THE EMERGING FRANCHISE BRAND S ROADMAP TO SUCCESS

THE EMERGING FRANCHISE BRAND S ROADMAP TO SUCCESS

Introduction We ve all heard the failure rate for new business concepts. As much as 50 percent of new businesses fail within their five years of operation, and just onethird of those that survive that timeframe make it to 10 years. For those that make it to the decade mark, prospects of continued success are far greater. One of the advantages of the franchise model is a lower failure rate. However, as many emerging franchise brands can attest, establishing a network of franchised businesses does not guarantee long-term viability and growth. According to FranData, the leading market research firm in franchising, almost 42 percent of the nation s more than 3,400 franchisors have fewer than 10 units. Over 2,300 franchises have less than 50 units a staggering 68 percent of the franchise industry. Building a franchise brand requires a robust business framework and a clear-cut roadmap that gets you where you want to be as a franchisor. We created The Emerging Franchise Brand s Roadmap to Success to illustrate the necessary steps franchisors should take to develop a successful model.

Replicable Model 1 Before you even begin to consider franchising your business and getting the necessary capital, it s critical to validate your business as a franchisable concept. Can other independent owner operators be trained on this model and operate it successfully? A Franchise Feasibility Study will help determine if your business and you are right for franchising. A quality Franchise Feasibility Study will typically cost you in the $5,000- $7,000 range, but will be well worth the investment if it helps keep you from making the wrong decision and spending hundreds of thousands of dollars in the process. 3

Adequate Capitalization The No. 1 reason businesses fail is a lack of adequate capital. The ideal scenario for most emerging franchisors is to self-finance. However, given that to start a franchise properly may cost you in the neighborhood of $200,000 to $250,000, and total investment levels over the first five to ten years of your franchise growth more than likely will be in the $1-2 million range, selffinancing may not be an option. After you have figured out the projected costs needed to start your franchise, you can choose between debt financing and equity financing. 2 Debt financing includes finding a lender that is willing to give you capital based on your personal and professional collateral. The terms of repaying the lender will include added interest and other considerations. Equity financing includes finding an investor that can finance your expansion for a percent of ownership in the business. While you will not be able to maintain 100 percent ownership with this option, you can negotiate the terms of the deal so both parties are satisfied with the partnership. 4

Resilient Concept with Long-term Viability While your business may be doing well today, you need to ensure that it will be viable to your customers over the long haul. It will not be worth the time and cost to franchise if you cannot successfully operate this business five or ten years from now. Think about your concept and consider if consumer demand for your product or service over the course of time will continue to be strong. Customer profiling, competitive landscape, regulatory changes, technology changes and market demographics should all play a role in that decision depending on your product or service. 5

Differentiation Among the most basic business strategies, differentiation is a way for emerging franchise brands to stand out compared to competing brands. Concepts can differentiate themselves based on product, service or solution. Think about the sheer number of burger concepts out there. How does a new brand enter the space and not only compete against the likes of McDonald s, a brand with decades worth of brand equity and loyal customers, but earn a share of the local market? By incorporating innovative sourcing techniques, proprietary products or services, philanthropic initiatives or unique processes, your brand may be able to create your own moat to help distinguish your offering amongst your competitors. 6

Along the same lines as differentiating your brand and business model, your concept should have strong barriers to entry in your specific market and industry. Common types of barriers include government regulations, high start-up costs, innovative and proprietary technology, product differentiation, strong patents or trademarks, exclusive access to suppliers and/or distribution channels, licensing requirements or special skills, and economies of scale. All of these provide a strong deterrence to competitors thinking of entering your market or industry. If your franchisees operate a model with high barriers to entry, they re in a better position to generate higher profits and go up against fewer competitors. For example, proprietary technology, such as an e-commerce platform that allows franchisees to supplement revenue generated in stores with online purchases, can provide a franchisor with significant advantage over would-be competitors. Developing a scalable platform requires innovation, capital investment and expertise in rolling out the software across an entire network of franchisees. 7

6. Realistic Plan for Growth Many emerging franchisors budget enough to get their systems in place, create manuals and develop their Franchise Disclosure Document (FDD) and franchise agreement. Unforunately, that is where their capital planning ends and usually where their capital dries up as well. Expanding your business requires expenditures even if it is only across town. As a startup franchisor, you will be responsible for all the costs associated with the franchise system. Here are a few necessary and potential costs to be considered in a startup budget: Training programs Operational manuals Sales and marketing materials Personnel recruitment Accounting and legal fees Research and development All of these will require an investment in time, money, people and other resources for the franchisor. And whatever aggressive plan for growth you may have in place, have a more aggressive plan for a lack of growth to ensure that your commitment and capital will sustain the brand even if it takes twice as long to achieve royalty self-sufficiency. 8

Robust Unit Level Economics Before you even begin thinking about franchising, make sure that each unit in your system has a strong bottom line. If you cannot make enough money to justify your own time and investment, your future franchisees will most certainly not be able to either. Once you have ensured your own success across all units, then start with your franchisees profitability. Ensure your franchisees are making money and getting an adequate return on their investment, and you will find you are much closer to solving the rest of your problems. One way of going about this is by establishing a threshold for unit economics by which current and future franchisees can expect to generate a return on investment. You need to be able to clarify how much a new operator will have to spend for buildout costs and getting their franchise up and running, and balance that against the time frame for seeing their investment pay off. When your units consistently meet this criteria, you re in a strong position to grow your brand. Trying to add more franchisees to their systems before making sure that their current franchisees are successful is where most franchisors make their mistakes. Your future recruitment strategies are tied to your ability to leverage existing franchisees as brand validators. If your franchisees aren t generating a strong return on investment, it s unlikely they ll encourage other prospective franchisees to join. At the same time, strong unit-level economics generates a more consistent revenue stream to the franchisor through royalties. 9

When you re looking to make an apples-to-apples comparison of multiple stores performance, EBITDA or earnings before interest, taxes, depreciation and amortization is one of the best metrics to use. Put another way, you can use it to measure a business s profitability and cash flow before debts are paid and other non-cash expenses like depreciation are taken into account, particularly on long-term assets like equipment. Comparing this value to the initial investment gives a strategic impression of the overall health of your franchise system and whether the return is attractive enough to capture future franchise candidates attention. For most small businesses and franchisors, investors want to see a 30 percent return on their initial investment annually at a pre-tax level, meaning they can recoup their cash investment in three years. 10

9. Support Structures Developed before Expansion You must be able to spare the time, energy and resources before you begin the franchising process to build your support and infrastructure plan. If there are internal issues to address, make sure you tend to them before you switch gears from business owner to franchisor because you will be focused on many different activities as a franchisor. You will need to consider what resources are available to support your future franchisees in the areas of training, operations, marketing and more. When you begin, that resource may be you or current members of your team, so ensure that all have adequate time to contribute beyond their current role to help the franchisees. And build a plan for infrastructure growth before you begin selling franchises so that you will know when to add personnel and where in order to fully support your franchise system. 11

10. Success in Multiple Markets For a successful franchise business, you should have a creative concept that rises above the competition. However, you need to make sure your concept does not fit into too small of a niche. Franchises have the potential to expand exponentially, so when executing your concept, make sure that it is scalable and has demand across markets. Before you franchise, know whether there is demand for your product or service in other markets. If your product or service is more of a local or regional preference, franchising may not be the right distribution vehicle for you. 12

Another way new franchisees will validate your emerging franchise brand during their due diligence is the consideration for the number of units you ve added since you began franchising. Having a strong track record of opening both corporate-run and franchise operated stores over a multi-year period will provide multiple advantages. First, the greater the number of happy, profitable franchisees in your system, the higher the profits for the franchise brand as a whole. Second, you re able to lean on this as proof that your franchise model is replicable and stands the test of time. Finally, you ll be able to attract new prospects who want to be a part of that success. 13

12. Franchisee Validation A franchise brand cannot grow without the support and validation of their franchisees. While most think that means you must have a strong return on investment and unit level profitability, it goes beyond just the financial returns. Franchisees must not only be making money and getting an adequate return on their investment, they must also be passionate about the brand and enjoy what they are doing. Without that, all they have done is bought themselves a job. They must also see value in the support the franchisor provides, not only in upfront training, but also in on-going support and initiatives. Finally, validation comes in the form of your relationship with your franchisees. They want to know that you care about them, their business and their well-being. Happy, healthy franchisees that are having fun and making money doing something they love and are passionate about, with a partner that cares about them as individuals, is the key to true validation. 14

13 It s important for emerging franchisors to keep in mind many of their franchisees will be new to business ownership, as well as franchising. A robust training system and operations manuals should involve both classroom-based sessions and on-site learning that gives new franchisees a clear understanding of what to expect in terms of: Brand training Human resources and people development Real estate and construction Local marketing strategies Operational procedures Financing and budgets Business plans Supply chain management Inventory management Sales With respect to operations manuals, your goal is to provide clear-cut documentation that gives franchisees explicit guidance on how to execute the business model. In essence, they are how-to guides for franchisees that provide the same set of directions for each owner to ensure things are being done the same way in each location. For the sake of the franchisor, a strong operations manual is also an important way of protecting intellectual property. STRONG TRAINING SYSTEMS AND OPERATIONS MANUALS Beyond the initial phases of getting the franchise location up and running, the most effective training systems will offer opportunities for continuing development, both virtually and through field support teams. Again, the strength of an emerging franchise brand lies with a growing system of franchisees who are well-trained and confident in their abilities to replicate the proven systems. 15

14. Franchise Development The final Mile Marker is the ability to sell your concept though franchising is truly a mutually beneficial business relationship that requires buyin on both sides. However, if you or your staff cannot get franchise candidates excited about your opportunity, the best business models in the world will struggle to stand out and be noticed. As a franchisor, you need quality people that can communicate your brand proposition effectively. You must have a robust Discovery Day that showcases your strengths and reinforces the reasons why a candidate should join your franchise versus the thousands of others that are competing for their investment dollars. You must be able to marry the needs and desires of the candidates to the benefits of owning your brand. And you need to ensure that you are getting this story out to all of your potential candidates today through effective digital and social media, public relations, and other sales and marketing channels available to you in franchising. 16

Get Started on the Right Path At Winmark Franchise Partners we have experience working alongside a variety of franchisors and entrepreneurs. We understand the needs of a startup franchisor and can offer advice and consulting services on any sized project or issue you may be facing as a franchise. For the right partners, we also offer investment and acquisition opportunities. The bottom line is that the vast majority of franchises in the United States will never exceed 100 units without getting the right help and guidance. Winmark Franchise Partners was created to help serve those constituents to help them get their brand to the next level. We can help your business expand into a successful franchise by providing the guidance you need. As a franchise incubator, we have the knowledge and capital to get your brand on the right track. If you are interested in franchise growth visit www.winmarkfranchisepartners.com or contact us at info@winmarkfranchisepartners.com (866) 994-5191