Understanding Franchise Operations & the Franchise Registry

Transcription

1 Understanding Franchise Operations & the Franchise Registry

2 Jania Bailey President & COO of FranNet Over 14 Years experience in the Franchise Industry 18 Years in the Banking Industry. Author- Thriving: The Journey to Success in the Business World.

3 Topics for Discussion Overview of Franchise Business Model Myths & Realities of Franchising SBA Regulations The SBA Franchise Registry Registry Requirements

4 A Franchise Advantages A proven, time-tested business model that works Predictable future results Very attractive to lenders Transparent due diligence process with the franchisor and existing franchisees Recognized brand name and turn-key operating systems Disadvantages An seemingly endless and overwhelming number of concepts to choose from Paying a franchise fee Royalties Reporting, compliance, and mandatory attendance for training, annual conferences, etc

5 What is Franchising? The creation of a distribution channel to build brand identity and attain market dominance Franchise Headquarters Franchise Operators QUICKLY! Customers

6 Franchise is A license to use: Name and trademarks Products Business Systems In exchange for: Initial franchise fee Ongoing royalties

7 Government Disclosure: FDD Franchisor Info Time in business Business experience Bankruptcies Litigation Costs Total Investment Franchise fee Other fees (Adv, Equip, Supplies, Insurance, etc.) Working capital Royalties Franchise Contract

8 Government Disclosure: FDD Obligations for Franchisor & Franchisees Territory Listing and Contact Info For: Current franchisees Past franchisees Earnings Claims Financial Statements Manager Policy Renewal, Termination & Transfer Policies

9 Franchising Myths

10 Franchising Myth #1: Only fast food and retail

11 Franchising Fact #1: FACT: Over 3,100 different franchise companies In more than 80 industries With over 900,000 operating units Popular Categories Education Retail Pet Care Cleaning Real Estate Senior Care Home Repair IT Services

12 Franchising Myth #2: Franchises succeed because of the quality of the product

13 Franchising Fact #2: FACT: Can you make a hamburger? Is your hamburger better than McDonald s? If it is not the product then what is it?

14 Franchising Fact #2: FACT: It is all about the Business System: Marketing Sales Operations Accounting

15 Franchising Myth #3: Successful franchises emerge in a new industry with no new competitors

16 Franchising Fact #3: FACT: Successful franchises emerge from well established industries by creating consolidation.

17 Franchising Fact #3: FACT: It s The System McDonald s started when there was a burger joint on every corner. More recent examples are in Consumer and Business services

18 Franchising Myth #4: Franchises are expensive

19 Franchising Fact #4: FACT: Average Initial Investment Range Percentage Under $50,000 13% $50,001 to $100,000 17% $100,001 to $250,000 28% $250,001 to $500,000 23% Over $500,000 18% Source December 2010 FranData

20 Franchising Myth #5: High return requires a high investment

21 Franchising Fact #5: FACT: There is no automatic correlation between the cost of the franchise and the potential return.

22 Franchising Fact #5: FACT: Service businesses require far less capital investments and frequently yield higher returns.

23 Franchising Myth #6: Industry experience is required

24 Franchising Fact #6: FACT: Franchisors want a person that can use their system. They want someone who will focus on being an owner business and management skills people and communication skills Proven Process Franchisor trains on how to use their system

25 Transferable Business Skills are the Key! Sales Customer Service Management Marketing

26 Why Own a Franchise? 900,000 franchised businesses provide 21 million jobs Over $2.3 Trillion Dollar Business Provide $660.9 Billion of annual payrolls There are over 3,100 franchise concepts in over 90 different categories.

27 Franchises Are Not All the Same Many Units vs. Fewer Units Older, well established vs. Newer Structured vs. Flexible Systems Expensive vs. Inexpensive There is no automatic correlation between the cost of the franchise and the potential return.

28 Different Business Models Employees Budget Business Environment Full or Part-time Hours Number of Units Business Preferences Types of Customers Service or Product New or Established Industry Room for Growth Other Items?

29 Why Franchising Works Proven, systematic approach to starting and staying in business Experience Simplicity Initial Training & Ongoing Support Name Recognition Sales, Marketing & Operational Systems Culture of Teamwork

30 Why Franchising Works You re in business for yourself, but not by yourself Franchises are a hybrid between corporate executive and an entrepreneur.

31 Be Aware of Statistics Big franchisors skewed the percentages because they had few failures Not all units are still run by the founder There are no average franchises You should only care about your success Make sure the franchise you are interested in is a great fit for you

32 Why Own a Franchise? If you pick a franchise that is a great fit for you, it is: Vehicle that can get you to your destination while meeting your lifestyle and financial goals Way to reduce risk

33 How Do You Find a Business That is a Great Fit? Separate the function of the business, from the function of the business owner!

34 Finding a Great Fit Interview at least 15 to 20 franchisees, the ones who are doing well and the failures. How are you the same or different?

35 Professional Advisors Additional Resources You Should Use Franchise Attorney Accountant

36 Diane Jansson Attorney with SBA s Office of General Counsel, Department of Financial Law & Lender Oversight 27+ years as an Attorney with the U.S. Small Business Administration 6+ years reviewing franchise agreement for listing on the Franchise Registry Serves as one of the members of the Agency s Franchise Committee

37 How an SBA Attorney Review s A Franchise Agreement Franchise Resources: SOP (E) Subpart B, Chapter 2, Paragraph III. B. 9. Pgs (7(a) lending) Subpart C, Chapter 2, Paragraph III. B. 5. Pgs (504 lending) (Both subparts discuss what is required for review of a franchise/license/dealer/jobber or similar agreement)

38 Franchise mailbox Franchise Registry or Franchise findings list -

39 SBA S DEFINITION OF FRANCHISE: If the franchisor/licensor/dealer/jobber, etc. provides a product or service that is critical to the Small Business Applicant s business operation and/or provides a trademark critical to the Small Business Applicant s business operation, then the agreement and any related documents must be reviewed.

40 SBA S DEFINITION OF FRANCHISE: Therefore, if your prospective borrower s agreement is not listed on the Registry then EACH AND EVERY TIME an application comes in a review of the documents MUST be undertaken.

41 ISSUE SPOTTING IN AN AGREEMENT: Types of control issues that SBA has found that will render the franchise ineligible: Franchisor s ability to set the Applicant s net profit; Excessive continuing fees paid to the franchisor; Transfer the franchisor may not solely control the transfer of the business restrictions as to the franchisor s approval are fine but we must see our language that its consent will not be unreasonably withheld it will not be inferred;

42 ISSUE SPOTTING IN AN AGREEMENT Upon transfer of the business the SBA franchisee cannot remain liable guaranty the performance of the new franchisee; Franchisor cannot control the franchisee s employee s (hiring, firing, etc. but it is acceptable under short term step-in rights);

43 ISSUE SPOTTING IN AN AGREEMENT Step-in rights generally found in the death or disability section or franchisor s right to manage the business. When these provisions appear it must be limited to not more than 90 days and that the franchisor periodically checks with the franchise;

44 ISSUE SPOTTING IN AN AGREEMENT Requirement that the franchisee must deposit all receipts and revenues into an account which the franchisor controls or where withdrawals can only be made with the consent of the franchisor; Option to purchase the applicant s personal property upon expiration or breach and the franchisor control the price at the time of purchase;

45 ISSUE SPOTTING IN AN AGREEMENT Franchisor requires that the billing and collection for all products/services for the franchisee be handled by the franchisor or third party chosen by the franchisor; Franchisor requires that the franchisee or EPC owner must sell the real property to the franchisor upon expiration or breach of the Agreement;

46 ISSUE SPOTTING IN AN AGREEMENT Requirement for any restrictive use of the real estate cannot be recorded against the real estate; Right of First Refusal on a partial transfer of ownership within a franchise entity; Maximum or minimum pricing by the franchisor;

47 ISSUE SPOTTING IN AN AGREEMENT Physician can t solely be chosen by the franchisor; Mediator/arbitrator cannot solely be chosen by the franchisor; Reasonable Business Judgment is not the same as unreasonably withhold consent ; Requirement that the Franchisor has the right to purchase the business during the term of the franchise agreement.

48 JUST BECAUSE A FRANCHISE IS LISTED ON THE REGISTRY DOES NOT MEAN YOUR JOB IS DONE

49 Ineligible business: As set out in 13 CFR and SOP (E), Subpart B, Chapter 2, Paragraph II, D. pgs (7(a) lending) and in Subpart C. Chapter 2, Paragraph II. D. pgs (504 lending).

50 Ineligible Business Non-profit businesses (for profit subsidiaries are eligible) Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors; Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies);

51 Ineligible Business Life insurance companies; Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify) Pyramid sales distribution plans; Businesses deriving more than one-third of gross annual revenue from legal gambling activities;

52 Ineligible Business Businesses engaged in any illegal activity; Private clubs and businesses which limit the number of memberships for reasons other than capacity; Government-owned entities (except for businesses owned or controlled by a Native American tribe);

53 Ineligible Business Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting; Consumer and marketing cooperatives (producer cooperatives are eligible); Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;

54 Ineligible Business Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude; Businesses in which the lender or any of its Associates owns an equity interest;

55 Ineligible Business Businesses which present live performances of a prurient sexual nature; or derive directly or indirectly more than 5% of their gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;

56 Ineligible Business A business or applicant involved in a business which defaulted on a Federal loan or Federally assisted financing resulting in a loss to the government. A compromise agreement shall also be considered a loss; Businesses primarily engaged in political or lobbying activities; and Speculative businesses (such as oil wildcatting).

57 Diane Jansson Franchise Committee: Diane Jansson Constance Kobayashi Steve Olear