Part 6 | International Franchise Association

Part 6

 

Development Of A Franchise Program

Kenneth Franklin, Franchise Developments, Inc.

A company that decides to franchise must have a clear understanding of how it will support franchisee operations, how it will foster communications with franchisees, what financial results the company and its franchisees can anticipate, and how it will market its franchise once it has the franchise program in place. Some key considerations for each of these aspects of a franchise program are discussed below.

Operations

A franchisor must have in place effective systems and a sound structure to support the operations of its franchisees. Essential elements include a franchisee support program; an operations manual; a training program; control systems and forms; a supervisory program; and an appropriate organization.

The Support Program: A Package of Services that the Franchisee Needs to be Successful

These services should reflect those characteristics of the business important to its success. In performing these services, the franchisor must consider its own limitations and capabilities, the cost involved in performing these services, and the type of support required--consultative, instructive, or directive.

Initially, the franchisor might offer the following services to the franchisee: market surveys, layout and design of the facility, site selection, lease-negotiation assistance, creation and development of an operations manual and training programs, and financial assistance. Ongoing services might include such areas as continuing training, group-purchasing programs, accounting, bookkeeping systems, collection and analysis of data and financial information, continuous guidance and assistance, research and development, and conventions and seminars.

An Operations Manual That Documents All the Major Functions Involved in Opening and Operating a Franchise

The operations manual aids in maintaining product and service standards as well as overall uniformity; helps in minimizing "calls to the home office"; forms the basis of a systematic approach to training; and becomes a source of reference for the franchisee as well as a tool for evaluating supervisors.

An operations manual might include the following:

  • Introduction and history of the company
  • Company policies
  • Business practices
  • Standards, procedures, and documentation for hiring of staff
  • Personnel administration
  • Job descriptions
  • Ordering supplies and outside services
  • Preparation techniques
  • Operating equipment
  • Cleaning, repairing, and maintaining equipment
  • Maintaining premises
  • Pre-opening procedures
  • Opening and closing tasks
  • Customer service
  • Operation forms, record keeping forms, and procedures
  • Bookkeeping and management-control systems
  • Advertising and promotion
  • Safety and Security
  • Reports to franchisor
  • Use of trademarks
  • Licensed software

A Training Program

The franchisee-training program not only teaches skills, knowledge, and management know-how, but also can help in correcting attitudes, creating a desire and confidence in the franchisee to succeed, teaching entrepreneurial skills, developing a willingness to cooperate for mutual benefits and advantages, and creating enthusiasm for the franchise program. One of the training program's purposes, therefore, is to create in the franchisee a strong allegiance to the company and lay the ground work for a successful future relationship. Never again in the franchise relationship will the franchisor have the franchisee captive like it does in the training program for the 1-2-3-4 weeks or how ever long the training program lasts. During this time, the franchisor has a chance to mold the franchisee. As a result, the training program must be highly structured and appropriately systematized.

Control Systems, Procedures, and Forms

These are needed to ensure standardization and uniformity of operations, minimize problems, supply informational needs, monitor the franchisee's performance, monitor the franchisee's adherence to standards, and ensure the company's ability to audit the franchise operations.

Forms that are required typically relate to sales, cost of goods, labor costs, advertising expenditures and other major expenses. Such forms would include the cash register form, activity form, a weekly/monthly recap, the sales report, customer analysis form, advertising analysis form, operations analysis form, and a report on the major expense items.

An Effective Supervisory Program

Since the supervisor must continually guide and assist the franchisee, the supervisor is possibly the most important person in the franchisor/franchisee relationship. In most cases, the supervisor has been a company store manager and understands the business intimately; therefore, when she talks with the franchisee, she speaks at his level and can truthfully say, "I am here to help you. Please listen to me, Mr. Franchisee. I understand all the problems you are experiencing. I have experienced them myself and have solved them. Here is how I can assist you." The supervisor is prepared to "roll up her sleeves," "jump in," and help out with all the problems that the franchisee might be experiencing. Thus, the supervisor gains credibility in the eyes of the franchisee.

As a representative of the franchisor, she ensures that the standards are maintained and detects and resolves problems before they become serious. She also strives to upgrade the abilities of the franchisee and her employees and often introduces new products, services, and promotional programs.

Because of the importance of the supervisor to the continuing success of the franchised system, she should be trained in interpersonal and negotiating skills, for she must know how to interact with the franchisee. She also must know the concerns of the franchisee regarding profitability, advertising and marketing, employee turnover, etc., and must be able to coach, counsel, and advise him. In addition, the supervisor must understand the franchisor's goals and philosophies as well, for the supervisor represents the franchisor.

Organizational Structure

The franchisor is responsible for developing and maintaining a support organization which satisfies the needs of each franchisee and operates efficiently and effectively.

To insure the effectiveness of the support organization, the franchisor first should prepare a clear organizational chart that shows the interdependence of each department. Next, the franchisor should identify the required jobs, the staff necessary to perform those jobs, and the criteria for selecting and hiring qualified people. During this analysis, the franchisor should evaluate the staff members' abilities against the established criteria.

After this evaluation, the franchisor should determine the authority and responsibility for each position, thus avoiding confusion that can occur if responsibilities and authority overlap. For each position, clear compensation levels must be established.

Once the organization's positions and compensation levels have been determined, effective training programs for managers and executives should be developed.

Thus, a strong support organization with a competent corporate staff is positioned to meet franchisees' needs.

Communications

Effective communication through carefully planned systems of information sharing, recognition, and reporting is critical for the continuing growth and development of the franchised business. The following methods of communication have been successfully used in franchise systems throughout the United States.

  • Telephone contact is one of the most effective and practical modes of communication. Frequent contact helps to insure closeness and continuity within the franchise relationship. Conference telephone calls can help instill in franchisees their importance both as individuals and as members of the franchise team. Many franchisors maintain an "800" number for their franchisees' use to encourage franchisees to communicate regularly.
  • Mail, electronic communication, satellite systems, CD-ROM, and video cassettes are common methods of providing and explaining instructions, supplying advertising and promotional materials, reporting sales figures and changes in personnel, and handling other important business matters.
  • House organs and newsletters are effective in explaining various activities within the franchising company, recognizing the top sales zones, expressing the opinions of franchisor management, announcing new territories and franchisees, and presenting other information of a positive and helpful nature.
  • Personal visits are usually made by the field supervisor, general manager, vice president of personnel, franchising director, training director, and so forth. The personal visit is a good public relations tool that can be used to encourage and uplift the spirits of franchisees and their employees.
  • Franchisee group meetings, one of the greatest forms of support for weaker franchisees, can encourage the sharing of experiences, techniques, and advice by the stronger, more successful franchisees within the network. Some franchisees will tend to reject recommendations or suggestions from the franchisor, yet readily accept criticism and suggestions from their peers. Peer group influence is always a strong force on people's attitudes and behaviors.
  • Franchisor sponsored meetings, such as regional meetings, semiannual meetings, and conventions, can be used by a franchisor to bring its franchisees together on a regular basis to share information and provide training. An informal atmosphere is encouraged through dinners and social gatherings.

Other forms include the following:

  • Franchisee advisory group (and/or one or more committees) on purchasing, customer service, advertising, retraining, etc.
  • Remembrance calendar
  • Bulletins, manual changes and memos
  • Letters soliciting advice or input
  • Birthday cards, anniversary cards, New Years day and holiday cards addressed to the franchisee and spouse
  • Retraining programs

Finance

The franchisor needs to establish an appropriate structure of fees, including advertising assessments, that the franchisee will be required to pay the franchisor. It also must have a thorough understanding of the investment that a typical franchisee will need to make to become a franchisee. Such information must be developed not only for purposes of the disclosures that the franchisor will be required to furnish to prospective franchisees, but also for purposes of understanding the level and type of financing that franchisees may need. Finally, the franchisor needs to understand the financial results that the franchisor and its franchisees can expect to achieve.

Franchise Fees, Royalties and the Advertising Assessment

Determining a franchise fee is more an art than a science. However, the following considerations can influence the amount of the fee:

  • The nature of the services offered by the franchisor
  • The extent of these services
  • The cost of the services to the franchisor
  • The need for the franchising company to cover its overhead and possibly show a small profit
  • The ability of the franchisee to pay
  • The amount the competition charges
  • The value of the trademark
  • The attractiveness of the franchise--is it "hot"?
  • The size of the territory being offered
  • The term of the agreement
  • Other assessments being charged

These and other relevant factors all need to be weighed in establishing the initial franchise fee. Companies beginning to franchise sometimes decide to begin offering franchises for a fee at the lower end of the range they are considering, in order to make the franchise opportunity more appealing to early franchisees. Franchisors are more hesitant to reduce the franchise fees charged to later purchasers.

Royalties/service fees. Since royalties are normally the major source of ongoing income for the franchisor, the royalty needs to be large enough to satisfy two criteria: it must generate sufficient revenue to support the functions and services which the franchisor must perform if the network is to remain competitive and viable, and it must return a reasonable profit. Normally, the cost of supervision is the biggest cost item funded by royalties. Therefore, the amount and frequency of supervision that will be offered to the franchisee needs to be predetermined in order to set the appropriate royalty charges. Additionally, the franchisor usually intends that royalty payments should not exceed 25- to 33-1/3% of the franchisee's pre-royalty profits.

Since the royalty charge has a major impact on the franchisee's profit and thereby his return on investment, it is critical that, in choosing a royalty, one understands clearly the franchisee's anticipated sales, gross margin, and operating profit.

Advertising Contributions. Since one of the greatest benefits of a franchise to the franchisee is the name recognition and advertising power of the franchisor or the network as a whole, it is common for franchisors to collect a separate charge or contribution from franchisees that is used solely to fund marketing and promotion activities. In determining the advertising contribution, the franchisor should consider the amount of money required for effective regional and national advertising programs as well as the funds required for the development of advertising materials and promotions. This determination also should consider the franchisee's necessary local expenditures in order to make an impact on his market.

It is not uncommon for new franchisors to require a lower contribution for advertising or no contribution for advertising, until there are sufficient number of franchisees to warrant media campaigns funded by franchisee contributions. Where this is the case, the franchisor should nonetheless have the right to charge its first franchisees the full amount of the anticipated advertising contribution. Because advertising campaigns and other promotional activities benefit the network as a whole, differences in the advertising contributions paid by franchisees are likely to generate discontent and complaints about "free riders" by those paying the higher contributions.

Select A Finance Program That Provides Easy Access to Capital

Normally the franchisee's financial resources come from one of three sources:

  • Personal resources of the franchisee. Some funds for the franchisee's start-up business come from savings, home equity, cash values from life insurance, assets such as bonds and stocks, bank loans, funds obtained from existing businesses that he or she may have, and retirement plans against which he or she can borrow.
  • Other resources - lenders and investors. A franchisee can seek funds from relatives and friends; small town and major regional banks; non-bank lenders such as credit unions, finance firms, and divisions of stock brokerage firms; SBA guaranteed loans; lease financing companies; private capital; and partners.
  • Franchisor assistance. Many franchisors typically will help their franchisees prepare loan applications or direct them to financing sources which have some familiarity with the franchise and an interest in servicing qualified franchisees. In some cases, the franchisor guarantees loans and commitments to lenders; defers part of the franchise fee; leases real estate and equipment; commits to equipment and inventory buy back; offers equity participation; and matches investors and operators together in a joint venture. Some franchisors have even developed master limited partnerships, small business investment companies, and business and industrial development corporations in order to seek public money to help franchisees finance their growth.

Financial Projections for Both the Franchisee and Franchisor (for internal use only)

For the franchisee, a detailed breakdown of investment requirements, working capital needs, operating income and expenses, and anticipated return on investment should be developed. Unless the franchisor makes what is referred to as an "earnings claim" (which includes any statement of actual or projected sales, costs or profits), these projections of operating income and expenses and return on investment cannot be provided to the franchisee before the franchise is sold.

For the franchisor, a financial plan projecting four years of anticipated growth in number of operating units, franchise fees, royalty income, expenses, profits, and organizational requirements and costs must be created. This plan is needed as an operating budget to know initial funding and cash flow requirements. The plan is also an aid for obtaining outside capital and investment.

Marketing

Marketing will be key both to the success of the franchise program and to the success of the franchisee's business. Franchisors must address a number of marketing issues.

The Business' Image

The public image established by the franchisor through its "packaging" is a key factor in inducing a franchisee to buy into the franchisor's program. Distinctive and appealing "packaging"--the identification strategy that establishes the franchisor's public image through its graphics, logo, exterior and interior design, and colors--is thus important to the success of both the franchised business and the franchise program. The franchisor should utilize store layout, colors, furnishings, decor, fixtures, design, uniforms, and graphics to establish a distinctive image.

Establishing Market Direction

An important decision that a franchisor must make at an early stage is where it will expand through franchising. Franchisors cluster locations within established markets because these markets have been successful. Adding franchised locations within an established market will generate additional funds for advertising in the market, thereby enhancing the market share, as well as helping to seal out competition.

In deciding whether to enter areas where there are no existing units, franchisors are often influenced by: (1) the ability to service and supply locations in the new market area; (2) the "run-off" value of the franchisor's trademark or reputation that might proceed the franchisee in the new locale; (3) the sales potential of the new market area; (4) the level of competition that exists in the new market area; and (5) the evaluation of population, income, retail sales, and other factors that may influence the likely success of a market area.

Grand Opening and Ongoing Advertising Programs

Providing advertising programs is one of the most important services that the franchisor can offer its franchisees. While franchisees might be able to create, on their own, other programs offered by the franchisor, they will never be able to duplicate the sophistication of the franchisor's advertising programs because these programs are funded by the combined contributions of all operating units. Usually, a national advertising program is funded by franchisee contributions and the franchisee has a contractual obligation to spend a minimum percentage of sales or dollar amount on advertising on the local level using promotional material supplied by the franchisor. The franchisor will monitor the franchisee's expenditures on the local level by reviewing P & L statements, advertising expenditure reports, and the franchisee's use of cooperative advertising programs.

Recruitment of Franchisees

A start-up franchisor, in order to use its time, resources and money most appropriately, must determine the profile of its likely franchisee, particularly documenting the skills and talents required. The characteristics of the franchise business dictate the kind of franchisee needed.

After the franchisor has established the profile, it must establish a budget and goals for recruiting franchisees, in order to determine the most effective place to use its advertising dollars. Should the franchisor promote in a business magazine? If so, which one or ones? Should it use newspapers? Would direct mail, trade shows, seminars, public relations, or broadcast media prove effective?

To attract excellent prospects and sell them, the franchisor must determine the business' unique features and benefits and then express them through cleverly worded ads, appropriate sales brochures, and effective phone and mail follow-up programs. All this effort is intended to obtain an interview with a qualified prospective franchisee.

The salesperson who will meet personally with prospective franchisees must be well trained in the franchisor's business and in effective sales techniques. Thus, the salesperson's personal presentation must be well structured, for the salesperson must ferret out information about the prospective franchisee's interests, while providing the prospect with information that will help in the decision-making process. The salesperson must use appropriate interviewing and qualifying techniques in order to identify and sell qualified franchisees.

The franchisor should also put into place a system for monitoring the effectiveness of, and refining, its franchisee recruitment process. For example, the franchisor should analyze the media used to determine which provides the most qualified leads, and should evaluate leads to determine which leads produce the most interviews and sales.

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