FRANCHISNG YOUR RESTAURANT
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Transcript of FRANCHISNG YOUR RESTAURANT
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FRANCHISING YOUR RESTAURANT
Joseph J. GottliebStout Kaiser Matteson Peake & Hendrick, LLC
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What is Franchising?A method for the distribution of goods or
services.Elements of a Franchise
License of a Trademark ;
Payment of an Initial Fee;
Franchisor provides substantial support or marketing plan or the existence of a “Community of Interest” between Franchisor and Franchisee.
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Quick Franchise FactsApproximately 760,000 Franchised
Businesses in U.S.19 Million Americans employed in Franchised
Businesses.Over 75 industries represented.Restaurants are the largest single sector
represented.
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Regulation of FranchisingThe Offer and Sale of Franchises is Regulated
by Federal and State law.Franchise Disclosure Document “FDD” must
be provided to prospects at least 14 days before the Franchise Agreement can be signed and money accepted.
14 states require registration of the FDD.Without a Federally Registered Trademark,
must comply with state Business Opportunity Laws.
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Is Your Restaurant a Good Candidate for Expansion Through Franchising?
Can the concept be duplicated?Are there regional taste factors to consider? Will it sell everywhere?
Is the concept teachable?
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Is Your Restaurant a Good Candidate for Expansion Through Franchising?
Is there an element of uniqueness?
Do you have sufficient proof of concept?Multiple locations?Operating history?
Will the business provide a good ROI?
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Franchising vs. Owner ExpansionFinancial Considerations
FranchisingFranchisee provides capital for expansion.
Can enable more rapid expansion.
Franchisor incurs costs of developing infrastructure to support franchisees, i.e. marketing, franchisee support staff, training.
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Franchising vs. Owner ExpansionFinancial Considerations
Expansion of the brand by Owner will always be limited by ability to finance growth.
Developing a franchise system involves costs of consultants and attorneys.
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Franchising vs. Expansion by OwnerRegulatory Issues
Franchisee has burden of compliance with local laws and tax compliance.
Franchisee has burden of compliance with HR and other employment issues.
Franchisor must comply with detailed Federal and State Franchise laws and regulations. Includes disclosure of Franchisor’s audited financial statements and other information.
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Franchising vs. Expansion by OwnerFinancial Rewards
Franchisee pays Initial Fee from $25K - $50K
Franchisees typically pay a royalty based on GROSS REVENUE.
Average range 5 – 7%
Franchisors give up larger portion of profit, but have less downside risk from operational problems.
Franchisors may not realize profit for several years.
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Franchising vs. Owner ExpansionOther Considerations
Franchisee has better knowledge of local market.
Franchisee has “skin in the game” and more highly motivated than an employee
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Franchising vs. Owner ExpansionOther Considerations
Franchisor loses a certain amount of control.Franchisor can control ultimate product or service.Cannot micro-manage.Joint employee exposure – NLRB.
Difficult to find good franchisees.
Start-up franchises may be difficult to sell.
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Issues Specific to Restaurant FranchisesHeavy Franchisee Reliance on Franchisor
Menu Development and Changes.
Sourcing of Product.
Proprietary Ingredients and Recipes.
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Issues Specific to RestaurantFranchises
Choosing your Franchisees
Brick and Mortar, Food Truck, Alternate Venues?
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Do You Really Want to Be a Franchisor?Running a franchise system is a different
business.
Legal compliance.
Must establish System Standards in an Operations Manual – the “How-To” Guide for the Franchisees.
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Do You Really Want to be a Franchisor?Must build an infrastructure to support
franchisees.
Branding and internet presence.
Cost of attorneys and consultants could easily exceed $150,000. Return on investment may be slow.
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Other OptionsJoint Ventures: Not a franchise but typical
partnership problems can arise, i.e. division of responsibilities, disengagement, etc.
Licensing – Can be done on a “One-Off” basis, but may be deemed a franchise or Business Opportunity under state law.
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Questions