An Update on the SA Franchise Program by Dr. Ben Litalien, CFE
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Certified Franchise Executive 25 Years of Franchise Experience U.S. Franchise Manager, ExxonMobil
On the Run Convenience Stores Franchisor of Frullati Café, Flying
Colors and Antone’s Po’boy’s & Deli Principal, Franchise Well Consulting Professor at Georgetown University,
UMUC and SNHU Doctor of Management in Franchising
Dr. Ben Litalien, Strategic Advisor
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The Source America Franchise Program
• In March 2012, a Strategic Franchise Program was launched to:
Identify Franchise Concepts
16 Concepts Chosen from over 50 Considered
Due Diligence Conducted • Fit with SA / CRP • Willingness to Work with the Network
Develop Favorable Terms
No Personal Guarantees
No Liquidated Damages
Preferential Provisions
Co-branding Options
Launch Pilot Franchises
Support CRP Interest in Negotiations
Provide Input on Financial Analysis, Real Estate Selection and other Key Elements
Monitor Performance
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Why is a Franchise Program Needed?
“Your success in life isn't based on your ability to simply change. It is based on your ability to change faster than your
competition, customers and business.”
— Mark Sanborn
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The Franchise Facts…
• More than 900,000 franchised businesses in the United States
• The franchise industry accounts for nearly 10% of the private sector output ($1.53 Trillion )
• Provides jobs for more then 18 million Americans
• Franchising generates one out of every seven jobs in the private sector; number 1 job creator in U.S. economy
• Franchises exist in over 100 different industries • According to SBA, more likely to be successful than
an independent business
“a franchise opens every 8 minutes of every business day”
Presenter
Presentation Notes
The success of the franchise model is undisputed. The department of commerce did a seven year study on business failures and the results were pretty compelling. Over 80% of independent businesses failed and over 90% of franchised businesses where still operating. Clearly, there is a foundation in the franchise model that is providing franchisees with a much higher success or lower failure rate, yet there are only about 200 nonprofit organizations at present that own and operate a franchise business. Given the success of the franchise model and the desire by many nonprofit organizations to launch social enterprise activities, Source America has taken a leadership role to support this effort. And, given the focus by many nonprofits on job creation for disadvantaged and/or disabled clients, the job creation statistics in franchising are also an attractive component. The good news about the franchise model is that the relationship between you and the franchisor is “independent contractor” which means that you control who you hire and how you mange the business. The franchisor does not dictate hiring or personnel practices so you are free to integrate the workforce as you deem appropriate, so long as you stay within the franchisors “brand standards”. For example, at Subway the brand standard is 3 minutes for a customer to order their sandwich and reach the pay station. So long as you consistently meet that standard you can hire whomever you wish to fulfill that role.
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Franchising is a Unique Model…
• A marketing strategy used by a company to expand their brand presence through granting “independent contractors” delegated authority to operate a business concept.
Franchisor - Know-How - Support - Trademark - Network Access
As ubiquitous as franchising seems, given we interact with them virtually on a daily basis, it is a complex model with it’s only federal and state regulations, it’s own body of law and a unique economic structure. At it’s core, franchising is a marketing strategy deployed by a company to rapidly expand their brand using OPM (“other people’s money”). The franchisor grants the franchisee the right to use a trademark within a structured business model, thus they have delegated authority. For example, when you buy an Auntie Anne’s pretzel shop franchise you only have the rights to use the marks within the confines of the business model. You don’t have the right to use the markets to sell products “online”, outside your physical location or for any other purpose. The franchisor agrees to give you access to their trade secrets, typically contained in their operating manuals, to provide some level of training and support, and to allow you to benefit from association with other franchisees. You as the franchise agree to pay a fee to access the system, ongoing fees for ongoing access to the trademark and support, and you agree to bear all the cost to open and operate the business. This relationship is governed by the Federal Trade Commission only during the offer and sales process. Once you sign the franchise agreement the FTC oversight goes away and your relationship is governed by the contract, typically called a franchise agreement, signed by you and the franchisor.
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Governed by the Federal Trade Commission – Patterned after SEC regulations
– Governs the ‘offer and sale’ of franchises
– Will respond to complaints of fraud, misrepresentation
Further Regulated by the States – 15 States Have Additional Franchise Laws
– May provide you with additional protection
– Good to know the specifics in your State and where you plan to operate the business
– Generally doesn’t matter whether the business is for profit or not for profit
A Regulated Industry…
Social Franchise Workshop - 8 22 12
Presenter
Presentation Notes
As mentioned, the FTC has a limited role in regulating franchising in the U.S. and it is designed to provide “consumers” with access to information they might need in order to make an informed decision. The FTC requires each company that offers a franchise for sale in the U.S. to provide any qualified applicant with a Franchise Disclosure Document which contains some very important information regardless of what type of business it is or the terms of the franchise agreement. The FDD outlines 23 specific items that must be disclosed including: Who owns the company and any parent and/or subsidiary companies along with audited financial statements Any material litigation that the franchisor is involved in or has been involved in An outline of any fees the franchisee will be required to pay, whether a one-time fee, lump-sum or financed, and any ongoing fees such as royalty Any territory that might be provided to the franchisee and whether your rights are exclusive within that geography Details about the training program including who is responsible for providing the training and their qualifications, and the table of contents from the training manual A list of all current franchisees including their address and phone number, and a list of any franchisees that have left the system within the past 12 months Any financial performance representations of business operations (this is not required and only about half of franchisors include this information) A key benefit from the FTC oversight on the offer and sale of franchises is access to information. You can obtain the FDD from a variety of franchises and compare them side-by-side as the 23 disclosure items are required of all franchise companies and they are in the same exact order. The other regulatory consideration is at the State level where currently there are 15 States that have franchise regulations above and beyond the federal guidelines. Nonprofits should determine if they are in a regulation State and determine how that might give them access to additional information and/or benefits. Our franchise consultant, Dr. Ben Litalien from Franchise Well can provide this information to you upon request. I’ll share his contact information with you at the end of this presentation.
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International Franchise Association – Started in 1960, the IFA is the world’s oldest and
largest organization representing this unique way of doing business
– Mission: Enhance and safeguard the business environment for franchisors and franchisees worldwide
A Strong Community…
Social Franchise Workshop - 8 22 12
– Currently have over 30,000 members, spanning 75 different industries, doing business in more than 100 countries
– Excellent resource for prospective and active franchisees – www.franchise.org
Presenter
Presentation Notes
The motto of the IFA is “in business for yourself but not by yourself”. Each franchisee is an independent business but it relies on the support, trademark and goodwill of the franchisor. The IFA is a trade association that is dedicated to franchising and it is an excellent resource for nonprofits as they consider developing a franchise strategy. Their website provides detailed information on over 1,000 different franchise concepts, each of which has agreed to follow the IFA Code of Ethics. They have a broad range of online courses that can provide education on a number of key aspects in franchising including franchise relations, site selection and operations, and marketing. They also have a specific membership category for nonprofit organizations so that as a member you can access discounts for various events and programs.
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Initial Franchise Fee – 75% of franchise systems have a fee
of $50,000 or less Start-up Costs
– 75% of franchise systems require start-up capital of less than $250,000
Royalty Payments – Typically 5-8% of monthly gross sales – Pays for trademark usage, training,
etc.
Average Franchise Costs…
Social Franchise Workshop - 8 22 12
Presenter
Presentation Notes
The economics of a franchise are well know and they tend to aggregate around some key values. The upfront fee to access a franchise, referred to as a Franchise or Initial Fee ranges from $10-$45K depending on the category and concept. For example, the franchise fee at Subway is $12,500 versus $50,000 at McDonald’s. Keep in mind that this fee is likely to be the “least” costly expense you’ll incur when buying a franchise. It’s a one-time fee and generally includes the initial training for up to four individuals. The cost to bring a franchise “online” can range from $50K for a non-location based service like residential cleaning to $600K for a Panera Bread store. The good news is that most franchises are under $250K including an allowance for working capital to start. The estimated initial investment is outlined in item 7 of the Franchise Disclosure Document and it is a very important area of consideration. Keep in mind the franchisor is only providing an estimate based on actual system results “on average”. For example, if the average annual expense for insurance ranges from $1,500 - $7,500 it will be important to determine your local costs and not assume the lower number. By far the most costly aspect of a franchise is the ongoing royalty fee, which is typically paid as a percentage of gross sales from the business. For example, the royalty fee at Subway Restaurants is 8% of sales, so if you have an average store doing $400K per year you’ll be paying $32,000 to the franchisor, whether you are making money or not. During the early stages of opening and operating your franchise business it is likely you will be losing money as you build your business but the franchisor will be making money on each dollar of sales you produce. While it would be advantageous to negotiate lower royalties, most franchisors are not willing to consider it, especially once they achieve a reasonable size. On top of the royalty is generally a compulsory advertising or marketing fee of 1-4%. Those funds are aggregated by the franchisor and spend to build the brand for the good of the system as a whole. They are not spent in your local market to drive your sales. This may seem like a significant amount but statistically, franchisors that have national ad funds tend to perform at a higher sales volume than those without them. This is because franchise systems typically don’t enact the fund until they have strong regional or national scale, at which time the economy of scales for media buying can be significant. Franchisees tend to reduce local marketing expenses in proportion to their contributions to a regional or national advertising fund.
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What is a “Social Franchise”?
• “A nonprofit-owned franchised business…” – Generally a wholly-owned subsidiary of the parent
nonprofit organization – May require learning a new “business” sector – Generally requires a long-term contract
• Can be a strong platform for controlled job creation – Franchisors do not “dictate” employment parameters or
day-to-day management/supervision requirements
• Must be aligned with concept of the Franchisor – Not a “social experiment,” but a “strategic relationship”
Presenter
Presentation Notes
Can a nonprofit own and operate a franchise? The simple answer is “yes” and the franchise business can be a for-profit entity or a nonprofit organization under the parent nonprofit depending on the purpose of the business. If your organization buys a franchisee for the express purpose of employing individuals with significant disabilities then likely it will be exempt under your current organizations 501(c)3 status. If your primary purpose in buying a franchise is to generate income to support your mission then likely it will be formed as a for-profit subsidiary and the net income can be transferred to the parent as dividends. There are numerous legal and tax considerations to work through and our consultant Dr. Litalien can help you with that as you move along. But when considering a social franchise strategy you have to be prepared to learn a new business sector in many cases and to sign a long-term contract. Franchise agreements on average are 10-years and they are much easier to get into than to get out of…like a marriage! When you are trading on someone else’s brand, unraveling that relationship can be a challenge so nonprofits need to do their homework and be committed for the long-haul when going into a franchise business. Another thing to keep in mind is how aligned your mission is with the business model of the franchisor. Franchisors are not interested in “social experiments” but “strategic alliances” with strong local partners that can help their brand grow and improve in value.
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Participating Franchise Companies…
Presenter
Presentation Notes
The Source America franchise program has identified a cross-section of franchise concepts that we feel would appeal to the network and it is just the beginning. Here are the current concepts that are in the program and they are eager to visit with any organization that is interested in considering their franchise model. You may note that we have several categories of concepts represented here that represent the diversity of our network and your organizations. For some, going into foodservice is a natural fit yet for others, business services represents a better alignment in their communities.
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The Newest Concept in the Program
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Two New Concepts Under Consideration
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A Recent Example…
• Looked at over 50 franchise concepts; narrowed to three
• Focused on job creation for clients with potential to create significant financial results to support mission
• Wanted something “good for the environment” they could offer their communities
• Excited to partner with a CRP to have a social impact
• Provided larger territory and discounts
• Willing to modify model to support employment goals
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Current Program Status…
Over a dozen franchises open and operating, creating over 50 jobs for clients
Several franchise concepts still looking for a “pilot” NPA to move forward
Franchise rights could be a single location or a development agreement for an entire region/State
Attend an upcoming 3-day training session (July 19-21 in St. Paul, MN; Nov 8-10 in Albany, NY)
Consider hosting a “Social Franchise Seminar” in your area for your constituents to learn more about franchising
“A Good Start and Ready to Grow”
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Are You Ready for a Social Franchise?
Established, Stable Organization
Strong, Committed Leadership
Mission Connection / Integration
Entrepreneurial; Social Enterprise Desire
Scalability (multi-unit and/or concept)
Capacity to Support a New Venture
“Evaluating Your Organizational Readiness”
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Franchising is not…
A Guarantee of Success There are real risks to consider
For Every Organization You need Leadership, Mission Fit You need Capital and a Champion
A Short-Term Commitment Must be willing to go through the entire cycle Average Franchise Agreement is 10 years
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Consider some next steps…
Asset Assessment Tangible & Intangible
Concept Categories Skills You Have Opportunities in Your Local Community
Investigate Participating Franchises Gather Information (e.g. FDD, phone interviews) Assess Level of Interest in the Organization
