Development Strategy

The ultimate development strategy that is adopted

should ensure that:
1. Approved candidates are capable and financially
qualified to operate successful franchised
locations.
2. Approved franchisees are capable and financially
qualified
3. The franchisor is able to support franchise owners
effectively and at a reasonable cost.
4. Quality remains high.
5. Risk of litigation is minimized.
6. Chances of franchisee success is optimized.
7. The franchisor is able to meet its development
goals.
Development Strategy

The development strategy chosen should also

match the goals and values of your company.
Just because a successful competitor uses a
particular strategy doesn’t mean that it’s right
for you.
Appropriateness of Your Franchise Business
Structure
Key Questions Regarding Your Business Structure:

Do the types of franchises we’re selling encourage

optimum unit-level performance?
Do the fees we charge cover our costs in all areas?
Are there provisions in our franchise agreement that
we don’t execute against or enforce?
Is our franchise agreement up to date in terms of
planning for future technology in our business?
Does our Item 7 investment range reflect reality?
Do our reporting requirements give us the data we
need to adequately benchmark performance in our
system?
Is our business structure flexible enough where it
needs to be?
Do we have well written bylaws for our advisory
council?
Establishing Your Fee Structure
 Determining the Initial Fee
Match fee to service performed
Fee determination methods
Cost plus
Market comparables
Positioning
Financial analysis
Fees range from $5,000 to $150,000
Average fee: $25,000
Fee should not deter franchise sales
Initial fee is a minor profit center
 Initial Fee Minor Profit Center

Advertising $5,000 - $13,000

Sales commissions $3,000 - $7,000
Brochures & mailing $500
Legal $500 - $1,000
Site selection 0 - $5,000
Training at HQ $2,000 - $5,000
Field training $2,000 - $4,000
Travel 0 - $2,000
Initial support $2,000 - $5,000

Totals $16,500 - $47,500

 Can Leverage off of Fixed Costs in
Early Years of Franchising
Advertising $5,000 - $13,000
Sales commissions $3,000 - $7,000
Brochures & mailing $500
Legal $500 - $1,000
Site selection 0 - $5,000
Training at HQ $2,000 - $5,000
Field training $2,000 - $4,000
Travel 0 - $2,000
Initial support $2,000 - $5,000

Out of Pocket – Early Years $5,500 -

$16,500
Best Practices Royalty Determination – Six Steps

Perhaps your single most important decision

Comparables is only step one of the analysis
Should compare comparables on multiple fronts simultaneously
Don’t look at royalties in a vacuum but in relation to the
opportunity/value proposition
Financial modeling is essential to a proper analysis
This starts with understanding support requirements
Varies based on positioning, concept, structure, markets targeted,
speed of growth, targeted franchisee, philosophy of the franchisor and
many other factors
Support requirements translate to required staffing and organizational
structure
Major elements of their cost structure – labor costs, space
requirements, etc.
This is the beginning of an appropriate “cost plus” modeling approach
Sensitivity analysis is the next step
Subject the model to testing under altered assumptions
“What if” modeling
Analysis of the value proposition – what do I get for my
money?
Positioning in the marketplace
Reverse engineering franchisee ROI
Selling Products and Rebates
Adequacy of Your Organizational Structure

Six key areas of evaluation:

Does your reporting structure align the right
responsibilities?
Do your senior managers have a workable
number of people reporting to them?
Are responsibilities in the organization clearly
defined?
If you have company-owned operations, are
they structured properly within your
organization?
Does the organizational structure “fit” your
leadership style as an owner?
Has your organizational structure evolved over
time to fit the growing needs of your business?
 Marketing and Other Fees
Initial launch marketing
Local marketing requirement
Cooperative marketing
System marketing fund
Back-Room Support Fees
Technology Fees
Other Fees
 Implementing the Franchise Strategy

External
“How are we perceived by our
Value
Proposition
franchisee candidates?”

Relevancy of your concept today and in the years

ahead
Equity of your consumer brand
Strength of your products and operations systems
against your competitors
Strength of your franchise structure against your
competitors
Overall marketability of your franchise opportunity
 Implementing the Franchise Strategy

Your
Organization
“How well do we perform as a team”

Adequacy of your organizational structure

Coverage of critical functional responsibilities
Staff capabilities and experience
Implementing the Franchise Strategy

Leadership performance
Staffing ratios
Compensation structures
Staff morale and group dynamics
 Implementing the Franchise Strategy

Internal Value
Proposition “How are we perceived by our
franchisees?”

Franchisee profitability
Franchisee relationships
Quality of your store development processes
Quality of pre-opening support systems
Quality of ongoing support systems
Developing a Top Performing
Organization
“How to perform as a team”
Coverage of Critical Functional Responsibilities

Brand management Research & development

Concept
Product mix Quality assurance
Development
Service offering Technology

Lead generation Real estate

Franchise Franchise qualification Facility design
Development Franchise sales Construction

Training Marketing support

Franchise Field support Public relations
Support Advisory councils Third party supply contracts
Franchisee communications

Human resources Franchise compliance

Company Accounting Insurance
Administration Legal
Office facilities
 Staff Capabilities
Young Franchisor
Hiring often limited by cash flow
Often little or no prior franchise
experience on the management
team
Managers hold a wide range of
responsibilities
Founders need to focus on
developing strong relationships
with the initial group of
franchisees
Established Franchisor
Goal should be to have a staff
highly experienced in
franchising
Experience from multiple
franchise systems is desired
The initial management team
hired needs to be hands on
Focus needs to be on the
transition from founders to
managers
The Cost of Home Grown Talent
 Staffing Ratios for the Franchisor

The right staffing ratios for your company will depend on

a variety of factors including:
The type of industry in which you operate
The complexity of your unit level operations
The speed at which your system is expanding
The geography over which you’re expanding
The types of franchises you are awarding
Your philosophy toward support
Implementation Planning and Support
Implementation Planning and Support
Implementation Planning and Support
Implementation Planning and Support
 Typical Staffing Ratios

Franchise development staff

Single unit focus = 1 for each 12-18 deals
Multi-unit focus = 1 for each 5-8 deals

Field support staff

Single unit restaurant = 1 for each 20-25 units
Multi-unit restaurant = 1 for each 10-15 owner groups
Territory-based service system = 1 for each 30-35 owner territories

Field marketing staff

1 for each 50 to 100 units/territories

Overall staff to franchised locations (within a mature organization)

1 staff equivalent for each 7 to 11 locations
 Staff Morale and Group Dynamics

Good franchisors develop a loyal and happy staff by:

Leading by example within the office
Educating their staff on franchising
Setting clear responsibilities, goals and objectives
Giving staff the resources they need
Allowing staff to do their job
Communicating and interacting with staff regularly
Maximizing Your Franchisee
Relationships
 Franchisee Profitability

“The secret to our success is to make sure

the franchisees make a little more money each
year.”
Ray Kroc
McDonald’s Founder

Benchmarking franchisee profitability requires access

to reliable and consistent information. Key measures
include:
Net operating income
Net income before owner’s compensation
Sales to investment ratio in the first year
Overall return on investment after financing costs
 Franchisee Relationships
Strong Relationships Yield
More committed operators who
will follow-through on your
vision
Better customer experiences
across your system
Improved franchise sales as a
result of great references being
provided
Less litigation/arbitration
An enhanced ability to introduce
changes into your system
Weak Relationships Yield
An inability to move the system
forward
A disproportionate amount of
staff time dealing with unhappy
franchisees
Greater cost of litigation or
arbitration
A far less efficient franchise
sales program
Lower morale for your staff
 Franchisee Relationships
Common elements in systems having strong franchisee
relationships:
A strong corporate culture
A system leader who is respected
Profitable franchisees
Highly active franchisee advisory
council program
Strong and capable field support staff
Establishing an Advisory Council Structure

Typical Approach to Councils

Council members elected by their peers
Council consists of 8-12 franchisees
Council meets with franchisor between 2 and 4
times per year

Problems With The Above Approach

Requires a small group of franchisees to properly
represent the entire franchise system
Often challenging for the council to obtain input from
other franchisees in the system
Lack of transparency to the system
Encourages negative franchisees to sit on the
sidelines and ignore council-supported initiatives
Alternative Approach to The Council Process

Regional Advisory Councils National Presidents’ Council

Multiple regions Presidents of each regional

Elected officers in each region council
All franchisees attend meetings Focus on higher-level strategic
Minutes taken by franchisor and issues
made available to all franchisees
in the system
Developing Effective Franchisee
Support Programs
Building Blocks for Supporting Franchisees
 10 Common Mistakes in Supporting
Franchisees
1. Lack of capital to provide adequate support, particularly in
the early years of franchising
2. Hiring support staff that is under-qualified or given insufficient
training and direction
3. Lack of operational experience by the franchisor
4. Failure to build the support program around the issues that
are most important to franchisees
5. Failure to involve franchisees in key decisions
6. Failure to develop an effective change implementation
process
7. The belief that technology can replace human contact
8. Failure by the franchisor to measure the results of its support
efforts
9. Negative attitudes toward franchisees
10.Fear of losing control with either the support staff or
franchisees
 Store Development Process

How refined is your real estate model?

Real How do you evaluate locations?
Estate Who drives the site selection process?

How involved should you be as the franchisor?

Lease Do your franchisees retain qualified real estate counsel?
Negotiation Are your required lease inclusions appropriate?

Are your design standards fully defined?

Facility Have your construction standards been cost engineered?
Design Who selects the architect for each franchised location?

What options exist for construction?

Facility
Are you assisting franchisees in the bid process?
Construction
Are you benchmarking construction costs?
 Quality of Pre-Opening Support

Pre-Opening Training:

Operations raining should focus on the quality of

the customer experience
Who must attend training?
Length of the training course
Quality of course materials
Use of self-study or online course materials
Testing throughout the training process
Use of a certification program
 Quality of Pre-Opening Support

Onsite Training:
Goals for o n-site training
Quality of the opening team
Agendas for onsite training
Assistance provided between the completion of
construction and the first day of operation
Role of the onsite trainer
Monitoring the effectiveness of the onsite training
process
 Quality of Ongoing Support Systems
Field Consulting
Qualifications of reps hired
Compensation structure
Ratio of reps to units
Frequency of visits
Routing efficiency
Agendas for each visit
Business planning tools
Use of mystery shops
Collection and dissemination of
best practices
Working with troubled
franchisees
Ongoing rep training
Marketing Support
Local advertising support
Co-op programs
Public relations support
Brand monitoring activities
Quality of consumer marketing
Consumer website
Field marketing consulting
Management of the system
marketing fund
Consumer testing/research
Management of outside agency
relationships
Focus of Support May Vary Based on the
Types of Franchisees You Have

Single Unit Franchisee Multi-Unit Franchisee

Financial statement basics Detailed business planning

Expense controls Financial benchmarking
Best practice sharing Planning for capital spending
Sales training Technology development
How to manage a family Multi-unit management training
business effectively Assistance with finance or lease
Strategies for local store programs
marketing Input on key strategy issues
Hiring good employees impacting the brand
Managing employees
Focus Within a Franchise Support Program
 Prerequisites for the Business
Planning Process

Some level of standardization for franchisee accounting practices

and income statement generation
Requirement that franchisees generate monthly financial
statements
Technology available to capture and analyze income and expense
information for the system
Field support staff who are capable as business consultants and
trained in the franchisor’s process
The respect of your franchisees to provide value through the
business planning process
Defined expectations and responsibilities for both franchisees and
the franchisor company
 Business Planning With Your Franchisees

Key steps in the planning process:

1. Create and continually refine the planning process with the input of
your franchisees
2. Communicate the final process both internally and to your franchisees
3. Schedule an in-depth meeting with each franchisee to develop their
plan for the coming year
4. Meet with franchisees at least quarterly to review progress to the plan
and actions needed to address problem areas
5. Provide benchmarking data to franchisees throughout the year,
allowing them to measure their own progress against the system as a
whole
 Business Planning With Your Franchisees
The planning process will vary based on the needs of each franchise system. In
general, however, a franchisee’s plan will focus on areas such as:

Marketing Operations Human Facilities

Management Resources
Budget Revenue Goals Staff Levels Maintenance
Local Marketing Cost of Goods Training & Construction &
Co-op Planning Operating Expenses Development Trade Dress
Support of Overall Profitability Compensation Updates
Systemwide Capital Expenditures Plan New Equipment
Initiates Cash Budget Turnover Targets Technology &
Tracking Operations Quality New Staff Hires Software
Marketing Customer Feedback Facility Lease
Performance Review
 Quality of Ongoing Support Systems
Communications
Franchisee Intranet
Newsletters
Seminars/conventions
Procedures for testing and
introducing new products or
services
Accumulating best practices
Disseminating best practices
Internal communications within
the franchisor company
Tracking of communications with
franchisees
Crisis management program
Vendor Relations
Supply agreements
Distribution structure and related
agreements
Advertising or public relations
agencies
Legal counsel
Various third-party approved
supplier programs
Auditing of supplier contracts
Quality assurance programs
 Quality of Ongoing Support Systems
Technology
Website
Intranet
POS and back office systems
Polling of POS and back office
data
Integration with vendor
technologies
Other telecommunications – cell
phone, Internet, VoIP, etc.
Store security systems
Compliance
State and federal franchise laws
Business opportunity and
industry laws
Franchise sales process
Compliance with your
obligations as the franchisor
under the franchise agreement
and operations manual
Franchisee compliance with your
standards
Franchise transfer process
Insurance
 The Need For Constant Monitoring
Strategic Planning
Process should be completed
annually.
Focuses on corporate vision,
strategies and tactics.
Primary focus is internal.
External focus concentrates on
competitive threats.
Entire company should be
involved in the process.
Tied to your development and
support budget.
Best Practices Audit
Should be completed every 3-5
years.
Both an internal and external
focus.
External focus looks at your
value proposition compared to
your competitors.
Internal focus on efficiency and
results of tactics employed.
Measures the overall value
proposition of your company as
a franchisor.
 Conclusion

Franchising is a means of duplicating success, not

creating success
Thrives by creating win-win situations
You must be selective
Franchising is a new and different business
Is not the right solution for every business
Provides one of the most powerful business expansion
models ever developed
Questions

The i Franchise Group