Franchising Nuts&Bolts

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Page 1: Franchising Nuts&Bolts
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• 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.

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License or Distribution Agreement

• This Licence Agreement 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.

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Four main types of franchises:

1. 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.

2. Manufacturer – Retailer...a parent company grants the right to a franchisee to sell their products e.g. new car dealerships.

3. Manufacturer – Wholesaler...the franchisee is granted rights under licence to distribute the franchisors product e.g. Coca-Cola.

4. Wholesaler – Retailer...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.

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1. Brand – the name associated with the products and services delivered in a memorable and satisfying experience to the customer.

2. Operating System – institutionalises the excellent service delivered in a memorable experience so it can be repeated over and over again from franchise to franchise in a consistent manner.

3. Support System – helps the franchisee get better and better at delivering the service in a memorable experience – helps a franchisee improve their performance.

4. Franchisee – brings talent and experience to the business and is motivated by being in a good system.

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Why do business owners choose franchising as a growth model?

• National reach.

• Additional funding and 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.

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Advantages for the franchisor:

• They allow 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.

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Advantages for the franchisee: • Much less risk through purchasing a franchise, than from starting a business from


• 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.

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• Fast food

• Couriers

• Home maintenance

• Car dealerships

• Convenience stores

• Trades

• Cafes

Virtually any business can be franchised!

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• 1180 franchise systems*

• 73,000 franchisees*

• 400,000 employees*

• $131 billion sales turnover*

* Source: Survey by Griffith University “Franchising Australia 2012”

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• Retail trade is the most popular form, making up 38% of systems in Australia.*

• The average term of a franchisee agreement is five years.*

• Almost 40% of franchise systems engage in online sales with customers.*

• The franchise sector reported annual revenue growth of 10% in 2012.**

*Source: Survey by Griffith University “Franchising Australia 2012”

**Source: PwC Franchise Sector Indicator 2012

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• 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.

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• 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.

• Delivers better than average returns.

The franchisor provides the business expertise (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...

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• A well established and accessible head office team

• Field support

• Franchisee representative committee

• Initial training

• Ongoing training

• The ability to network with other franchisees

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• Financial stability – for start-up and ongoing cash flow.

• The motivation and drive to work for themself.

• A realistic expectation of the work involved.

• The ability and desire to work as part of a team and follow the


• Brand passion.

• Experience (not necessarily in the same field as the system).

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Franchising is not a business in itself, but a way of doing business

• Creates a brain trust of motivated people all working towards the same goal.

• Creates an economy of scale not available to a small business owner.

• Connects the consumer directly with passionate small business owners.

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Fee Details

Franchise Fee 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.

Royalties 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 Contribution Fee

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%.

Franchise Application Fee

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.

Design and Project Management Fee

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.

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Fee Details

Franchise Fit-out and Signage

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.

Transfer Fee 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%.

Renewal Fees 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.

Sale of Business Transfer Fee

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.

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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?

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12 Key questions to test your franchise strategy (cont.):

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?

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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.

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What else do you need to do? 1. Determine the franchisor and franchisee roles and responsibilities – functional and


2. 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.

3. Develop a practical Franchise Agreement and Disclosure Document for new franchisees.

4. 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.

5. Develop a Franchise Induction Program that provides franchisees with the knowledge and skills required to operate and manage their business effectively.

6. Develop and document a comprehensive franchise expansion / growth strategy.

7. 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.

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