Coming to America: Exporting a Franchise to the U.S.

Transcription

1 Coming to America: Exporting a Franchise to the U.S.

2 Coming to America: Exporting a Franchise to the U.S. Saturday, February 20, :30 pm 5 pm Ray Hays John O Brien Edith Wiseman Carl Zwisler

3 Overarching Questions Every Prospective Franchisor Should Understand Before Coming To The U.S. Can my business be operated profitably at the unit level? What will it cost to generate a profit from U.S. franchise expansion? How long will it take to generate profits? What are the unique risks of franchising in the U.S.? How can the risks be mitigated? What don t I know about the U.S. market that I need to know? 2

4 During This Presentation, We Will: Acquaint you with issues related to franchising in the U.S. so that you can ask the questions you did not previously know to ask Give you tools to get you answers to those questions Provide you with experiences of others who have entered the U.S. market Engage you in discussions with U.S. franchisors who can explain how they address the issues you will confront in the U.S. 3

5 Ray Hays Ray Hays is the Founder and Managing Partner of FranLaunch USA, a team of American franchise experts, who help international franchisors to expand into the U.S. Ray is an international franchise executive with over 25 years experience in over 50 countries. Ray served in a range of management roles for global franchise leaders, including Marriott, Choice Hotels International, Comfort Keepers Senior Care, New Horizons Computer Learning Centers, AlphaGraphics and Edwards Global Services. In addition to leading the FranLaunch USA program, Ray is owner of Envoy Investments, LLC an international franchise management and investment firm. Ray s areas of specialization include operations launches, franchisee training and support, franchise development and brand marketing. His diverse sector experience includes consumer services, business services, hotels, and restaurants. 4

6 [email protected] John O Brien John O Brien, is the founder and CEO of Poolwerx Corporation, Australia s largest franchised pool retail group. As an industry leader, John has advised the Australian Government on a variety of issues facing franchising and has also chaired the Australian, Asia Pacific and World Franchise Councils, all while building a brand that has twice been named Australia s Franchisor of the Year (Service and Outright). John co-founded the new industry body SPRAA (Swimming Pool Retail Association Australia), which has recently driven the implementation of the first nationally recognized Swimming Pool and Spa Technician qualification. Add to this a finals berth in the Ernst & Young Entrepreneur of the Year awards, the title of Owner Manager of the Year from the Australian Institute of Management and most recently the Rising Star award from the Queensland Q400 awards, and you can start to see why Poolwerx and John O Brien are forces to be reckoned with. Poolwerx s unique approach to franchising gives every franchise owner a career path from which to build a multi-van, multi-store and multi-million dollar enterprise. This strategy that has seen sales growth maintained for the past 10 years. 5

7 Edith Wiseman Edith Wiseman is President of FRANdata and has been highlighted in Franchise Times magazine as a rising star in franchising. Wiseman has long been a key figure in understanding business model best practices. Her franchise financing expertise and work with the U.S. Small Business Administration (SBA) has had a major impact in the amount of capital flowing into the franchise community. Wiseman was recently named to the IFA Supplier Forum Board and has co-chaired the Women s Franchise Network. She is a frequent speaker and has led industry roundtables as well as written articles for numerous industry publications. 6

8 Carl Zwisler Carl is a principal in Gray Plant Mooty s Franchise & Distribution Law practice group. He represents companies in structuring, negotiating and enforcing U.S. and international franchise, licensing, and distribution agreements. With the experience he has gained advising franchisors and master franchisees through every phase of the life cycle of a franchise program, Carl is uniquely qualified to advise international franchisors in starting and improving their international franchising programs. He is sought out by franchisors and franchise investors from around the world to assist them with cross border issues. Carl is a former IFA General Counsel. 7

9 Why The U.S.? 8

10 The Franchisor s Dreamland Source: DataPointed.net The Contiguous United States Visualized By The Distance To The Nearest McDonald's 9

11 International Franchisors In The U.S. Expansion of International Brands in the U.S Kumon (Japan) Tim Hortons (Canada) WSI (Canada) Cartridge World (Australia) CertaPro Painters (Canada) Pandora (Denmark) Filtafry (UK) Tutor Doctor (Canada) Aussie Pet Mobile (Australia) Bark Busters (Australia) Engel & Völkers (Germany) 10

12 Profile Of Recent International Entrants International Brands Recently Entering U.S. Market Automotive Business-Related Building & Construction Services - General Maintenance services Health & Fitness Frozen Desserts Restaurants (Sit-Down) Retail Stores Retail Food QSR Source: FRANdata 0% 5% 10% 15% 20% 25% 30% 35% % of all new brands % international Average System Size when Entering U.S. Market 11

13 Profile Of Recent International Entrants $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Average Initial Investment international brands total new brands Source: FRANdata 12

14 Profile Of Recent International Entrants 6,000 Average Size of New Businesses (square feet) 5,000 4,000 3,000 2,000 1,000 - Source: FRANdata international brands all new brands 13

15 Why The U.S.? Global Ranking: Ease Of Doing Business Starting a Business Enforcing Contracts Brazil China France Germany India Italy Japan Russia Spain UAE UK U.S Source: World Bank Group, Doing Business 2016, 14

16 Economic Output By Franchise Industry Real Estate $57.44 Retail Food $44.61 Retail Products & Services $46.58 Table/Full Automotive Service Restaurants $43.84 $70.09 $ Billion Business Services $ U.S. Franchise Output Commercial & Residential Services $59.31 Quick Service Restaurants $ Lodging $96.33 Personal Services $

17 Advantages Of The U.S. Market Access to Qualified Franchisees, Franchise Professionals and Personnel with extensive Franchising Experience Share of Units Controlled by Franchisee Type Units 100+ Units Units 3% 6% 7% Units 8% 5-9 Units 10% Single Unit 45% 2-4 Units 21% Source: FRANdata 16

18 Advantages Of The U.S. Market Established infrastructure, resources, and transparency of the industry Example of one subsector s Top Brands Average P&L Source: FRANdata 17

19 Advantages Of The U.S. Market Established infrastructure ease of product and food supply chain 68% of all food distribution in the U.S. goes to restaurants and bars, which procure $ billion dollars of food a year 57% of QSR brands in the industry recognize rebates as a source of income for the franchisor Annual U.S. Foodservice Distribution to Restaurants & Bars ($ billions) Full Service $ Bars and Taverns $ Limited Service $ % Distribution of Rebates 5% 13% Affiliates Franchisor Marketing Fund 57% Parent Companny Source: FRANdata and Technomic 18

20 Advantages Of The U.S. Market Ease of access to capital $35 $30 Small Business Lending Capital Needs Billions $25 $20 $15 $ Thousands $5 10 $ New Unit Demand Existing Unit Demand Total Borrowing Requirements Actual Lending 0 Source: FRANdata 19

21 Advantages Of The U.S. Market Market data widely available Average Continuity Rate Geographic Distribution of Cleaning & Restoration Businesses Maintenance - General Service - General Commercial/Residential Window Cleaning Restoration Products, Services Consistent Carpet and Upholstery Maid Services 80% 85% 90% 95% 100% # of Businesses ,000 1,000+ Source: FRANdata 20

22 Disadvantages Of The U.S. Market? Highly Competitive Rising Competition Among Sandwich Brands Quiznos Other Sandwich Brands 21

23 What Are The Disadvantages Of The U.S. Market? Franchise regulation adds to costs and time to establish franchised business Registration Cost Lawyers Fees Time Delays 22

24 Qualifications To Enter The U.S. Market 23

25 What Qualifications Should A Company Have Before Entering The U.S. Franchising Market? A proven concept Profitable business units or franchisees (if a franchisor) Leadership commitment to the U.S. Adequate capital A strategic plan Patience 24

26 Miscellaneous U.S. Entry Issues 25

27 How To Enter The U.S. Market? Know your business Research the market Develop a plan with input from associations and professional advisers Select a business format and a business partner Modify as necessary Be patient 26

28 Structuring The Deal Is a separate U.S. entity needed to franchise in the U.S.? Shielding the parent company from liability Ease of preparing financial statements Possible tax reasons 27

29 Presence In The U.S. And Entity Selection Which form of entity do we choose and where do we incorporate? Corporation or limited liability company (LLC) Selection often driven by tax ramifications and state corporation laws 28

30 Understanding U.S. Culture(s) Service Expectations Informality Direct communications style punctuality 29

31 General Tax Considerations Subject to U.S. taxes How do we repatriate money from the U.S.? Most countries have a double taxation bilateral tax treaty with the U.S. Otherwise 30% withholding tax rate 30

32 Best Expansion Vehicles 31

33 What Options Does A Company Have For Expansion Into The U.S.? Company branch including sales and support center replicating home country outlets Merger/Acquisition Joint venture If a manufacturer, appoint Dealers, distributors Agents Franchises Direct franchising or master franchising 32

34 When Is Recourse To Franchising Appropriate? If a business plan and research indicates that franchising is a good way to enter the U.S. If the company has the human and financial resources to devote to recruiting, training and supporting franchisees to make them successful 33

35 Risks Of Franchising v. Other Expansion Strategies Franchising typically reduces financial risks of expansion compared to other models Legal risks arising from property ownership or leases, employment law and buying and selling products in the U.S. are avoided or mitigated through franchising But franchise law compliance adds a risk which company-owned operations do not confront 34

36 Selecting A Franchising Strategy 35

37 Selecting A Franchising Strategy Is An Important Part Of A U.S. Franchising Strategy 36

38 Master Franchise (MF) What s the best size of MF territory? Small pool of entities with funds/assets, skill and knowledge Note, possibility of multi-brand group taking on your brand Franchisor loses significant control Franchisor has Agreement with MF & they have one with franchisee Royalties are paid to MF, who pays portion to you Is there enough royalty to share? Franchisor needs a second operating manual for MF Putting all your eggs in one basket in a big opportunity country! Overall costs vary, possibly faster ramp-up, lower royalty share, lower internal operational risk 37

39 Area Representative Franchise (AR) / Development Agent Map and grant AR territories AR Recruit franchises on behalf of franchisor Services them on behalf of franchisor Franchisor Has Agreement with AR & franchisee Collects royalties from franchisees and shares % with AR Franchisor needs a second operating manual Overall costs vary, possibly faster ramp-up than direct, reduced operating risk, shared royalty, greater control than MF 38

40 Franchisor Direct Entry Franchisor establishes a head office support structure in the U.S. Direct agreement with franchisees and collect all royalties Significant entry cost & business culture learning Probably slower ramp-up, increased operating risk, control Leaves options to then pursue the correct growth model 39

41 Which Factors Should A Company Consider When Selecting A Franchising Strategy? Cost of expansion Speed of expansion Speed of return on investment Risks Quality control 40

42 Comparison of International Franchising Strategies Relative Cost Relative Speed Relative Return Unit Cheapest Slowest Lowest Area Development Mid Mid-high* Mid-high* Master** Highest Highest* Highest* * Depends on number of units developed and Franchisor s share of fees ** Objective of Master Franchising is fastest growth 41

43 How Franchising Format Selected Affects Legal, Training And Translation Expenses Number of: Agreements FDDs Manuals Training Programs Filings Unit Area Development Unit & AD 1 or 2 1 Master Unit & Franchisor

44 Time Needed To Break Even Shortest Area Development * Master* Unit Longest * Assumes same rate of growth 43

45 Franchisor Share Of Revenue Using Different Franchising Strategies Initial Fee (Primary Franchisee) Initial Fee (Operating Unit) Royalty Other Fees Unit 100% 100% 100% 100% Area Development 100% 100% 100% 100% Master 100% shared shared shared 44

46 Understanding U.S. Franchise Regulations 45

47 What You Need To Know About U.S. Franchise Sales Laws Which laws apply? How much does compliance cost? How long does compliance take? 46

48 Federal And State Regulations Common Law vs. Civil Law Legal System Statutes and judicial precedents Amount of detail in agreements Less reliance on overarching principles Different agreements are required Two Levels of Franchise Regulation Federal and State Federal (FTC) Disclosure Rule State Franchise Registration/Disclosure State Franchise Relationship Laws 47

49 How Do U.S. Laws Regulate Franchising? FTC Franchising Rule State Franchise Registration and Disclosure Laws State Business Opportunity Laws State Franchise/Dealer Relationship Laws 48

50 What Does The FTC Franchise Rule Require Of Franchisors? Deliver to prospective franchisees or Franchise Disclosure Document ( FDD ) FDD contains: 23 Items of information relating to the franchisor and the business being franchised (Plain English) Standard form of franchise agreement Other standard agreements Audited financial statements No documents are filed with the FTC For more information and to see copies of FDDs, see docqnet.dbo.ca.gov/search 49

51 Financial Requirements For Franchisor Entities U.S. franchise laws require audited financial statements Must follow U.S. GAAP Must cover 3 year period Exception for start-up entity 50

52 Timing Requirements When must FDD s be delivered to prospective franchisees? 14 calendar days before: Paying a fee Signing an agreement Earlier, if reasonably requested A few states have variations and require disclosure at the first personal meeting 51

53 Timing Requirements When must final version of agreements be delivered to prospective franchisee? 7 calendar days before signing the agreements, but only if standard disclosed agreements are unilaterally changed by the franchisor Negotiated changes initiated by prospective franchisee do not trigger an additional waiting period 52

54 Proper Use And Disclosure Of FPRs Financial performance representations (FPRs) (or earnings claims ) are any representations concerning the actual or potential sales, income or profits of an existing unit or a new franchise All FPRs must: Be fully included in Item 19 of the FDD Have a reasonable basis Describe its factual basis and the material assumptions Be able to be substantiated Franchisors and their franchise sellers may only provide FPRs to prospective franchisees if the above requirements have been met, subject to two limited exceptions 53

55 Key Exemptions From Disclosure Requirements Under The FTC Franchise Rule Minimum Payment Fractional Franchise Large Franchise Investment Large Franchisee Insiders (Franchisor Officers, Managers or Owners) 54

56 State Franchise Registration And Disclosure Laws* Oregon Washington Montana North Dakota Minnesota New Hampshire Vermont Maine Nevada Idaho Utah Wyoming Colorado South Dakota Nebraska Kansas Wisconsin Iowa Illinois Missouri Ohio Indiana Kentucky Pennsylvania Virginia New York Mass. Rhode Island Connecticut New Jersey Delaware Maryland Arizona New Mexico Oklahoma Arkansas Tennessee North Carolina South Carolina Texas Alabama Georgia Hawaii Louisiana Florida REG/DIS Alaska * Oregon requires disclosure, but not registration. 55

57 What Must Franchisors Do To Comply With State Franchise Registration And Disclosure Laws? File an application which includes an FDD, standard franchise agreements and audited financial statements with a state agency for approval Pay a filing fee of $250 - $750 Processing time is days 56

58 What Do State Agencies Review? FDD and franchise agreements to determine compliance with disclosure format requirements and state relationship laws Financial statements to determine franchisor s ability to fulfill duties to franchisees Litigation history of franchisor and executives to determine whether their involvement creates unreasonable risk to franchisees 57

59 When Must Franchise Filings Be Made? Before making an offer of a franchise 58

60 How Long Is A Registration Effective? Usually for one calendar year, or until days after franchisor s fiscal year end Amendments to registration are required if a material change occurs to required disclosures 59

61 Advertising All forms of advertising for franchisees are regulated as offers, including internet advertising, and usually must be approved before use Exemptions are available for certain websites State review, not federal 60

62 Legal Risks 61

63 How Frequent Is Litigation In U. S. Franchising? Rate of Litigation Initiated per 100 Franchised Units franchisee initiated franchisor initiated 62

64 What Are The Legal And Regulatory Risks Of Franchising In The U.S.? Not registering trademarks and other IP Not knowing that franchising practices are regulated Offering franchises without complying with franchise sales laws. U.S. regulations differ from other countries in that registration is required in 13 states before even offering a franchise. Making earnings claims that do not comply with franchise sales laws 63

65 Not requiring franchisees to indemnify the franchisor and carrying appropriate insurance that names the franchisor as an additional Not using contract language that applies to the appropriate jurisdiction s laws, specifies a convenient forum for the franchisor, waives jury trials, shortens limitations periods, waives punitive damages, and awards attorneys fees and court costs to the prevailing party 64

66 Not committing to compliance with franchise sales laws and taking steps to train the franchisor s franchise recruiting staff in compliance and establishing policies and procedures to assure that compliance commitments are met Assuming that use of a master franchisee to prepare unit franchise agreements and undertake full responsibility for compliance with U.S. franchise laws will avoid liability for the franchisor Not understanding how the franchised business is regulated in the U.S. 65

67 FDD Bloopers 66

68 Planning To Launch A Franchise Program 67

69 Sample U.S. Market Entry: 5 Phases Phase 1 Business Planning Trademark and Domain Budget and Timelines Market Intelligence Phase 2 Franchising Tools FDD and State Filings Marketing Localization Franchise Sales Tools Phase 3 Operations Launch Pilot Unit Adaptation of Model Proof-of- Concept Phase 4 Franchise Sales Sales Team Franchise Marketing Qualification and Signing Phase 5 Franchise Growth New Unit Openings Training and Field Support National Growth 68

70 Timeline*: Months 1-2 Months 3-6 Months 7-12 Year 2 onward Sample U.S. Market Entry: 5 Phases Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Business Planning Franchising Tools Operations Launch Franchise Sales Franchise Growth Trademark and Domain FDD and State Filings Pilot Unit Sales Team New Unit Openings Budget and Timelines Marketing Localization Adaptation of Model Franchise Marketing Training and Field Support *Note: The timeline will vary by franchise concept and readiness. 69 Market Intelligence Franchise Sales Tools Proof-of- Concept Qualification and Signing National Growth

71 Most Businesses Will Require Adaptation To The U.S. Market Adaptation Requires: Understanding the concept and its key success drivers Understanding U.S. business and legal challenges: supply chain competition demographics operational costs employer laws 70

72 Where Should You Open Your First Outlet? Where customer demographics support your concept Where access is reasonably easy from your headquarters Where market is not saturated with competitors Where brand familiarity or other factors offer a competitive advantage 71

73 What Is The Best Way To Recruit Franchisees In The U.S.? Master franchisees, brokers, employed staff from U.S./abroad Websites, franchise shows, paid advertising in franchise media, social media, PR 72

74 How Franchise Sales Laws Affect Franchise Recruiting? Registration before offer FDD before sale Financial Performance Representation restrictions Advertising registration requirements 73

75 What Will Market Entry Cost? 74

76 Market Research Your Brand s Consumer And Franchise Market How big and where is your brand s market? Then physically shop and experience it Meet with suppliers to prove your research Meet with potential competitors both franchised and not Attend trade/industry expos and conferences Commission professional research and/or report Choose Head Office location and key advisers Invest 1 year and either the CEO or next most senior person to lead 75

77 Business Plan Invest 6-12 months, your most talented executive full-time, many of your senior team s time and a U.S. based consultant to prepare the Plan Build the consumer value, franchisee and franchisor financial modelling A fully modelled maturity plan, probably 10 years The cash-flow is critical to underpin the what-ifs of plan underperformance How are you going to fund the plan? 76

78 Set-up Costs Establish professional support network including accountants, tax advisers, bankers, leasing, and shopfitters. Establish funding sources. Note: U.S. credit status challenges Establish supplier network, prices and agreements Re-write manuals to be U.S. specific Key staff relocation and visa costs Choose and establish head office, recruit local executives 77

79 Go-Live Costs (based on direct entry model) Adjust your consumer and franchise model for the U.S. market Refine your operational model for the U.S. in every way note franchise, HR, marketing, financing and mostly State variation Travel both intra and internationally Exhibition and franchise recruitment costs 78

80 Other Expenses Registering IP (trademarks, patents and domain names) Researching the market Determining the most advantageous market entry strategy Preparing market specific business plans Preparing franchise agreements, Franchise Disclosure Documents ( FDDs ) and registering franchise offerings 79

81 Preparing U.S. GAAP financial statements Preparing and translating operations and training manuals Recruiting local investors/partners Testing and adapting the concept Note: It will take twice as long and cost three times as much as you thought! 80

82 Sample First Year Expense Budget For a Franchisor setting up office in the U.S. Budget in the range of $500K to $600K Does NOT include the capital requirements if you choose to set up a pilot operation For a pilot unit, estimate typical start-up costs + 25% to $50% Alternative to setting up U.S. branch office: Using a U.S. representative or management advisor, the budget may be lower, around $200K to $300K 81

83 Resources For Inbound Franchisors International Franchise Association ( Industry associations local chambers of commerce U.S. Department of Commerce ( Your ministry of trade or commerce Banks and Accountants IFA Supplier Forum Directory ( Franchise Attorneys Marketing and Public Relations Business Advisors and Consultants Accounting and Financial Services Presenter Supplier Websites: FranData ( FranLaunch USA ( Gray Plant Mooty ( 82

84 Ray Hays FranLaunch USA 5210 E. Pima St., Suite 200 Tucson, AZ Telephone:

85 John O Brien Pool Werx 10 Camford Street Milton QLD 4064 Australia Telephone: [email protected] 84

86 Edith Wiseman FRANdata 4075 Wilson Boulevard Suite 410 Arlington, VA Telephone:

87 Carl E. Zwisler Gray Plant Mooty The Watergate - Suite New Hampshire Avenue, N.W. Washington, DC Telephone: Facsimile: [email protected] 86