Franchise Seminar

THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com FRANCHISING AND ALTERNATIVE BUSINESS EXPANSION TECHNIQUES ******* SEMINAR Presented By Carl J. Kosnar i THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com SEMINAR OUTLINE ii THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com BUSINESS EXPANSION TECHNIQUES SEMINAR OUTLINE SECTION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. OBJECTIVE OF THE PROGRAM ALTERNATIVE TECHNIQUES OF EXPANSION THE FRANCHISE VEHICLE FRANCHISING IN THE ECONOMY CAN YOUR BUSINESS BE FRANCHISED? WHY FRANCHISE YOUR BUSINESS? THE BENEFITS OF BEING A FRANCHISEE THE FRANCHISE AGREEMENT FRANCHISE REGISTRATION AND DISCLOSURE LAWS FRANCHISE SALES PROGRAM FINANCING REQUIREMENTS SPECIAL CONCERNS WHAT THE FRANCHISE DEVELOPMENT PROGRAM SHOULD INCLUDE PAGE 1 3 5 7 8 9 10 11 17 19 20 21 22 iii THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 1 OBJECTIVE OF PROGRAM A. Planning and Establishing Goals for Your Company's Expansion Program I. Assess Feasibility of Product or Service That is the Subject of Expansion Program II. III. B. Evaluate and Determine Which Expansion Vehicle is Best What Should the Expansion Program Include? Evaluate Your Company's Operational, Financial and Human Resource Capabilities I. Prepare a Complete Set of Financial Projections a. Source and Use of Funds Analysis for Franchisor and Franchisee b. c. d. Pro-forma income Statement for Franchisor and Franchisee Personnel Schedule Indicating Positions, Salaries, Timing Territory or Area Allotment 1 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com II. Organization Chart a. General Manager b. c. d. e. Sales Manager Training Director Accountant Secretary III. Position Descriptions 2 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 2. ALTERNATIVE TECHNIQUES OF EXPANSION A. B. C. D. E. F. G. Continue Current Program Expand Through Vertically Integrated, Company-owned Units Partnership or Joint Venture Limited Partnership Distributorship or Dealership Trademark License Management Incentive/Equity Participation 3 Legend: Excellent Good Fair Poor Company -Owned Distributorship EXPANSION TECHNIQUES THE KOSNAR GROUP Limited Partnership Trademark License 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Partnership or Joint Venture Management Incentive Franchise 3 2 1 0 BENEFITS Less Capital Needed Eliminates Manager Recruitment Problem Income Based on Gross Sales of Units / Easier to Monitor Growth Can be Accomplished Faster Group Purchasing Power More National, Regional and Local Advertising More Research and Development Cash Flow Available to Develop CompanyOwned Market Penetration Faster and Greater Creates Excitement Among Employees Generated Better Product Service Loyalty and Control Expansion Techniques Chart 4 Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 3. THE FRANCHISE VEHICLE A. Definition: B. Elements of a Franchise I. Use of Name, Trademark or logo II. Use of a Marketing Plan, System or Procedure on Which the Franchisee Relies and Submits to Control III. Payment of Fee C. Types of Franchises I. Trade Name and Product II. III. Business Format Affiliate D. Various Franchise Structures I. Individual II. Territorial or Area a. Two-Tier b. Three-Tier E. Possible Sources of Revenue and How to Determine I. Franchise Fee II. Royalty III. Profit on Sale of Product IV. Rental or Lease Fees V. Advertising Fee VI. Equity Appreciation VII. Unusual Profit Potential 5 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com FRANCHISE STRUCTURE CHARTS INDIVIDUAL FRANCHISE AREA DEVELOPMENT FRANCHISE MASTER FRANCHISE SUBFRANCHISE 6 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 4. FRANCHISING IN THE ECONOMY A. B. C. D. E. F. Retail Sales Other Sales Business Format Franchises Product and Trade Name Franchises Is There Room For More Franchises? What Are The Future Prospects For Franchising? 7 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 5. CAN YOUR BUSINESS BE FRANCHISED A. B. C. D. E. F. G. H. I. J. K. L. M. N. 0. P. Q. R. S. Risk Rating Competition Rating Industry, Service or Profession Rating Company Longevity Rating Company Growth Rating Desirability Rating Business Organization Business Adaptable on a Nationwide Basis Business Has Public Acceptance Product or Service Differentiation Can Others Learn Business Financial Controls and Records Credit Rating Public Attention Price of Opportunity Integrity and History Monitor From Headquarters Review by Independent Professional Feasibility Study Should be Performed if in Doubt 8 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 6. WHY FRANCHISE YOUR BUSINESS? A. B. Expansion Can Be Accomplished With Less Capital Eliminates Manager Recruitment Problem and Day-to-Day Direct Management Responsibility Income is Based on Franchisee's Gross Sales, Not Net, and is Easier to Monitor Growth Can Usually Be Accomplished Faster Group Purchasing Power Can Result in Savings More Funds are Available for National, Regional arid Local Advertising More Funds are Available for Research and Development Cash Flow From Franchise Fees and Royalties Can Be Utilized to Develop Company-Owned Units in the Future Market Penetration is Faster and Greater Creates Excitement Among Present Employees Generates Better Product and Service Loyalty and Control C. D. E. F G. H. I. J. K. 9 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 7. THE BENEFITS OF BEING A FRANCHISEE A. B. C. "Own Your Own Business" Syndrome/The Great American Dream In Most Cases No Previous Experience Is Necessary Existing Complete System; Everything Established, Business Concept, Name, Patents, Formulas, Design, etc. Proven Proto-type Identity Lower Risk Standard Products and Systems Bookkeeping and Accounting Systems Group Buying Power Initial Training Program Ongoing Training, Supervision and Consulting Local, Regional and National Advertising Programs Ongoing Research; New Products, Ideas, etc. Financing or Assistance in Obtaining Financing Location and Site Selection Use of Operations Manuel Marketing and Sales Techniques Planning and Forecasting Inventory Control Systems Computer Systems Begin Business With Less Capital Equity Appreciation 10 D. E F. G. H. I. J K. L. M. N. 0. P. Q. R. S. T. U. V. THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 8. THE FRANCHISE AGREEMENT A The Reasons a Franchise Agreement is Needed I. The F.T.C. Rule 436 Requiring Full Disclosure Makes it Necessary to Have a Written Agreement. II. All the Parties Have an Understanding of the Basics on Which They Will Operate. Equitable Relationship Insures Uniformity Establishes Standards of Performance Protects All the Parties Provides For Remedies in the Event of Default III. IV. V. VI. VII. B. Who Should Draft the Franchise Agreement I. The Franchisor II. III. IV. Duplicate Another Company's Agreement Attorney Consultant/Attorney C. Content of Franchise Agreement I. Appointment and Franchise Fee II. Territory/Location a. Right to Approve Sites b. c. d. e. Right to Prime Lease Tie Lease to Franchise Agreement Plans and Specifications Equipment Must Conform to Specifications III. Proprietary Marks a. Use of Name 11 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com b. c. d. e. f. IV. Contest Name Notification to Franchisor of Other's Use of Name Conformance to Operating I-11anual Use Products, Systems, Supplies, as Specified Sign Requirements Training and Assistance a. Must Complete Training b. c. d. Start-up Assistance Continuing Advisory Service Promotional Materials and Bulletins, Marketing Developments, Products and Techniques V. Advertising a. Approval of All Advertising Copy, Materials, Packaging, Materials b. c. Establishment of National Advertising Fund Local Advertising Promotional d. Co-op Advertising VI. Operating Manual a. Must Adhere b. c. d. Confidential Property of Franchisor Adopt Revisions VII. Maintenance and Repairs a. Maintain Interior and Exterior b. Create Fund for Refurbishing VIII. Accounting and Records a. Must Keep Complete Records as Prescribed 12 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com b. c. d. e. Provide for Reports Allow for Inspection of Records Provide for Audited Statements Weekly Reports and Payments of Royalty IX. Standards of Quality a. Establish Need for Uniformity b. X. Provide for Purchases Which Conform to Specifications Modification of System a. Establish Right of Franchisor to Modify b. Prohibit Franchisee from Unauthorized Modification XI. Continuing Services and Royalty Fee a. Establish Royalty 1. Determine Program Necessary to Provide Ongoing Support and Consulting Service 2. Project Total Direct and Indirect Costs of Providing Continuing Services Establish Percentage of Royalty and Continuing Service Fee to Provide for Costs and Reasonable Return for Use of Franchisor’s Name, Concept and System 3. XII. Insurance a. Protection for Franchisee and Franchisor b. Establish Amounts of Protection Necessary 1. Worker’s Compensation 2. 3. 4. 5. General Liability -- Product --Bodily Injury Property Damage Malpractice Errors and Omissions XIII. Term a. Determine Term 1. Renewal and Termination Provisions Must Comply with New Laws 13 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 2. 3. Coordinate with Lease Long Term a. Insures Royalty Longer to Franchisor b. More Security for Franchisee 4. Short Term a. Adjust Royalty Upward if Desired b. Eliminate Undesirable Franchisees c. XIV. Allows for Earlier Execution of New Terms and Conditions Restrictive Covenants a. Establish Restrictions of Franchisee's Ability to Compete, Divert Business, Hire Away Employees, Divulge Secrets -- Subject to State and Antitrust Laws' Termination and Defaults a. Bankruptcy b. c. d. e. f. g. Notice to Cure -- Varies from State to State Failure to Pay Royalties or Fees Failure to Submit Reports or Financial Data Vacation or Abandonment of Premises Failure to Comply with Franchise Agreement Loss of License XV. XVI. Rights and Duties of Parties Upon Expiration or Termination a. Franchisee Must Pal All Sums Owing b. c. Franchisee Must ' Cease Using Name Franchisor's Right to Purchase Physical Assets XVII. Commencement and Hours of Operation a. Specify When Agreement Commences b. Determine Hours and Days of Operation Short of Agency Relationship 14 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com XVIII. Transferability of Interest a. Provide Conditions Under Which Franchisee Can Sell 1. Transfer Fee 2. 3. 4. 5. XIX. Rights of Approval Payments of Fees and Sums Owed Not Unreasonably Withheld Require Training of New Franchisee Death of Franchisee a. Survivors Can Apply to Continue b. c. c. Survivors Can Sell Franchisor Can Buy Assets and Real Estate Provide Formula for Buy-Out XX. Right of First Refusal a. Franchisee Must Notify Franchisor of Bona Fide Offer b. Franchisor Can Buy at Same Price as Buyer. XXI. Operation In Event of Disability or Death a. Franchisor's Right to Operate b. Save Harmless XXII. Taxes Permits a. Require Payment of Taxes, Assessments, Liens, Equipment and Previous Accounts b. c. Require Compliance with all Federal, State and Local Laws Require Obtaining of All Permits, Certificates and Licenses Necessary XXIII. Independent Contractor a. Not Agent, Partner, Employee of Franchisor b. c. b. Can't Incur Liability to Franchise Franchisee Bears Cost of Defense of Claims Receipt of Payments Not Waiver 15 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com XXIV. Non-Waiver a. Non-enforcement by Franchisor is Not a Waiver b. Receipt of Payments not Waiver XXV. Notice a. Manner of Notice b. Date of Notice XXVI. Liability for Breach a. Payment of Costs, Attorneys' Fees by Party in Default XXVII. Entire Agreement a. Overrides Any Previous Agreements b. Provides for Amendments, Charges or Variance Only if in Writing XXVIII.Severability a. Each Section of Agreement is Severable c. Franchisor Can Terminate Agreement if Parts Found Illegal Affect Basic Consideration of Agreement XXIX. Applicable Law a. Specifies Which States' Laws Apply XXX. Arbitration (Where Applicable) a. Provides for Selection of Arbiters b. b. Binding Arbitration XXXI. Franchisee Acknowledges Receipt of FTC or UFOC Documents XXXII. Franchisee a. Define Term "Franchisee" to Include Successors XXXIII. Caveat a. Disclaimer as to Claims Made b. Franchisee Assumes Risks c. Success of Business Cannot be Guaranteed d. Success of Business Also Depends on Franchisee's Ability 16 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 9. FRANCHISE REGISTRATION AND DISCLOSURE LAWS A. B. Definition and Purpose -- Protect Franchisee and Franchisor States in Which Registration is Required: California Hawaii Illinois Indiana Maryland Michigan Minnesota New York North Dakota Rhode Island South Dakota Virginia Washington Wisconsin C. D. E. F. G. Certain States Have Franchise Investment Laws Federal Trade Commission Rule 436 Business Opportunity Laws Penalties Uniform Franchise Offering Circular I. II. The Franchisor and Predecessors Identity and Business Experience of Persons Affiliated with the Franchisor and Franchise Brokers Litigation Bankruptcy Franchisee's Initial Franchise Fee or Other Initial Payment Other Fees Franchisee's Initial Investment III. IV. V. VI. VII. 17 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com VIII. IX. Obligations of Franchisee to Purchase or Lease from Designated Sources Obligations of Franchisee to Purchase or Lease in Accordance with Specifications Financing Arrangements Obligations of the Franchisor; other Supervision, Assistance or Services Exclusive Area or Territory Trademarks, Service Marks, Trade Names, Logotypes and Commercial Symbols Patents and Copyrights Obligation of the Franchisee to Participate in the Actual Operation of the Franchise Business X. XI. XII. XIII. XIV. XV. XV1. Restrictions on Goods and Services Offered by Franchisee XVII. Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related Information XVIII. Arrangements With Public Figures XIX. XX. XXI. Actual, Average, Projected or Forecasted Franchisee Sales, Profits or Earnings Information Regarding Franchises of the Franchisor Financial Statements XXII. Contracts Acknowledgement of Receipt by Prospective Franchisee Exhibits: I. II. III. IV. V. VI. VII. VIII. Actual, Average, Projected or Forecasted Franchisee Sales, Profits or Earnings Financial Statements for Fiscal Year 2008 Financial Statements for Fiscal Year 2007 Financial Statements for Fiscal Year 2006 Franchise Agreement Equipment Lease Lease for Premises Loan Agreement 18 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com 10 FRANCHISE SALES PROGRAM A, Determine Buyer Profile I. Entrepreneur as a Franchisee II. III. IV. V. B. C. D. E. Manager-Type Sales-Type Technological or Professional Background Financial Requirements Determine Where Your Buyers Are Located Develop Best Plan to Reach Them Set Sales Goals and Prepare How Many Can You Really Handle? I. II. III. IV. V. How Many Prospects Can You Follow-Up Site Selection Assistance Initial Training Start-Up Assistance In-Field Support F. G. Franchise Opportunity Brochure and Other Recruitment Materials Advertising and Public Relations Programs I. II. Establish Budget for Advertising and Public Relations Determine Best Medium a. b. c. d. e. Newspapers Other Publications - Special Magazine, Trade Journals etc. Business Opportunity Shows Trade Shows Broadcast/ TV & Radio 19 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com f. H. Internet / Online franchise Web sites Follow Up…. I. Complete Prospect Form II. III. IV. V. VI. VII. VIII. IX. X. Send Literature Salesperson Contacts Prospect Qualify Prospect ... Background, Experience, Interest, Available Cash Answer Questions Ask Prospect to Complete Confidential Application Negative Selling Technique Schedule Personal Interview/Visit Provide Offering Circular (Disclosure) Close I. In-House Franchise Sales Organization I. Control and Direction II. III. IV. V. J. Costs Integrate into Total Operation Other Functions Future Corporate Potential Outside Franchise Sales Organization I. Possibly More Experienced Than In-House II. Cost Less Initially 11. FINANCING REQUIREMENTS A. Which Party Needs Financing I. Franchisor II. III. B. Franchisee Customer of Franchisee Capital Requirements of the Franchisor Occur in the Following Order: 20 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com I. II. III. IV. C. Research and Development Stage Prototype Development Franchise Development Program Initial Recruitment and Selling Period Types I. Business Loan II. III. IV. V. VI. VII. VIII. Venture Capital Receivables Financing Equipment Financing/ Leasing SBA SBIC Public Stock Issuance Private Placement 12. SPECIAL CONCERNS A. B. C. D. E. Antitrust New Laws UFOC Interpretation and Applicability in Various States Use of Pro Forma Statements and Projections on Earnings, Sales or Profits Class Action Suits 13. WHAT FRANCHISE DEVELOPMENT PROGRAM SHOULD INCLUDE A. Conduct Research B. C. D. Prepare Client Analysis Report Prepare Definitive Time/Task Schedule Review Prototype Unit 21 THE KOSNAR GROUP 2306 Wales Drive, Cardiff by the Sea, CA 92007 carl@kosnar.com Tel 760-632-8402 • Fax 760-632 0772 www.kosnar.com E. F. Systems, Forms and Controls Operations Manual G. H. I. J. K. L. M. N. 0. Initial Training Program Support Program Determine Franchise Fees, Royalties, Advertising Fees and Other Revenue Sources Franchise Agreement Franchise Brochure Franchise Disclosure Document (FDD) Franchise Registration Franchise Sales Program Continuing Professional Assistance THIS PUBLICATION HAS BEEN BROUGHT TO YOU BY: CARL J. KOSNAR THE KOSNAR GROUP 2306 WALES DRIVE CARDIFF BY THE SEA, CA 92007 PHONE: (760) 632-8402 FAX: (760) 632-0772 carl@kosnar.com www.kosnar.com COPYRIGHT/CONTACT INFO - The contents of this Franchise Seminar Newsletter may be copied, reproduced or freely distributed for all nonprofit purposes without the consent of THE KOSNAR GROUP as long as OUR name and contact information are included. If you wish to UNSUBSCRIBE from our TKG Newsletter: e-mail us at carl@kosnar.com with UNSUBSCRIBE or REMOVE in the subject. **** 22