An Introduction to Franchising

Transcription

1 An Introduction to Franchising

2 What is Franchising An innovative method of distributing goods and services. A legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. An extremely successful and rapidly growing way of doing business in Australia. 2

3 Franchising vs. Licensing Model A license or distribution model would be used where you are the licensor granting certain rights for someone to use your goods / products They exclude establishment fees, other fees or a system Exclusive arrangements are possible but need to be considered in the context of the Competition and Consumer Act Any fees would need to be loaded in product supply pricing 3

4 Types of Franchises Four main types of franchises: Retailer - Retailer... the franchisor markets a service or product under a common name and standardised system, through a network of franchisees, e.g. Forty Winks. Manufacturer - Retailer... e.g. a parent company grants the right to a franchisee to sell their products, e.g. new car dealerships. Manufacturer - Wholesaler... the franchisee is granted rights under license to distribute the franchisors product, e.g. Coca-Cola Wholesaler - Retailer... e.g. frequently a cooperative of franchise retailers who have formed a wholesale company through which they are contractually obliged to purchase e.g. hardware and automotive product stores. 4

5 The Four Elements of a Franchise Brand - the name associated with the services delivered in a memorable and satisfying experience to the customer Operating System - institutionalises the excellent service delivered in a memorable experience so it can be done over and over again from franchise to franchise in a consistent manner Support System - helps the franchisee get better and better at delivering the service in a memorable experience which ultimately improves a franchisees financial performance Franchisee - brings talent and experience to the business and is motivated by being in a good system 5

6 What s in it for the Franchisor Why do business owners choose franchising as a growth model: National reach Additional resources for further brand expansion Owners have far more motivation to succeed compared with store managers Good franchising will always be a win-win situation. 6

7 The Advantages of Franchising For the franchisor Allows the business to expand much more quickly than they could otherwise The business can invest less capital and labour as the franchisee supplies both The business can ensure it has competent and highly motivated owners/managers at each outlet through franchising Businesses are able to provide franchising rights to only qualified people Studies show that franchised businesses perform better than company owned stores For the franchisee Franchisees face much less risk through purchasing a franchise, than tom starting a business from scratch 7

8 The Advantages of Franchising For the franchisee Much less risk through purchasing a franchise, than from starting a business from scratch. Franchisees are affiliated with a proven company or system which generally have national or state based name / brand recognition. Franchisees are provided with proven and efficient method of operation and support including management, business development, marketing and training assistance, etc. They will benefit from professional state and national marketing campaigns. They will benefit from the buying power received by being part of a group. Access to more customers through brand awareness. Easier to obtain finance. And the customer - knowing what you're getting...the quality of the product or service at one location will be comparable to other locations. 8

9 What Kind of Businesses Franchise Fast food Couriers Home maintenance Car dealerships Convenience stores Trades Cafes Virtually any business can be franchised! 9

10 Franchising in Australia franchise systems billion industry franchise units systems franchising for more than 10 years employs people Source: Franchising Australia 2014, Griffith University 10

11 Franchising in Australia Retail trade is the most popular form, making up 27% of systems in Australia The average term of a franchisee agreement is five years On average, franchisor revenue increased by 9% in 2013/14 financial year On average, franchisee revenue increased by 9% in 2013/14 financial year Source: Franchising Australia 2014, Griffith University 11

12 Franchise Success Stories in Australia 12

13 What Makes the Franchise Model Work Teamwork between all parties Ongoing commitment to brand culture and direction Open communication with franchisor and field support staff The ability and the desire to follow a proven system 13

14 What Does a Good Franchisor Look Like Financial stability - a long term plan for growth and expansion Established: A recognisable brand Emerging: A brand with a plan Great training and support in place Good margins and group buying power Transparency and open communication The franchisor provides the business expertise, including marketing and advertising plans, management guidance, financing assistance, site location, administrative support and training, that otherwise would not be available to a business starting from scratch. 14

15 What Internal Support Should be Available A well established and accessible head office team Field support Franchisee representative committee Initial training Ongoing training The ability to network with other franchisees 15

16 What Does a Good Franchisee Look Like Financial stability - for start-up and ongoing cash flow The motivation and drive to work for themselves A realistic expectation of the work involved The ability and desire to work as part of a team Brand passion Experience but not necessarily be in the same field as the franchise system 16

17 Why is Franchising so Successful? Franchising is not a business in itself, but a way of doing business Creates a brains trust of motivated people all working towards the same goal Creates an economy of scale not otherwise available to a small business owner Connects the consumer directly with passionate small business owners 17

18 The Financial Model Fee Franchise Fee Royalties Marketing Contribution Fee Franchise Application Fee Design and Project Management Fee Details An upfront payment that franchisees will make for access to, and use of the name, trademark and business system and initial training / launch support. Consider the brand and potential profitability, the franchisor s cost of initial training, support and recruitment of the franchisee and comparable franchise fees and offerings in the marketplace. Maintaining and investing in the system. Franchise systems charge an on-going franchise fee equivalent to 6-10% of gross turnover. On average they are about 8%. Marketing the system. Typically franchise systems that collect marketing contributions based on a percentage of gross sales range between 1% and 5%. On average they are about 3%. This should cover the franchisors cost in processing the application. This would be refundable for 14 days from when the applicant receives a copy of the current FA, DD and ancillary documents in the form in which they are to be executed. To cover all costs associated with establishing a new franchise e.g. the franchisor s time and expense in the initial design work, preparation of construction drawings and signage design, coordinating the actual fit-out including approvals / inspections at all stages of the project and rectifications, etc. 18

19 The Financial Model Fee Franchise Fit-out and Signage Transfer Fee Renewal Fees Sale of Business Transfer Fee Details Typically the franchisee will fully cover these costs. Franchisees may be required to pay money (all full fit-out costs) into a trust fund administered by the franchisor for coordination of the fit-out. Charged to the incoming franchisee and is usually a percentage fee based on the sale value of the franchise. This is typically calculated on a percentage between 10% - 15%. The renewal fee should cover the franchisors legal and administrative costs in renewing the franchise and moving the franchisee onto the then current Franchise Agreement (FA). On renewal of the FA (after each option expires or when all options are exhausted), the franchisee should not have to pay a further (full) franchise fee, however, the franchisor is able to charge a smaller fee to cover the cost of administering the changeover and in consideration of the further term offered, etc. Typically these can range between $10k and $15k. Some franchisors also charge a business transfer fee which is payable by the outgoing franchisee. This is used to discourage the franchisee from selling the business before its full development and compensates the franchisor for the inconvenience of having to screen, approve, induct and train a new franchisee e.g. year 1 = 50% of the current franchise fee. 19

20 Will Your Franchise Strategy Work 12 key questions to test your franchise strategy: 1. Is there a proven track record in the business to be franchised and in the intended market? 2. Is the concept profitable (better than average returns) for both the franchisor and the franchisee? 3. Is the concept saleable and attractive to potential franchisees? 4. Is there a proven secure and committed supply chain (people) or exclusivity in products or equipment? 5. Is the business reproducible? (i.e. not unique to location) 6. Can the knowledge of your business be adequately transferred? 20

21 Will Your Franchise Strategy Work 7. Is there a pool of suitable franchisees (including the right skills and finance to invest)? 8. Are there suitable sites and territories available? 9. Does the concept have longevity? (i.e. not a fad) 10. Is there a comprehensive franchise system with adequate resources to support growth expectations? 11. Does the franchisor and support staff have strong people and communications skills and technical competence and experience under their area of responsibilities? 12. Does the franchisor have a legal right and framework to operate the franchise system? 21

22 Next Steps Feasibility and Development 1. Business model proving 12 key considerations to test the franchise strategy. Does the concept have longevity (refer previous slide)? 2. Market research an appropriate level of professional market research to ensure there is a strong market need, etc. 3. Develop a strategic plan with a 3-5 year outlook with short, medium and long term goals identified. 4. Develop the franchise business model aspects of the current business model to be replicated in each franchise i.e. site and franchisee characteristics, services, quality, service standards, pricing and marketing, etc. 5. Determine the franchise funding model for the franchisor and franchisee initial investment requirements and the ideal franchisee remuneration and fee structure model. Ensure that it is equitable, competitive, sustainable and attractive to a prospective franchisee. 6. Determine the franchisor and franchisee roles and responsibilities functional and administrative. 22

23 Next Steps Feasibility and Development 7. Create the franchise and financial policies. These will reflect in detail the franchisors revenue sources and policies for the key financial, operational, supply, territories and expansion areas. 8. Develop a practical Franchise Agreement and Disclosure Document for new franchisees. 9. Develop a Franchise Operations Manual that clearly details the standards and procedures that are essential to supporting the day to day running of the franchise business. 10. Develop a Franchise Induction Program that provides franchisees with the knowledge and skills required to operate and manage their business effectively. 11. Develop and document a comprehensive franchise expansion / growth strategy. 12. Prepare to strategically market and sell the franchise opportunity e.g. a comprehensive franchise information kit (brochure and DVD) outlining the business story, the opportunity, the system and the people, etc. 23

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