Justin Howe of H-Tea-O allows us to follow him through the process of franchising his business. This will be the first episode of that series. He discusses his journey in franchising; his successes and challenges in franchising.
Justin Howe Intro
Get to know Justin Howe
Topic Segment ? Franchising H-Tea-O Part 1
TOPICS DISCUSSED IN THIS EPISODE:
Texas Tea – the birth of the concept
Proving the concept
Supply chain challenges
Creating a solid infrastructure
Putting together the perfect team
Becoming a franchisee in order to be the best franchisor
No Item 19 challenge
Real estate is one of the most important elements
Establishing a solid franchisee training program
Drue Townsend shares A LOT of what she has learned from managing the MARKETING FUND at FASTSIGNS International. The words “Marketing Fund” can create anxiety in many people and Ms. Drue will demystify the concept and teach you exactly what you need to know to make the most of your company’s marketing fund. Rob Vinson from Vinson Franchise Law joins the conversation to help us with some of the legal issues that are related to the Franchise Marketing Fund.
Drue Townsend Intro
Get to know Drue Townsend
Topic Segment – Franchise Marketing Fund
TOPICS DISCUSSED IN THIS EPISODE:
What Is A Marketing Ad Fund?
It is a collection of money paid by franchisees and managed by the franchisor, to enact defined marketing and advertising initiatives and bring value to the brand and franchisees.
It is in addition to any Royalties paid by the franchisee to the franchisor.
It is usually a percentage of gross sales (but could be a flat fee)
Marketing Fund By Laws:
There should be written By-Laws that outline how the fund can be used (what types of initiatives; pro-rata vs. major markets vs. national only), who makes decisions about it (as an example, highest ranking Marketing Person and CEO with Franchisee Ad Council input), who can sign contracts (often just the CEO and Marketing Person), where the money is kept (recommendation is that it is held in a different financial account with its own Profit and Loss Statement and Balance Sheet), who is providing the fiscal oversight and ensuring proper collection and use of the fund.
Sample Acceptable Uses of the fund
Build and maintain the brand and location’s central website
Create television ads
Run paid social media ads
Join a vertical industry association and exhibit at their trade show
Agency fees or marketing team member salaries/benefits
Marketing research projects
Franchise Development advertising
Legal fees for the new corporate office lease negotiation
Create training and operations manuals about safety
Pay for a convention cocktail party
Collect just to rebate back to franchisees who do X and Y
How to Justify an Ad Fund to a Franchisee
Use the dollars to protect and promotes the brand, which protects your investment today and should add value to your asset when you go to sell one day
It builds brand awareness and brand consistency when marketing and advertising has the same messaging strategy and look/feel; easier to control and do when centralized
Doing things “on your behalf”; things that you – or other franchisees – can’t, won’t or shouldn’t do on your own.
Looking for economies of scale (having a customer satisfaction survey platform that all franchisees can be part of through the Ad Fund vs. having each one find their own; having one website managed and hosted by corporate; buying national cable television vs. having 30 franchisees by spot cable), things that require compliance (email marketing platform); , would reach beyond one’s area and impact other franchisees positively or negatively (joining a national association and advertising on their homepage), etc.
The Importance of Franchisee Involvement in the Marketing Fund
Create a Marketing Ad Council (ours is called the National Advertising Council) and it has 6 elected Board Members representing the 650 locations in the US and Canada. Scale the number with growth; we started out with 3 and don’t have plans to increase beyond 6 anytime soon. Too many prohibits decision making.
The National Advertising Council ? or whoever works with the corporate team on Ad Fund projects ? can be different than the Franchise Advisory Council, or one group of franchisees can provide guidance to the corporate team on both types of topics.
You can have officers for the Ad Council, but because franchisees have their own businesses to run, we don’t have franchisees fill these roles and therefore then have to do the meeting minutes, organize administrative board events, etc.
What Should You Start Spending Money on Today From an Ad Fund
A corporately managed website with micro-sites/location pages on it
Google My Business page management
Directory Listings management (so all information about a location gets propagated accurately and updated across the web)
Brand social media sites (and organic content/ads on them)
Creation of some brand materials (depending on your product/industry and how you go to market; could be an automated platform or just have the assets/materials available
Point of Purchase materials
Print materials (brochures)
Digital Asset Management software
Common Pitfalls with a Marketing Funds
Don’t cap your Ad Fund fees; it will make future high-volume franchisees happy but it will keep your Ad Fund from growing (and you will have more locations to help)
Try not to require yourself to spend pro-rata. It is very hard to do well and sometimes money needs to be spent in an area of the country or on something that doesn’t benefit all equally. Ex: a sponsorship that covers only 15 cities, but has regional television and a big online effort; a state listing on a website where 50% of your locations do business.
Don’t collect money only to give it back through subsidies or rebates or matching. A lot of admin work, disagreements about what does and doesn’t qualify, etc.
Franchise Marketing Fund Tips
Start an Ad Fund from the beginning (as you establish your brand/franchise). If you don’t have one, start one now with future agreements. Consult with your accountant and attorney to determine if it should be set up as a separate entity (and what kind), what the tax implications will be, if it is subject to any accounting regulations (ASC 606 deals with revenue recognition).
If corporate can match any funds, it is a great way to soften the process of starting an Ad Fund
Collect Ad Fund fees the same way that you collect Royalties (ex: EFT on the 5th of the month). If you don’t pay your Ad Fund fees, you are subject to the same compliance issues and penalties as you have if you don’t your Royalties on time/ever
Encourage franchisees to spend money locally on things that make sense in their market ? local pay-per-click, display ads on local websites, radio, joining associations, sponsoring events, etc. Don’t fund discounts in national promotions either (ex: $1 off sandwich promotion should be absorbed by the franchisee; not paid by the Ad Fund).
Determine if king kong seo, freelance help or an in-house marketing team is best for your business. There are pros and cons for each, and in the long term, the best result is probably a mix of all three, but emerging businesses with small or no Ad Funds have to really stretch dollars.
Have governance and be transparent with your franchisees. Review financials each month and have annual statements audited. Share categories of spending at big meetings. Have a franchisee-elected Board of Directors that works with the corporate team to be a sounding board, communicator, tester, etc.
Have protections. Require a small percentage of the funds to not be budgeted ? to be held out of the budgeting process ? in case sales decline or the Ad Fund is owed money by the franchisees. It’s easier not to budget for something than to have to cancel programs later. As your system grows and your Ad Fund grows, have provisions in your guidance documents that allow you to reduce that percentage. (We don’t, and our By Laws require a 5% hold back or carryover, which is now hundreds of thousands of dollars a year).
Make your agreements broadly specific. Sounds like an oxymoron but give the brand room to expand what the Ad Fund can cover, but don’t make it too open-ended.
How to Set Up a Franchise Marketing Fund
Contact a franchise attorney and ask them for best practices in your industry, business and the way you market. See if they have sample drafts or if they can help you create an Ad Fund plan, By-Laws, content to include in your Franchise Disclosure Document and content to include in your Franchise Agreement.
Determine and set up your collection amount, audit and governance processes, etc.
Create a long range marketing plan – 3 to 5 years – based on estimated collected funds, and what those funds could buy. Prioritize the spending and share the big picture plan with franchisees and future franchise candidates so they know there is a plan, but clarify that this is based on assumed growth and that the plan is not contractually guaranteed.
Robert Bilotti talks about franchisee onboarding and training. We will dive deep into “training theory” and then wrap it all up with a step-by-step discussion on how a new franchisor needs to set up a training program for franchisees.
Rob Bilotti Intro
Get to know Rob Bilotti
Topic Segment ? Franchisee Onboarding and Training
Topics discussed in this episode:
The difference between a franchise system and a collection of mom and pops is “Training”
What is the difference between onboarding and training?
When do I need to hire a full-time trainer?
What to train versus how to train
Can a start-up franchisor use the operations manual as the training program at first?
Your first franchisees will be some of the most important validators of the concept, and if you skimp on training up front, it will come back to bite you.
Your most important franchisee is the first one after the former employee, friends, and family franchisees. That is the one that will really be the proof of concept. Be sure that you have a solid training program BEFORE that franchisee starts.
Invest in a learning management system (LMS) early
What is an LMS?
How does training change when you are in growth mode?
How to select an LMS right for your system
Moodle is a free, open source LMS
Look for a user-friendly system (from the administrative perspective) and a nimble system. Learn this by doing lots of demos and talking to other companies that use an LMS. Google is a great resource.
LMS support is probably one of the most important features. Usually, the more you pay, the more support you get.
What are the different modes of training (modality)?
In person Instructor Led
Virtual Instructor Led
Knowledge Sharing (wiki learning)
If you set up a mentoring program to help train new franchisees, be sure to invest in a training program for the mentors so they can be trained in how to train.
There is a difference between lecturing and facilitation when it comes to training.
There is not one modality that is best for everybody. There is not a “one size fits all” when it comes to training.
Survey your franchisees, and do it often, how you are doing with training. Don’t just capture “smile sheets”, rather actionable information. This should happen every 3 to 6 months.
You CAN measure return on investment in training, especially in a franchise system.
Use gust satisfaction surveys to draw training topics.
What are the steps that a start-up franchisor needs to follow to develop a training program?
Document – document – document. What makes your business a success.
What can you expand on from that? Create actionable content from that documentation? This is the ?what?.
Determine how you will take that information and disseminate it to the people who need it. This would be the franchisee and their employees. This is the “how”.
Determine how you will support your franchisees in their training efforts to their employees.
Establish a mechanism for measuring the results of the training.
Allow plenty of time to develop your training program. If you start developing your training program after you have signed your first franchisee then you have waited far too long.
Lori Kiser talks about how to best utilize a franchise broker consultant company. Everybody wants to know how to find the path to granting more franchises, and in this episode we definitely talk a lot about that. We will discuss what is a franchise broker consultant, how to make your business ready to utilize their services, and how to effectively work with them once you have hired them.
Lori Kiser Intro
Get to know Lori Kiser
Topic Segment ? How to work with Franchise Broker Consultants
Quickdraw Questions plus the first time ever Lyrics Quiz
Topics discussed in this episode:
Franchise Broker Consultants are not business consultants in the traditional sense of the word. They specialize in producing qualified, vetted leads for franchisors.
A franchise broker consultant is not part of the sales team of the franchisor. They will not take the prospect through the franchisor’s sales process, though they will stay involved as the candidate passes through the process.
In order to be successful with a franchise broker consultant, a franchisor must have the following already in place and running within their concept:
An in-house franchise development staff (sales team)
A well-defined sales process
The ability to go beyond the generic 6-step sales process, and know how to learn and understand the prospects dreams, desires, and business goals
Unit economics that are positive and consistent
A leadership team with a solid understanding of franchising
A typical start-up franchisor is usually not a good candidate for a franchise broker consultant group because the broker consultant is paid based on successfully bringing a prospect that eventually signs a contract with the franchisor. Because start-up franchisors typically don’t have the infrastructure in place to handle the lead volume, broker consultant groups are less likely to accept them as a client.
How to take your startup system and get it ready to be accepted by a broker consultant group:
Create a specific landing site for franchisees. This will demonstrate to the broker consultant group that you are knowledgeable and organized, and that you have a place to start a new prospect so that they don’t fall between the cracks once the prospect is delivered to the franchisor.
Create a sales process that works for your team and track the performance of the sales process and the development team. If you can?t prove that you can successfully close a prospective franchisee then a broker consultant group is not very likely to burn good qualified and vetted leads with your system.
Be able to show GREAT unit economics ? meaning, be able to show that the franchisees are making money.
Demonstrate that all of the existing franchisees will validate well. Know that all of the franchisees are happy and that they will sell that happy story to a prospect who makes the validation calls.
Demonstrate that the franchise system has all (most) of the amateur mistakes out of the way so that the franchise broker group?s brand won?t be tarnished by referring leads to the franchisor client.
Have an FDD that is registered in al of the required states so that the franchise broker consultant will not be limited by geography. Similarly, be ready to offer and close franchise deals nationwide, including developing a nationwide support group to service the new franchisees.
Demonstrate that your system can handle the stresses of sales volume, such as being able to build out a location for multiple new franchisees while simultaneously walking a second set of prospective franchisees through the sales process, AND manage all existing franchisees at the same time. This requires a team that is in place and seasoned.
A typical franchisor broker consultant will sift through over 100 candidates before they find one that is worthy of passing on to the franchisor clients.
The Franchise Rule does apply to a franchise broker consultant, although the broker consultant shouldn’t be doing any selling of the specific system.
Once a franchisor is able to join forces with a franchise broker consultant group, what is the best way to manage that relationship?
Think of the broker consultant as a talent scout, scouting players for your team
The franchise broker consultant will act more like a brand ambassador to the candidate.
Since the franchise broker consultant already an established relationship with the candidate, the franchisor should trust and utilize the candidate’s information from the broker consultant when the franchisor is brought into the relationship.
Be open to adapting to the processes, nomenclature, personality, and style of the franchise broker consultant group, as well as to the type of candidate that they typically generate
There are different types of consultant groups as well as different types of consultants within each of the groups. You will likely only work with a handful of consultants within a consultant group. That is normal.
The best franchise broker consultants are not as enticed by your commission dollars as they are developing their referral network. These consultants rely heavily on referrals from happy candidates who eventually convert to franchisees. While it is important to pay consultants a fee that is competitive, understand that they need to like you and believe that your system is successful before they burn good leads on your system.
?Tom Spadea discusses the benefits of properly managing the FDD and the Franchise Agreement, from the beginning, making sure to keep the end in mind. The “end” he speaks of is a possible acquisition by an investment company. What will they expect to see when they look at your franchisees contracts in your files?
Tom Spadea Intro – 00:00:40 Segment 1 – 00:03:22
Get to know Tom Spadea Segment 2 – 00:24:40
Topic Segment – Managing Your Franchise Agreements with the End in Mind Bonus Segment – 00:57:15
Managing Franchisee Growth Segment 3 – 01:02:50
Topics discussed in this episode:
Where do most franchisors get it wrong? Many franchisors and franchise attorneys focus mostly on the substantive issues of the and forget about procedural issues related to the process – managing latent defects
Item 23 receipt page not being properly executed and filed
Guarantees not properly executed
Individual versus LLC signing FA/lease
You can have the best FDD and franchise agreement in the world, but if you don’t manage the process properly, it can cost you a lot of money in the short term with an unenforceable contract, and in the long run, upon exit.
It’s important to understand who the real audience of the Franchise Agreement is. It is the franchisee, but it is also a prospective private equity investment firm who may want to purchase your system in the future.
What is the process? Step 1: Make sure that the franchise agreement is up-to-date Step 2: Geographical Analysis – Ensure that the franchisor is registered in every registration state where the concept will be offered. That includes where the prospect is currently located as well as where they want to open a location. Both states must be registered if required by that state. Deliver the correct FDD for the state. Step 3: Ensure that 14 days pass between delivery and signing of the Franchise Agreement, not including delivery day and signing day Step 4: Spend the time to ensure that names are all spelled correctly, along with middle initials. Check the address, LLC name etc. Step 5: Prepare a custom franchise agreement based on the specific agreements made between franchisor and franchisee – do not use the sample franchise agreement that is included in the FDD. Deliver the document to all required recipients and ensure proper signatures Step 6: Ensure that the lease includes all of the required language as per the franchise agreement
There are many different software packages that can help you with each aspect of the transaction, but Spadea Law has the platform that hits every element. Compliance Map helps franchisors ensure that they are only offering the franchise in the proper states. The link to the Compliance Map software demonstration is below:
Mike Pollock give us tips on how to build a franchise development system for your franchise. But it was more than just that because we also talked about how to take a warm lead through the process to close the deal.
Doug Groves talks about insurance, specifically, what types of business insurance are out there, the importance of finding a rep that knows your industry, and what role does insurance play in the relationship between franchisor and franchisee.
Topics discussed in this episode:
Basic coverage that all business owners should have:
Property (property, fixtures, furnishings, and equipment)
General liability (slips and falls)
Workers’ Comp (employees injuries and lost wages)
Auto (company owned vehicles)
Employment Practices (HR related risks)
Umbrella (covers over and above the above mentioned)
Every insurance policy has a purpose.
Umbrella policies are a cheap way to purchase vast amounts of insurance for a much lower price
When you are deciding on limits for each type of insurance:
Property: The property limits should be equal to the replacement cost of the property it is covering
All other: The rule of thumb is that you make the value of the insurance policy to be more attractive to a would-be plaintiff than your personal assets.
Best Practice: Select an insurance broker who has experience in providing insurance for companies in your same industry. They will know which questions to ask in order to recommend the right options for you.
The question is answered, why does this line appear in all franchise agreements and franchise operating manuals: “All liability insurance policies must name us (the franchisor) and any subsidiaries that we designate as additional insured.”
We answer the question, why do franchisors require franchisees to carry certain levels of insurance.
What is the EZCert program and how does it help franchisors manage all of the insurance certificates from all of their franchisees – for FREE.
Book: Killing the Sacred Cow
By Garrett B. Gunderson
Our culture is riddled with destructive myths about money and prosperity that are severely limiting the power, creativity, and financial potential of individuals. In Killing Sacred Cows, Garrett B. Gunderson boldly exposes ingrained fallacies and misguided traditions in the world of personal finance. He presents a revolutionary perspective that can create unprecedented opportunity and wealth for thoughtful, mission-driven individuals.
By Kit Vinson|August 4th, 2017|Franchise Law, Podcast|Comments Off on The Franchise Manual Podcast – Episode #16 – Is Three-Party Franchising Right for Your System?
Brian Schnell talks about Three Party Franchising – using Area Developers and Master Franchisees to grow your franchise system. Many people misuse these two terms, or use them interchangeably – Brian’s going to clear it all up for us.
Brian Schnell Intro – 00:00:40 Segment 1 – 00:02:28
Get to know Brian Schnell
Segment 2 – 00:23:53
Topic Segment – Is Three Party Franchising Right for Your System?
Segment 3 – 01:00:51
Topics discussed in this episode:
What is the difference between a Master Franchisee and an Area Developer
What is the Three-Party Franchise model?
Three Party Franchise model works very well internationally
Avoid the temptation of “0-100 franchisees quick” through three party franchising without a full understanding of what is involved. Don’t try to sprint before you know how to walk.
The conversation about Three Party Franchising shouldn’t take place without a full understanding of risks and benefits to all parties.
What is the necessary infrastructure before diving into a three-party franchising model? A full understanding of:
The infrastructure must exist somewhere; either on the franchisor side or the area developer side.
The functions of managing a franchise system are usually carried out by a team of corporate employees. It is not realistic to expect an area developer to fulfill the same functions plus operate a unit without the proper infrastructure.
Finding an area developer that is good at EVERYTHING is not likely. Try focusing on an area developer’s core competencies and supporting the area developer in the areas where he/she is weaker.
Don’t offload functions of managing a system to an area developer that can be more efficiently executed by the corporate office.
After you sign a master franchisee or an area developer, the system DOES NOT go into autopilot. The franchisor must stay involved and active.
Trying to fix problems in the three-party franchise relationship are much easier to correct early on, so stay connected and involved.
Educate yourself before trying to utilize a three-party model by talking to attorneys and consultants who have experience.
Manage expectations up front through a well-written agreement and ops manual
Paul Rocchio – IFA Procchio@Franchise.org
Contact Paul for information about joining the International Franchise Association
Book: Dare to Serve By Cheryl Bachelder
Servant leadership is sometimes derided as soft or ineffective, but this book shows that it’s actually challenging and tough minded – a daring path. Bachelder takes you firsthand through the transformation of Popeyes and shows how a leader at any level can become a Dare-to-Serve leader.
Nancy Friedman shares her experiences as a franchisor and what she believes were the reasons for its ultimate failure. This is going to be a really good episode because we always hear about people telling us how they succeeded, but rarely do we get to hear from the other side of that coin. The episode is filled with great “take-aways” and is a must-listen for any emerging franchisor.
Segment 1 – 02:54
Get to know Nancy Friedman
BONUS: – 27:21
Free gift for listeners
Segment 2 – 28:33
Topic Segment – “Franchising Failure” A Case Study
Segment 3 – 50:00
In this episode, Nancy discusses the five steps to ultimately fail in franchising.
Proper vetting of prospective franchisees is key. Do your due diligence. Trust but verify
Make sure you have the proper infrastructure in place before you begin the journey down the road of franchising. You can’t do everything all by yourself.
As a training document, a reference document, a master document for the system standards, as a sales tool, have your franchise operations manual in place. As a successful Startup “we” make it look easy. It’s not.
Steps 4 and 5:
Don’t be too hot for the deal. Speed is not success. Have a growth plan in place. When you grant a new franchise, ensure that it fits into your well thought-out plan. A shotgun approach may have worked for some companies, but it doesn’t mean that it’s the easiest, most efficient, or best method of expansion. Franchising isn’t for everyone.