All
businesses need to work and adhere to the taxing liabilities in their state=
and
nation.
Hav=
ing
developed the three primary financial statements, it is important next to
compare the data so that we can better under the significance of the financ=
ial
information. This information is particularly useful when developing fundin=
g.
The=
re are
different financial ratios which may be developed. However, there are four
classifications including:
(1) liquidity ratios,
(2) leverage ratios,
(3) operating ratios, and
(4) profitability ratios.
Break-even Chart
A
break-even chart may be developed simply by listing the sales volume or uni=
ts
on the horizontal axis and the income and expenses on the vertical axis of a
break-even chart. A fixed expense line is drawn horizontal to the horizontal
axis and on top of that a variable expense line is drawn. The total revenue
line is drawn from the origin of the chart and where the total revenue line
crosses the total expense line (fixed expense + variable expense) the
break-even occurs.
Bre=
ak-even
analysis is useful to allow the franchisor to understand when profits will =
be
reached. This analysis is also useful to help the franchisor to understand =
when
franchisees may recoup their original investment and receive profits for th=
eir
business.
The=
legal
obligations before starting a franchise include the development of a Uniform
Franchise Offering Circular (UFOC) as well as an Area Developer contract an=
d a
franchisee contract or agreement.
The=
UFOC is
basically a requirement of the Federal Trade Commission adhering to the fed=
eral
franchise disclosure rules of 1979 and requires the disclosure of twenty-th=
ree
specific items relating to the franchising business.
The
franchise agreement is designed to explain all the contractual relationships
between the franchisor, the NMF, the Area Developer and the franchisee
including exclusive territory, fees, royalties, training, and the obligatio=
ns
of all stakeholders. In addition, an important section concerning terminati=
ons
and nonrenewals is also contained in both the UFOC and franchise agreement.=
The individual or entity known as the &=
quot;National
Master Franchisee" is generally granted the rights within a prescribed
territory and for a specific period of time to solicit prospective franchis=
ees.
The NMF will be responsible for the solicitation and signing of each Area
Developer and franchisee and will generally provide the training and other
services to the franchisee. The NMF receives a percentage of the franchise =
fees
paid to the franchisor. A NMF also has the right to develop and operate
franchise units within the territory assigned.
The area development agreement is one o=
f the
most popular ways to create multi-unit franchises. The development agreement
allows the AD to develop and operate multiple units in a given specific are=
a.
This right is generally accompanied by obligations to create and establish a
specific number of franchises in the designated territory over a given peri=
od
of time
Controlling is concerned with
determining standards and methods of evaluating performance against
predetermined standards to evaluate operating results. Controlling is an
important function of any franchising organization. Proper evaluations need=
to
be established and once in place should be followed by prompt praise or
punitive actions if the results are particularly deviant from the standard.
Most evaluations by franchisors include the following functional areas:
Sales
appraisal
Costs of
goods sold appraisal
Costs of
labor appraisal
Apprais=
al of
performance of managers
Apprais=
al of
performance of assistant managers and staff
Apprais=
al and
analysis of financial transactions
Appraisal of headquarters managers, e.g. directors of&= nbsp; franchise sales, training, purchasing and grand opening managers must occur.
The franchisor needs to be able to develop controls and methods of determining appropriate performance levels in the areas of sales, costs, profits, quality control, employee morale, turnover, and general appearance.
There are certain specific financial fees which most franchisees will pay and must be included in the overall budget when seeking funding. The “opening” involves many serious financial considerations inclu= ding start-up costs, franchise fees, and one to three months operating costs. Th= ese costs are crucial for both the franchisor and franchisee to understand. In addition to start-up or turnkey costs associated with the development of a business, the franchisee will also be required to pay fees to the franchisor headquarter organization including:
Costs associated with initial training and organization.
The royalty fees paid by the franchisee to the Master Franchisee are
generally a percent (3-8 percent) of the bi-weekly or monthly revenues of t=
he
franchise business. They assure that a support organization remain availabl=
e.
Most franchisors now include an advertising fee which is paid by the
franchisee to the headquarters organization. Franchisors generally keep the=
se
funds in a separate account and are not included in a general revenue accou=
nt
of the franchisor. These monies are spent by the franchisor only for the
purpose of advertising or marketing the franchising system, products or
services.
A very positive aspect of the franchise relationships = has been the development and creation of franchise advisory councils (FACs and ADACs). As a franchise system grows, there may be differences of opinion am= ong the stakeholders
In the early stages of activity, this form should be completed at the NMH and Area Developer levels to assign responsibility for creating the initial business plan.
|
EXECUTIVE SUMMARY |
PERSON RESPONSIBLE |
DUE DATE |
|
COMPANY NAME |
_________________ |
___________ |
|
&nbs= p; TYPE OF BUSINESS |
|
|
|
&nbs= p; COMPANY DESCRIPTION |
_________________ |
___________ |
|
&nbs= p; KEY PERSONNEL |
_________________ |
___________ |
|
&nbs= p; START-UP SCHEDULE & COMPETITION |
_________________ |
___________ |
|
&nbs= p; FUNDS REQUESTED |
_________________ |
___________ |
|
&nbs= p; FUNDS USE |
_________________ |
___________ |
|
&nbs= p; FUNDS REPAYMENT |
_________________ |
___________ |
|
MARKETING |
_________________ |
___________ |
|
&nbs=
p;
VISION / |
_________________ |
___________ |
|
&nbs= p; MAJOR MARKETING OBJECTIVES |
_________________ |
___________ |
|
&nbs= p; PRODUCT / SERVICES |
_________________ |
___________ |
|
&nbs= p; CUSTOMER PROMOTION / ADVERTISING |
_________________ |
___________ |
|
&nbs= p; PRICE |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE PROSPECTUS |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE RECRUITMENT PLAN |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE SALES / ADVERTISING |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE LOCATION SELECTION |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE GRAND OPENING |
_________________ |
___________ |
|
MANAGEMENT |
_________________ |
___________ |
|
&nbs= p; HEADQUARTERS KEY PERSONNEL |
_________________ |
___________ |
|
&nbs= p; HEADQUARTERS ORGANIZATION STRUCTURE |
_________________ |
___________ |
|
&nbs= p; HEADQUARTERS POLICIES / W&S |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE OPERATIONS MANUAL |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE KEY PERSONNEL |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE ORGANIZATION STRUCTURE |
|
|
|
&nbs= p; FRANCHISEE POLICIES / W&S |
_________________ |
___________ |
|
&nbs= p; PERT CHART |
|
|
|
HEADQUARTERS FINANCE & ACCOUNTING = |
_________________ |
___________ |
|
&nbs= p; START-UP OR TURN-KEY COSTS |
_________________ |
___________ |
|
&nbs= p; FUNDS AVAILABLE |
_________________ |
___________ |
|
&nbs= p; PROJECTED INCOME STATEMENT |
_________________ |
___________ |
|
&nbs= p; PROJECTED BALANCE SHEET |
_________________ |
___________ |
|
&nbs= p; PROJECTED CASH FLOW |
_________________ |
___________ |
|
&nbs= p; BREAK EVEN ANALYSIS |
_________________ |
___________ |
|
&nbs= p; RATIO ANALYSIS |
_________________ |
___________ |
|
&nbs= p; PROVISION FOR TAXATION |
_________________ |
___________ |
|
FRANCHISEE FINANCE & ACCOUNTING |
|
|
|
&nbs= p; START-UP OR TURN-KEY COSTS |
|
|
|
&nbs= p; FUNDS AVAILABLE |
|
|
|
&nbs= p; PROJECTED INCOME STATEMENT |
|
|
|
&nbs= p; PROJECTED BALANCE SHEET |
|
|
|
&nbs= p; PROJECTED CASH FLOW |
|
|
|
&nbs= p; BREAK EVEN ANALYSIS |
|
|
|
&nbs= p; RATIO ANALYSIS |
|
|
|
&nbs= p; PROVISION FOR TAXATION |
|
|
|
LEGAL |
_________________ |
___________ |
|
&nbs= p; UNIFORM FRANCHISEE OFFERING CIRCULAR |
_________________ |
___________ |
|
&nbs= p; FRANCHISEE CONTRACT |
_________________ |
___________ |
|
&nbs= p; TRADEMARK |
_________________ |
___________ |
|
&nbs= p; BUSINESS STRUCTURE |
_________________ |
___________ |
|
&nbs= p; INSURANCE: TYPE & COST |
_________________ |
___________ |
|
APPENDIX |
_________________ |
___________ |
|
&nbs= p; BUILDING PLANS |
_________________ |
___________ |
|
&nbs= p; LAYOUT DESIGN |
_________________ |
___________ |
|
&nbs= p; DIAGRAMS |
_________________ |
___________ |
|
&nbs= p; CHARTS |
_________________ |
___________ |
|
&nbs= p; WORKING PAPERS |
_________________ |
___________ |
[1] This paper contains an adaptation of information found at http://www.bu= s.lsu.edu/ei/FranchiseClass/default.asp
[2] Uniform Fran=
chise
Offering Circular (UFOC)
The
UFOC contains 23 different statements which are required to satisfy the
franchise disclosure rule. These 23 sections include:
(1)
the Franchisor, Predecessors and Affiliates
(2)
Business Experience of persons affiliated with the franchisor
(3)
Litigation
(4)
Bankruptcy
(5)
Initial Franchise Fee
(6)
Other Fees
(7)
Initial Investment
(8)
restrictions on Sources of Products and Services
(9)
obligations of franchisee
(10)
financing arrangements
(11)
obligations of the franchisor; other supervision, assistance, or services
(12)
exclusive area or territory
(13) trademarks, service marks, trade names, logo types, and commercial symbols<= o:p>
(14)
patents and copyrights
(15)
obligations of the franchisee to participate in the actual operations of the
franchise business
(16)
restrictions on what the Franchisee may sell
(17)
Renewal, Termination, Transfer and Dispute Resolution
(18)
arrangement with public figures
(19)
Earnings claims: actual, average, projected or forecasted franchisee sales,
profits or earnings
(20)
list of outlets
(21)
financial statements
(22)
franchise agreement and exhibits
(23)
acknowledgement of receipt by prospective franchisee
Franchise Fundamentals for Economic Development Page