Developing Franchise Concepts for MSMEs

Financial Services Volunteer Corps

Consultations on Developing Franchising

Concepts for MSMEs

Delivered by:
Bachir Mihoubi
John Glazer

Egyptian Junior Business Association

January 4-8, 2015
Cairo, Egypt
Financial Services Volunteer Corps
FSVC Egypt Program
Non-for-Profit, Key Indicators: 2003-2013

Public-Private Partnership Years Since

11
Inception

Projects
Mission: Completed
150
Help build sound financial
People
systems to support robust Impacted
3,650+
economies in transitional and
Pro Bono
developing countries. Hours 24,800
Delivered
•
Bachir Mihoubi
Founder & CEO of FranCounsel Group, an international franchise
consultancy firm.
• International Transactions Attorney with several major U.S. law firms,
representing both foreign clients doing business in the U.S. and
American companies with international business interests.
• Developed major U.S. brands in more than 35 countries.
• Has lived and worked in France, England, Canada, and the United
States.
• Serves as an Advisor to several Boards of Directors of major U.S. and
Canadian brands.
• Lectures Extensively on International Law and Franchising in numerous
countries.
• Appointed by the U.S. Department of Commerce to act as Expert
Franchise Advisor to the governments of several developing countries.
• Author of numerous articles on franchising and transactions of legal
publications.
• Member of the International Franchise Association.
 John Glazer
• Over 30 years experience as President/CEO of start-up companies,
franchises, and venture development organizations.

• Specialties:
• Pre-Seed and Early-Stage Venture Capital
• Innovation Capital and Social Impact Investing
• Entrepreneurial Consulting
• Small and Medium Business Development
• Technology Commercialization
• International Economic Development
• Rural Economies

• Director, TechGROWTH Ohio

A venture development organization delivering services, capital, and talent for early-stage
technology companies in Appalachia Ohio, USA
DEVELOPING FRANCHISE
CONCEPTS FOR MSMES

Day 1
Fundamentals of Franchising
Franchisee Perspectives
 The Franchising Model
Franchising is a method of implementing business concepts and
distributing products and services.

Franchising is a form of doing business, covering comprehensive

business systems: quality control, product development and
delivery, management, operations, finance, accounting, sales,
marketing, and training.

Franchising is system for replicating successfully implemented

businesses.

It is entrepreneurial for both Franchisor who wants to grow a

business concept/brand and the Franchisee who wants to start and
own a business.
 What is a Franchise
• For Franchisor:
– Opportunity to GROW a business
• For Franchisee:
– Opportunity to START a business

• Business Model
– General STRATEGY to eliminate costs and
standardize/streamline operations

• Public and Social Value

– Structure for Social Enterprise.
 Franchisor Roles
• Intellectual Property
– Business concept, proven success, systematized model
– Brand recognition, goodwill, reputation
– Trademarks and Business Systems
• Expansion strategy: Chain vs Franchise
– Outsource Risk and Capital:
– OPM (“Other People’s Money”)
• Both Vendor and Partner
• Vendor: Participation in cash streams
• Partner: Participation in revenues
 Franchisor Model:
Franchisor Basics:
• Initial Fee:
– Consideration for Access to IP
– Down Payment on Risk
Reduction
• On-Going Royalties:
– Consideration for use of
Intellectual Property
– Amortization of Value of Risk
Reduction
Franchisor Value-Add:
• Opening Process:
– Financing
– Training
– Opening Capital Costs
• On-Going Operations
– Inventories
– Advertising
– Services & Supplies
– Continuing Training
– Meetings and Conventions
• Franchisee “Exit”
– Sale of the Business
– Franchise Transfer
 Becoming a Franchisee
• Opportunity to START a business
“Being in business for yourself, but not by yourself.”

• Being an Entrepreneur vs. Buying a Job

“A franchisee is an entrepreneur
with a streak of conformity.”

• Risk Taking and Risk Adverse:

“A franchisee is an entrepreneur,
who relies on an established system.”
 Franchisee Roles
Value Proposition to Franchisee:

– Reduced risk and startup costs

• Amortized over time
– Reduced operating costs
• Creates “room” for royalties
– Franchise Services
• “Economies of Scale”
– Intangibles
• Proven Systems
• Assistance in Execution
• “Belonging”
 Franchisee Roles
• Costs
– Initial Franchise Fees and other startup costs.
– On-Going Royalty payment
– Advertising Fees

• Franchisor controls over Franchisee Business

– Site Selection and Approval
– Trade Marks and Trade Dress: design/appearance
– Goods and Services sold
– Methods of Operations
– Supply Chain and Third-Party Vendors
– Restricted Trade Area
 How to Be a Franchisee
• Be Coachable…Learn
• Go with the Franchise System:
– Adopt & Master
– Compliance
– Innovate later (and with Franchisor)
• Participate in Decision Making
– Franchise Advisory Council
– Reporting Requirements
• Understand What You Bought
– Vested Interest in the Health of the Whole
– Contribute to the Franchise System Development
 Franchise Myths
• It’s almost impossible to fail
• Franchises provide a proven system, so they are automatic money
machines
• To be successful, all you have to do is follow the franchise’s system
• Franchise companies help you with everything
• Franchises have lower risk than independent business startups
• Franchising is easy, because everything is all set up for you
• Franchises are turn-key businesses; all you have to do is “turn the
key” to the door of your franchise business every morning
• Franchises are great for entrepreneurs
• Absolutely nothing is negotiable in a typical franchise agreement
• Franchise business loans are easier to get than non-franchise loans
 Types of Franchises
• Business Format Franchise
– Turnkey Business Systems
– Complete start-up and on-going support
– Compliance with operating system
– Training: comprehensive business systems
• Product Distribution Franchise
– Supply Agreement
– Product sales and distribution
– Marketing collateral
– Training: sales, installation, service
 Alternatives to Franchising
• Distributorships / Agencies
• Licensing
• Subsidiaries
• Joint Ventures
 Advantages of Franchising for
SMEs
• Franchisor Reputation and Brand Value
• Rights (limited) to use Intellectual Property
• Training and Technology Transfer Programs
• Operational and Management Systems
• Targeted Customer Markets, Relationships,
Channels
• Established, Articulated, Proven Business Model
• Economies of Scale
– Collective Purchasing, Marketing, Services
• Improves/Modernizes Economy
Franchisor Services and Support to
Franchisees
• Relationship Managers
– Point of Contact
– Monitoring
– Troubleshooting
– Site Visits
• Finance & Accounting
– Turnkey Systems
– Benchmarks and Metrics
• Personnel
– Training Manuals for
Franchisee Staff Positions
– Job Descriptions, Hiring
Practices, HR
• Marketing
– Collateral Material
– Channels
– Collective and Individual
• Operations
– Procedures, Forms, Checklists
– Daily, Monthly, Yearly
• Inventory Management
– Supply Chain
– Accounting and
Reconciliations
– Open to Buy
– Working Capital Management
 Factors to Consider in Selecting a
Franchise
• Profitability
– Revenue Model, Expense Structure, ROI
• Track Record
– Business Model Execution & Franchise Relations
• Industry Sector
– Size, Growth, Market Share, Trends
• Reputation
– Integrity, Commitment, Image, Litigation History
• Management Team, Monitoring, Controls, Assistance
• Stage of Franchise
– Established vs Rising Star
 Factors to Consider in Selecting a
Franchise
• What are you buying when you buy a franchise?
– A Lifestyle
– A rule-governed system
– A concrete set of day-to-day activities
– A “System” for which YOU are responsible
• Important: “Does It Fit?”
• Most Important:
“What do you ‘really, really’ want?”
 Factors to Consider in Selecting a
Franchise
• Know what they’re selling
– It’s a “confidence game.”
• The Franchisor wants to give you confidence you can achieve
your goals by becoming a Franchisee.
– Service & Support is Important
• Do they have the “system”?
• Can they teach it? / Can you learn it?
• Start-up and Set-up: how much is up to you?
• On-Going services: will they be there for you?
– The Economics are More Important
• Business Model
• Franchise Fees
 Factors to Consider in Selecting a
Franchise
Initial Investment
• Build a Model for Your Specific Operation
– Most Franchisors’ numbers are aggregated and “common sized”
– Factor in your own circumstances (e.g., financing amount/terms, lease terms, life needs)
– Business Plan and Projections
– Do Your Homework
• Explore alternatives to Franchisor’s “package”
– Drive Costs out of Initial Investment
• Alternative suppliers
• New vs. Used
• Franchisor roles in mitigating risk
– Fixtures/equipment buy back
– Inventory liquidation
– “Guarantees”
• Analyze the “Earnings Claim”
– Pool of franchised units reporting
– Ask for breakdown of first years of under 3-yr olds
Evaluation of Franchises: Feasibility
Studies
• Market Study
– Demographics
– Competitive Landscape
– Revenue Forecasting/Projections
• Business Model
– Assumptions and Formulas
– Validations
• Initial Investment and On-Going Costs
– ROI
• Franchisee Business Plan
– Financials
– Operations
– Marketing
Evaluation of Franchises: Business Model Validation

Key Partners Key Activities Value Propositions Customer Customer Segments

Relationships

Key Resources Channels

Cost Structure Revenue Streams

http://www.businessmodelgeneration.com
 Factors to Consider in Selecting a
Franchise
On-Going Costs
• Press Franchisor on all Fees, not just Royalties
– Some—not all—are avoidable
– What would it cost you to buy on your own without the Franchisor as intermediary?
• Some—not all—will be less expensive
• Prescribed vendors
– Some—not all—are avoidable
• Restrictions – find out them all.
– Some—not all—are avoidable
• Required Participation in Programs
– National Advertising Program
– Continuing Education Programs
– Retrofits & Upgrades
• Role of the UFOC in negotiations
– “Uniform”: Same Deal / No Preference
– Language is Key – Engage Competent Franchise Attorney
 Factors to Consider in Selecting a
Franchise
Intangibles
• Reputation
– International Franchise Association and Other Organizations
• Members? Awards? Active Participants?
– Other Franchises
– Franchisees
• Is there a Franchise Owner Association? (Why?)
• Stage of franchise is important
– Everyone is happy with a young franchise
– “What have you done for me lately” as franchise matures
• Character (and/or Competence) Tests
– Know the rules and give Franchisor opportunities to violate them
• Ask for earning claim information before substantial disclosure
• Ask for meetings/conversations during waiting periods.
• Ask for projections before signing franchise agreement
 Factors to Consider in Selecting a
Franchise
The End Game(s)
• Worst Case Scenario
– Will the Franchisor help recoup investment?
– Liquidated Value
– Can You Afford to Lose?
• Termination
– Conditions, track record, post-termination continuation, what do you
own and what does Franchisor own (?), “liquidated damages”
• Renewal: Costs and Conditions
• “Graduate”? Can I go it alone? “De-Identification”
• Transfer / Exit
– Restrictions on sale of business
– Dollars to Franchisor on Exit
– Ownership of “Goodwill”
 Basic Franchise Documents
• Franchise Disclosure Document (FDD)
• Franchise Agreement
• Confidential Operating Manual
• Other Manuals:
– Training
– Marketing
 Franchise Disclosure Document
(FDD)
FDD: Key Components
• Franchisor History, Current State, Future Plans
– Predecessors/Affiliates; Business Experience; Litigation; Audited Financials;
Contracts; Outlets
• Fees: Initial and Others
• Initial Investment Requirement
• Franchisor Restrictions
– Products and Services (bought and sold)
– Owner-operator
– Territory
• Detailed Obligations for both Franchisor and Franchisee
• Intellectual Property (patents, copyrights, proprietary information)
• Renewal, Termination, Transfer
• Dispute Resolution
• EARNINGS CLAIM
Franchise Disclosure
Document Items in FDD

1. Franchisor, Predecessor, Affiliates

THE Disclosure Document
2. Business Experience
3. Litigation
•Registered with Federal Trade Commission
•Registered with Individual States
4. Bankruptcy
5. Initial Franchise Fee
6. Other Fees
7. Initial Investment
Prescribed Content
8. Restrictions on Sources of Products and Services
9. Franchisee Obligations
•Uniform for all Franchisors: outline/format
•Offering: An INVESTMENT document
10. Financing
•ALL information for an Informed Decision 11. Franchisor Obligations
•Protective of the Franchisee 12. Territory
13. Trademarks
14. Patents, Copyrights, Proprietary Information
Key Components 15. Obligation to Participate in Actual Operation of the Franchise Business
16. Restrictions on What Franchisee May Sell
17. Renewal, Termination, Transfer, and Dispute Resolution
• Franchisor History, Current State, Plans
Predecessors/Affiliates; Business Experience;
18. Public Figures
Litigation; Audited Financials; Contracts; Outlets 19. Earnings Claims
• Fees: Initial and Others 20. List of Outlets
• Initial Investment Requirement 21. Financial Statements
• Franchisor Restrictions 22. Contracts
Products and Services (bought and sold) 23. Receipts
Owner-operator
Territory Exhibits
• Detailed Obligations for both Franchisor and • Financials
Franchisee • Form of Franchise Agreement
• Forms of Other Agreements
• Intellectual Property
• Receipt Form
• Renewal, Termination, Transfer • State Regulators
• Dispute Resolution • Franchisor’s Agents
• EARNINGS CLAIM • State-Specific Addenda
 Franchise Agreements
• Franchise Law – Best Practices
• Obligations of Franchise Agreement stakeholders
(franchisor and the franchisee)
• Staffing and Training
• Public Image (Advertising and Promotion – Logos and
Trademarks)
• Franchise Fees (upfront and ongoing) and Accounting
Records
• Tenor of Agreements (Term – Rights of Renewal – Sale of
Business – Termination and Consequences)
• Others (Minimum Performance Clauses – Insurance –
Ongoing Improvements)
 Franchise Operating Manuals:
Confidential Operating Manual
Comprehensive and Detailed
• Business Start-Up
• Financial Management
• Inventory Management
• Sales and Marketing
• Personnel Management
• Operational Cycle Procedures
– Ordering, Receiving, Stocking, Merchandising,
Selling, Returns
• Daily Operations
 Regulatory Environment
• U.S. Franchising is a highly regulated, litigious
environment
– Not so much prior approval as after-the-fact enforcement
• Compliance & Disclosure
– Franchisees “rely” on Franchisor Representations
– Penalties are Severe
• Triple Damages
• Inability to Sell
– Franchisor Mantra:
“NEVER do anything wrong and
DOCUMENT everything you do!”
(Requires knowing what you’re doing)
 Conclusion: What is a Franchise?
• Franchisor:
An opportunity to grow a business

• Franchisee:
An opportunity to start a business

• General Business:
A strategy to eliminate costs and streamline operations

• Organizational Structure:
A model for social enterprise
DEVELOPING FRANCHISE
CONCEPTS FOR MSMES
Day 2, Part 1: Franchisors’ Perspective

Evaluation, Branding, and Operating Manuals

Developing a Franchise Concept
Developing Franchise Concepts for MSMEs
Financial Services Volunteer Corps

Consultations on Developing Franchising

Concepts for MSMEs

Delivered by:
Bachir Mihoubi
John Glazer

Egyptian Junior Business Association

January 4-8, 2015
Cairo, Egypt
Financial Services Volunteer Corps
FSVC Egypt Program
Key Indicators: 2003-2013
Non-for-Profit,
Years Since
Public-Private Partnership Inception
11

Projects
150
Completed
Mission:
Help build sound financial People
3,650+
Impacted
systems to support robust
economies in transitional and Pro Bono
Hours 24,800
developing countries. Delivered
•
Bachir Mihoubi
Founder & CEO of FranCounsel Group, an international franchise
consultancy firm.
• International Transactions Attorney with several major U.S. law firms,
representing both foreign clients doing business in the U.S. and
American companies with international business interests.
• Developed major U.S. brands in more than 35 countries.
• Has lived and worked in France, England, Canada, and the United
States.
• Serves as an Advisor to several Boards of Directors of major U.S. and
Canadian brands.
• Lectures Extensively on International Law and Franchising in numerous
countries.
• Appointed by the U.S. Department of Commerce to act as Expert
Franchise Advisor to the governments of several developing countries.
• Author of numerous articles on franchising and transactions of legal
publications.
• Member of the International Franchise Association.
 John Glazer
• Over 30 years experience as President/CEO of start-up companies,
franchises, and venture development organizations.

• Specialties:
• Pre-Seed and Early-Stage Venture Capital
• Innovation Capital and Social Impact Investing
• Entrepreneurial Consulting
• Small and Medium Business Development
• Technology Commercialization
• International Economic Development
• Rural Economies

• Director, TechGROWTH Ohio

A venture development organization delivering services, capital, and talent for early-stage
technology companies in Appalachia Ohio, USA
 Franchise Fundamentals:
Guiding Principles and Content
• Franchise Law – Best Practices
• Staffing and Training
• Public Image (Advertising and Promotion – Logos and
Trademarks)
• Franchise Fees (upfront and ongoing) and Accounting
Records
• Tenor of Agreements (Term – Rights of Renewal – Sale
of Business – Termination and Consequences)
• Others (Minimum Performance Clauses – Insurance –
Ongoing Improvements)
Different Commercial Vehicles
Used in Franchising
Direct franchising
• unit agreements definition
– situations where used
– advantages of this form of agreement
– disadvantages of agreement

• multiple unit agreements definition

– situations where used
– advantages of this form of agreement
– disadvantages of agreement

• development agreements definition

– situations where used
– advantages of this form of agreement
– disadvantages of agreement
Different Commercial Vehicles Used in
Franchising
Master franchise agreements definition
• situations where used
• advantages of this form of agreement
• disadvantages of agreement

Representative agreements definition

• situations where used
• advantages of this form of agreement
• disadvantages of agreement

Joint venture agreements definition

• situations where used
• advantages of this form of agreement
• disadvantages of agreement
Important Elements of a Unit Franchise
Agreement
Recitals
Definitions
Grant of rights
• non exclusive as regards trademarks
• right to use trade marks and franchise at specific location
• reservation of rights by franchisor
• exclusive territory
Fees
• initial franchise fee
• continuing royalty
• advertising and promotion
• other
Important Elements of a Unit Franchise
Agreement
Records, reports and audits
Obligations of franchisor
• provide initial and ongoing training
• loan copy of manual

Training
• initial
• pre and post opening
• continuous

Ongoing supervision of use of trade marks and franchise system

 Important Elements of a Unit Franchise
Agreement
Obligations of franchisee
• follow each and every detail of franchise system
• proper use of trade marks
• other

Provision of products and services

• proprietary
• non proprietary
• proprietary of other suppliers (eg.Coca Cola)
• approved suppliers -- no changes
• approved suppliers -- changes possible
• other suppliers
• non essential
 Important Elements of a Unit Franchise
Agreement
System changes
• required by law
• required to comply with commercial realities, custom, usage, etc
• required for economic reasons

Manuals
Advertising and promotion
Lease matters
• who is responsible for negotiations?
• who is head lessee?
• use of lease option agreements?
 Important Elements of a Unit Franchise
Agreement
Construction, fixturing, machinery and equipment
Improvements to premises
Trademark matters
Non-compete provisions
• in term
• post term

Confidentiality
Term of agreement
• right or option to renew

Sale, transfer and assignment of franchise

• by franchisor
• by franchisee
Important Elements of a Unit Franchise
Agreement
Termination
• without notice
• with notice
• different notices
• non curable defaults
• by franchisor
• by franchisee

Effect of termination
Insurance and indemnification
Governing law and Jurisdiction
Mediation
Arbitration
 Important Elements of a Unit
Franchise Agreement

Acknowledgements
Entire agreement provisions
Concluding provisions
Other agreements:
• sub-lease
• lease assignment
• registered user agreements?
• personal guaranty and acknowledgement
 Creating Franchise Concepts
Franchising as a General Business STRATEGY
• Treat (any) business as if it is to be a Franchise
• Founders need to replace themselves with systems
– End dependency on key people , talent, know-how, & experience
to get things done or know what to do
– A “Business System”
• The business runs itself without constant presence, supervision, etc.
• The Franchise as a Prototype
– Systematizing Operating Procedures
• Confidential Operating Manual of Any Business
• Well-Documented System to run the business
– Perfecting Systems: work “on” the business (as well as ‘in’ it)
Franchise Concept Development
Advantages of Creating Business Systems
• Consistency in the Delivery of Value
– Not a secret know-how or special talent
– Something that can be taught and learned
• Wider talent pool – career path opportunities
• Uniform standards – quality measures
• Continuous improvement: drive out costs
• Capture innovation:
– Play/Innovate with the system, but:
• Control variables & capture data
• Measure, document, standardize what works
 Franchise Concept Development:
Standardized Operating Procedures
• Essential Core of a Franchise
– Covers EVERYTHING about the business in DETAIL
– Documents the “Franchise System”
– Creates the Proprietary Information
• Systematization
– Transforms “intuitive know-how” into “systems”
• Establishes System Standards and protects the value of the “brand”
• Turnkey
– Turns experience & expertise into “anybody can do it”
• Makes it replicable and teachable
• A Franchise is a Professional School
• Improves the Business
– Rationalizes and Aligns all Aspects of the Business
– Eliminates error and even judgment
– Drives costs and inefficiencies out of the system
– Captures and Systematizes Innovation
• Continual Improvement and Continual Updating
 Franchise Concept Development
Business Systems
• Technology
– Systematically/Automatically Solve Problems
– Free People for Meaningful Work
• People
– Practices/Methods/SOPs/Teachable
• Frameworks for People to Do Their Jobs
– Expert-Created / Anyone-Can-Implement System
• Information
– Quantification & Data Capture Systems
– Measure Innovations / Drive Improvements
– Know How Things are Going and Establish Goals for
Improvements
 Franchise Concept Development
Ready for Franchising?
• Prerequisites
– Successful Business Model
– Market Opportunities
– Standardized Operations (Essence of a Franchise)
– Home Office “Value Proposition”
• Intellectual Property
• Branding
• Economic Model
• Franchise Infrastructure
– Franchise System
– Disclosure and Compliance
– Document, Document, Document
 Franchise Documents
• Legal Documents:
– Franchise Disclosure Document (FDD)
– Franchise Agreement
• Franchise System Documents:
– Confidential Operation Manuals (COM)
• Standard Operating Procedures….for EVERYTHING
– Home Office Staff Documents
• Compliance Manual
• Start-Up Manual
• Training Manual
• Operations Manuals
 Franchise Disclosure Document
(FDD)
FDD: Key Components
• Franchisor History, Current State, Future Plans
– Predecessors/Affiliates; Business Experience; Litigation; Audited Financials;
Contracts; Outlets
• Fees: Initial and Others
• Initial Investment Requirement
• Franchisor Restrictions
– Products and Services (bought and sold)
– Owner-operator
– Territory
• Detailed Obligations for both Franchisor and Franchisee
• Intellectual Property (patents, copyrights, proprietary information)
• Renewal, Termination, Transfer
• Dispute Resolution
• EARNINGS CLAIM
Franchise Disclosure FDD Items
Document (FDD) 1. Franchisor, Predecessor, Affiliates
2. Business Experience
3. Litigation
THE Disclosure Document 4. Bankruptcy
5. Initial Franchise Fee
•Registered with Federal Trade Commission 6. Other Fees
•Registered with Individual States 7. Initial Investment
8. Restrictions on Sources of Products and Services
9. Franchisee Obligations
Prescribed Content
10. Financing
•Uniform for all Franchisors: outline/format
11. Franchisor Obligations
•Offering: An INVESTMENT document 12. Territory
•ALL information for an Informed Decision 13. Trademarks
•Protective of the Franchisee 14. Patents, Copyrights, Proprietary Information
15. Obligation to Participate in Actual Operation of the Franchise Business
16. Restrictions on What Franchisee May Sell
Key Components
17. Renewal, Termination, Transfer, and Dispute Resolution
18. Public Figures
• Franchisor History, Current State, Plans
Predecessors/Affiliates; Business Experience; Litigation;
19. Earnings Claims
Audited Financials; Contracts; Outlets 20. List of Outlets
• Fees: Initial and Others 21. Financial Statements
• Initial Investment Requirement 22. Contracts
• Franchisor Restrictions 23. Receipts
Products and Services (bought and sold)
Owner-operator
Exhibits
Territory
• Financials
• Detailed Obligations for both Franchisor and
• Form of Franchise Agreement
Franchisee
• Forms of Other Agreements
• Intellectual Property
• Receipt Form
• Renewal, Termination, Transfer • State Regulators
• Dispute Resolution • Franchisor’s Agents
• EARNINGS CLAIM • State-Specific Addenda
 Franchise Agreements
• Franchise Law – Best Practices
• Obligations of Franchise Agreement stakeholders
(franchisor and the franchisee)
• Staffing and Training
• Public Image (Advertising and Promotion – Logos and
Trademarks)
• Franchise Fees (upfront and ongoing) and Accounting
Records
• Tenor of Agreements (Term – Rights of Renewal – Sale of
Business – Termination and Consequences)
• Others (Minimum Performance Clauses – Insurance –
Ongoing Improvements)
Franchise Operating Manuals
• Brief summary of the business
• The franchisor’s business philosophy and details of the existing franchise
network
• Responsibilities and obligations of franchisee and franchisor
• Operating methods (Equipment – Stock – IT and vehicle requirements)
• Operational Instructions (Standard Procedures - Financial Records -
Accounting and Financial Reporting - Payment of Franchise Fees – Cash
Control and Banking Procedures - Staff Requirements, Training, Job
Descriptions, Discipline and Attire – Opening Times – Trading Patterns –
Pricing Policies – Purchasing Requirements and Stock Levels – Advertising
- Insurance)
• Outlet Details (Location – Store Layout – Display and Merchandising
Techniques – Hygiene – Complaints Procedure)
• Standard forms used in ordering, accounting and employment contracts.
• A summary of relevant legislation parameters
 Business Planning
Franchisor Structure
Administration Start-Up
Corporate Strategy Financing
Accounting Business Plan
Data Services Location
Regulatory Compliance Layout and Design
Franchise Service Programs Fixture and Equipment
Sales On-Site Team
Deal Flow: Qualified Prospects Marketing
Investment Offering Franchise Sales
Lifestyle Counseling National Marketing Programs
Closing Deals In-House Ad Agency for Franchisees
Training Services and Support (Regional Managers)
Adult Learning Finance & Accounting
Owner and Operator Personnel
Home Office and On-Site Marketing
Continuing Education Programs Operations
Staff Training Manuals Inventory Management
 Business Planning
Franchisor Business Model
• Critical Mass:
– Revenue from existing franchisees (royalties, services,
etc.) covers franchisor operations

• Stages of Franchisor Growth

– Start-Up
– Dependence on New Franchise Sales
– Critical Mass
– Mature System
 Business Planning
Franchisor Risk Factors
• Look Over Your Shoulder: Risk of Franchisee Revolt
– Preventatives
• Careful Selection of Franchisees
– Qualify Prospects
– Say “No”
• Ensure the Delivery of Value
– Business Model Needs to Work
– Competitive Position Needs Real Advantage
– Franchise Services Need to Deliver Value
• Engage Franchisees in Decision Making:
– Franchise Advisory Council
– Leadership Builds Clarity & Consensus through Communication
• Engage the Best Attorneys
• Compliance Manuals
• Conflict Resolution
 Lean Launch
Pilot Testing
• For Franchisors
– Importance of the Founding Franchisee
– The “Corporate Store”
• Training Center
• Innovation Development and Testing
– Proof of Concept
• Identify and Validate Assumptions
• Fine Tune Operations Manual
• For Franchisees
– There is no test run
– Talk to existing franchisees
 The Lean Startup Approach
• Intent is to reduce the likelihood of failure
• A startup is not a business
• A startup is a learning engine
– Identify a Market and a Value Proposition
– Test hypotheses to find a business model
– Minimum Viable Product (MVP)
– Build-Measure-Learn – quickly!
– Pivot or Persevere
 The Business Model
• How an organization creates, delivers and
captures value
• The Value Proposition
• Customer Segments
• Customer Relationships and Channels
• Key Resources and Activities
• Partnerships
• Revenues and Costs
The Business Model Canvas
 What is a Hypothesis?
 An assumption about an element of the business
model
 It must be tested!
 Testing metrics must be actionable, accessible
and auditable
 If confirmed, it helps to validate the business
model
 If rejected, pivot or persevere.
Lean Launch Pilot Testing
DEVELOPING
FRANCHISING CONCEPTS
FOR MSMES

Day 2, Part 2
Half-Day Seminar:
• The Role of SME Franchising in Economic Development
• Franchise Funding Mechanisms: Banks & Investors
• Franchising Ecosystem: Government, NGOs, Private Sector, Media, etc.
• Micro Franchise / Social Franchise
Developing Franchise Concepts for MSMEs

Financial Services Volunteer Corps

Consultations on Developing Franchising

Concepts for MSMEs

Delivered by:
Bachir Mihoubi
John Glazer

Egyptian Junior Business Association

January 4-8, 2015
Cairo, Egypt
Financial Services Volunteer Corps
FSVC Egypt Program
Key Indicators: 2003-2013
Non-for-Profit,
Years Since
Public-Private Partnership Inception
11

Projects
150
Completed
Mission:
Help build sound financial People
3,650+
Impacted
systems to support robust
economies in transitional and Pro Bono
Hours 24,800
developing countries. Delivered
•
Bachir Mihoubi
Founder & CEO of FranCounsel Group, an international franchise
consultancy firm.
• International Transactions Attorney with several major U.S. law firms,
representing both foreign clients doing business in the U.S. and
American companies with international business interests.
• Developed major U.S. brands in more than 35 countries.
• Has lived and worked in France, England, Canada, and the United
States.
• Serves as an Advisor to several Boards of Directors of major U.S. and
Canadian brands.
• Lectures Extensively on International Law and Franchising in numerous
countries.
• Appointed by the U.S. Department of Commerce to act as Expert
Franchise Advisor to the governments of several developing countries.
• Author of numerous articles on franchising and transactions of legal
publications.
• Member of the International Franchise Association.
 John Glazer
• Over 30 years experience as President/CEO of start-up companies,
franchises, and venture development organizations.

• Specialties:
• Pre-Seed and Early-Stage Venture Capital
• Innovation Capital and Social Impact Investing
• Entrepreneurial Consulting
• Small and Medium Business Development
• Technology Commercialization
• International Economic Development
• Rural Economies

• Director, TechGROWTH Ohio

A venture development organization delivering services, capital, and talent for early-stage
technology companies in Appalachia Ohio, USA
How to Use Franchising to Grow the
Economy…
and Create an Entrepreneurship
Culture!

Cairo, Egypt Jan. 4th – 8th

Bachir Mihoubi
Chief Executive Officer
FranCounsel Group, LLC
bmihoubi@fcgus.com
1404 384-3317
Why Franchising
is a
Good Model
Positive Effects of Franchising on Local
Economies is Undeniable …. Especially
on Job Creation and Economic
Development

• Domestic output increased through direct sales and their multiplier

effects
• The multipliers of franchising provide sense of level of impact this
type of investment will have on economy
• By creating employment and income for their employees…
• Franchisees stimulate local demand for goods and services
• Cost/availability of supplies drives Franchisees to source locally
• … magnifying positive impact on host market
 Direct Employment Impact of
Franchising is Significant

• Calculated by…

• - Multiplying the number of franchise outlets

• - By the number of people working in each outlet

• - And adding the # of jobs created by Franchisees

Indirect Economic Impact of Franchising
Even More Substantial ……although Less
Obvious

• Indirect job creation occurs through industrial linkages to

suppliers/customers and measured by employment multipliers

• Every franchise unit creates an average of 33 jobs:

• 13 direct jobs

• -20+ indirect jobs (via other economic exchanges)

 Emerging Markets Contending with Massive
Unemployment, Underemployment and Labor
Mobilization Problems

• Youth and Females particularly affected by country’s unemployment

problem

• Under 30 hardest hit by underemployment

• Franchising helps alleviate these challenges

 Franchising is Effective Method of
Creating Entrepreneurs

• Provides proven techniques & tools to start your own business

• Research shows franchising can enhance a company’s:

• Growth Rate

• Odds of survival … especially those that grow rapidly

 Franchise Model is Dependent
on Proven Standard…which are beneficial
during start-up phase

• - Brings strong resources and built-in knowledge

• - Provides mechanism for quick scalability

• - Often outperforms non-franchise counterparts

• - Usually higher employment growth vs. non-franchised concepts

Impact of Franchising
on the US Economy
 Franchise Industry Presence is
Pervasive!

• 300 Business Segments

• 3,000 Franchisors

• 828,000 Franchise Establishments

• Thousands of Suppliers
 Franchise Industry
Economic Input is Huge!

• $840 Billion Direct Output

• $2.1 Trillion* Direct & Indirect Output

• *Totals 9.0 % of private non-farm output

 U.S. Franchises are Directly
Responsible for Millions of Jobs !

- 9 million or 6.2% of non-farm private sector

- Equivalent to # jobs in durable goods manufacturing

- Exceeds total employment of such major industries as:

– Finance & Insurance
– Real estate and rental and leasing
– Wholesale trade, transportation and warehousing
– Nondurable goods manufacturing
– Information
 Impact Even Greater With Indirect
Employment Included!

• 18 million American Jobs

• 1 of 8 U.S. Private Sector Jobs

• Equivalent to Entire Canadian Workforce!

 Start-ups are the Key
to Net Job Creation*

• Proven that start-ups have been primary drivers of net employment

changes since 1977

• Young start-ups account for 3 % percent of total employment but

represent 20 % of gross job creation

• Public policy should pay more attention to this to support young

entrepreneurs

*Source: Ewing Marion Kauffman Foundation

Transfer of Knowledge &
Management Skills
 One of Causes of Unemployment is that
Graduates are Unprepared
…for Work Demands
• Schools do not offer practical skills necessary for careers: -
Technical
- Vocational

• Education critical to both:

- Entrepreneurship
- Small business development

• Franchising education occurs through both:

- Formal training
- Imitation
 Institutions Offer Franchise
Education In Some Countries
• Franchisors offer franchisees knowledge about:
- Operating systems and processes
- Experiential business training
- Periodic improvements
- New product innovation & market research
- Financial planning

• Chinese University opened centers to train future managers of

franchised operations

• Ideally you can help introduce similar programs in your

Universities!
 Foreign Franchisors Entering Host
Country also Act as Model
… for Local Entrepreneurs to Imitate
• “Demonstration Effect” has significant yet hard-to-measure impact
on local development of Small Businesses

• Proven that local entrepreneurs in developing countries learn from

existing franchisors

• Management of brand name, goodwill & reputation

• Loyalty to the company

 Franchising is Effective Solution to
Address Unemployment
…and Encourage Entrepreneurship

• Creates more diversified economy with new sectors

• Successfully integrates minorities/immigrants into the economy

• Particularly true in economically disadvantaged regions

• Enriches the business environment for everyone

 Thanks for Opportunity to Share
That...

Franchising will Indeed Grow Your Economy …...and Create an

Entrepreneurship Culture!

• A Good Business Model with Multipliers

• Positive Impact on Economy & Jobs

• Transfers Knowledge & Management Skills

 Thank you
for your attention!

Bachir Mihoubi
Chief Executive Officer
FranCounsel Group, LLC
www.francounselgroup.com
bmihoubi@fcgus.com
1404 384-3317
Developing Franchise
Concepts for MSMEs
Franchise Funding Mechanisms
 Commercialization:
Stages of Development
IMAGINING INCUBATING DEMONSTRATING Market Entry Growth &
the Commercial to Define Products & Processes to Prove Commercial Sustainability
Opportunity Commercialization in Commercial Viability to Generate
Viability Financial Returns

Mobilizing Mobilizing Mobilizing Mobilizing

Resources for Resources for Resources for Resources for
Incubating Demonstrating Market entry Growth &
Sustainability

IMAGINING INCUBATING DEMONSTRATING MARKETING GROWTH

“Valley of Death”

Launch and Acceleration

Financing Company
Stages
Franchise Funding Mechanisms:
Sources of Capital
• Bootstrap
– Personal Investment & “Sweat Equity”
– Friends & Family
– Partners, Strategic Alliances, Customers
• Banks
• Government Grants & Other Programs
• Franchisor Financing Programs
• Investors
– Angel Investors
– Venture Capital
 Franchise Funding
Mechanisms:
Types of Capital
 Angels
 Wealthy individuals
 Often with industry knowledge or
connection
 Usually makes smaller investments
 Wants to stay involved with
contributions beyond cash
 Seed Funds & Institutional VC
 Professionally managed
 Usually have a ‘theme’ or focus
(sector, stage, industry, etc.)
 Grants
 Non-dilutive investment
 Government programs
 Foundations
 Strategic Ventures
 Usually corporate
 Focus on companies that are
complimentary and synergistic
 Balance ROI with strategic goals
 Most often not the ‘lead’ investor
 Private Equity
 Invest in tangible assets Buy low,
sell high
 Usually syndicated capital
 Motivated by ROI
 Banks
 Issue debt secured by assets
(receivables, property,
equipment, etc.)
Franchise Funding Mechanisms:
Banks
• Promissory Note
– Terms: Interest, Payment Schedule, Reporting & Information Rights, Covenants, Security
Interest
– Collateral: Real Property, Personal Guarantees
• Bank Concerns
– Risk and Repayment
– Few Loans for Start-Ups: Cash Flow Challenge
• Potential Government Role
– Percentage Guarantees
• Potential Franchisor Role
– Risk Reduction
– End Game Protection
• Interventions
• Asset “Buy-Back”
• Brokerage
• Bank Financing Preparation: The Business Plan
– Franchise Concept/Brand, Start-Up & Operational Support, Site and Market, Financial
Projections, Personal Background & Qualifications, Collateral Analysis
Franchise Funding Mechanisms:
Government
• Grant Programs
– Egyptian Junior Business Association
– Others?
• Subsidized Loan Programs
– Greater Risks
– More Favorable Terms
• Interest Rates
• Interest Only and Baloon
– Compare: CALF program (USA)
• Loan Guarantees
– Buy Down Commercial Rates
– Percentage Guarantee – lowers risk and collateral need
– Compare: SBA program (USA)
Franchise Funding Mechanisms:
Franchisors
• Franchisor Financing
– Most Don’t, Some Do
– Debt and Earn Out
• The Dominos Pizza Model
– Ownership Opportunity for Good Operators
– Long-term, expensive debt / deferred owner benefits
– Corporate Options
• Other Franchisor Roles
– End Game: Asset Purchase, Brokerage
– Service to Banks in Bankruptcies
Franchise Funding Mechanisms:
Investors
• Challenges
– ROI
• “The Cost of Money” and Time Horizons
• How do Investors get Returns
– No Exit (?)
– Alternative Deal Structures
» Royalties / Dividends
» Franchisee Buy Back
» “Puts”
– Role of Franchisor – Limit Investor Protections
• Approaching Investors
– Business Plan, Executive Summary, “Tear Sheet”,
Presentation, “Diligence Ready”
 Funding Mechanisms:
Prepare & Apply
• Before you Apply:
– Be “Investment-Ready” and “Investment-Worthy”
• Only one chance for the first impression
– Prepare:
• Business Plan and Executive Summary
• “Tear Sheet”
• Presentation Material
• Be “Diligence-Ready”
• Apply
– Follow proper application process
– Adapt materials to investor preferred formats

– Wait for investor follow-up

– Work with intermediaries
Business Plan Components
 Executive Summary
 Value Proposition
 Company and Mission/Purpose
 Product / Service
 Business Model
 Target Market
 Marketing Strategy
 Sales Strategy
 Competitive Analysis
 Management/Organization
 Operational Plan
 Capital: Sources and Uses
 Financial Summary
 Exit Strategy
Developing Franchise
Concepts for MSMEs

Franchising Ecosystem:
Roles for Government, NGOs,
Private Sector, Media, etc.
Developing Franchise
Concepts for MSMEs
Micro Franchises & Social
Enterprises
 Micro-Franchising
Business Model:
• Systemization and replication of micro-enterprises
– Follows the footsteps of micro-finance and micro-credit
• Small businesses easily replicated by following proven concepts
– marketing, operations, financial management
• Opportunities (and Support) for the poor to own and manage their
own businesses
– Huge percentages of world’s population survive on earnings from their
own micro-enterprises
– Micro-enterprises succeed or fail on subsistence levels
– Micro-Franchising: assists these “necessity entrepreneurs” to be more
successful and reach economic self-reliance
• Through: business models, financing, training, on-going support
• Training: leadership, entrepreneurship, sales & marketing, operations, customer
service, finance
 Micro-Franchising
• Key Mission:
Promotes economic development through proven small business
models replicated by “necessity entrepreneurs” at the bottom of the
social-economic pyramid, providing self-employment
opportunities.
• Key Principles:
– Replication, sustainability, and social impact
• Key Goal:
– Economic self-reliance
• Key Challenges:
– Financing,
– Training, and
– On-going support infrastructure
 Micro-Franchising: Creates Businesses and
Value

Micro-Credit Micro-Franchising
Business Creation

Humanitarian Business Development

Missions Services/Education

Value Creation
 Micro-Franchising Profile
Shared Characteristics
• Focus on Problem/Solution sets of interest to both
local populations and potential funders
• Significant External Funding
• National / International Linkages
• Connections to Local Franchiseable Businesses
• Involvements of Local Banks
• Front-end Business Training
• Continuing Business and Operations Support
• Capacity to Scale into Larger Toolkits
 Micro-Franchising: Examples
• YouthWORKS, Sierra Leone, Kenya
– International Rescue Committee (IRC) 2008 Pilot
– Franchise Relationships with Existing Companies
• Youth (ages 15-24) Distribute/Sell Products & Services
• 2009: 83% Profitable
• GEM, Sierra Leone, Kenya
– Girls Empowered by Micro-Enterprise (IRC supported)
– Support Services:
• Basic Life Skills & Ongoing Mentoring
• Franchise-Specific Training (from local businesses)
• On-Going Support
• Startup Capital (IRC) – inventory and other assets
– Metrics:
• 550 Girls (ages 16-19) completed training
• 60 Micro-Franchises launched (2013) and still in operation
• $24 (USD) average increase in monthly income
• 90% of those in business have diversified to other products/services
• 80% engaged in some form of savings.
– Funders: IRC, Nike Foundation, World Bank, Innovations for Poverty
– https://www.microlinks.org/lessons-learned-innovations-youth-microfranchising
 Micro-Franchising: Examples
Drishtree Banking and Computer Service Kiosks
• For-Profit Enterprise established in 2000
– Initially: computer kiosks in rural India
– Currently: diversity of micro-franchise licenses: banking, business, health,
retail) in 5000 villages
• Support
– Initial Business & Operational Training
– Use of Drishtree branding materials
– Local district coordinators and support staff
– Drishtree mico-credit accounts for purchases
– New Product Access
– “Fast Fail” Methodology testing franchise models
• Funders: Acumen Fund, Amaron Batteries, ICICI Prudential, International
Finance Corp, Microsoft, National Skills Development Corp, Scojo, State
Bank of India, Others
• http://www.drishtee.com/franchisee/join-drishtee-family/
 Micro-Franchising: Examples
TISA (Tiendas de la Salud), Guatamala
• Micro-Pharmacies established in 2009
– Currently: 50 stores in central Guatamala
• Support
– Qualified Franchisees: Local Trust Relations and Health Work History
– Initial Business & Operational Training: Complete Manuals
– Startup Loans form BanRural (Guatamalan Bank)
– 20% Discount off Retail for generics from Farmacias de la Communidad
This initial supplier subsequently acquired the franchise)
– Monthly Support Visits
– Stores serve communities with public health care outlets
• Funders: Began with $400K, 5-year grant from Linked Foundation (mission:
poverty alleviation for women in Latin America)
• http://globalhealthsciences.ucsf.edu/sites/default/files/content/ghg/pshi-tisa-
evaluation.pdf
• http://healthmarketinnovations.org/blog/bringing-high-quality-medications-
closer-home-through-tiendas-de-la-saluds-network-health
 Micro-Franchising: Examples
Other Examples:

– BRAC (Asia, Africa, Americas)

• http://www.brac.net/content/
– Nuru Energy (East Africa and India)
• http://nuruenergy.com/
– Grameenphone – village phone program
• http://www.grameenphone.com/
– CFW- the HealStore Foundation (Kenya)
• http://www.cfwshops.org/
– VisionSpring (reading glasses)
• http://visionspring.org/
– Reach India
• http://www.reach-india.net/
– Living Goods (Uganda)
• http://livinggoods.org/
– Healthkeepers (Ghana)
• http://healthmarketinnovations.org/program/healthkeepers
– Fan Milk Limited (Ghana)
• http://fanmilk-gh.com/
– Bomgi Microfranchising and Nutraceuticals (Uganda)
• http://www.bomgi.com/#!
 Franchise Model for Social
Enterprise
Franchise Systems
• Technology (Systems) to Subsidize “Life”
– Enables community self-providing
– Integrates with culture and individual development
– Lowers the “cost of doing life”
• Home Office Support (Systems) to Empower “Work”
– Centralized expertise creating “anyone-can” systems
– Delivers common services
– Eliminates duplicated effort
– Enables “front line” to do more with less and
– Helps people focus on what they do best
Social Enterprise Illustrations
• New Work Enterprises
– Poverty Eradication Program organizing work around:
• Community Self-Providing: Work that has to be done
• Community Business Ventures: Work done for cash
• Individual “Pursuits:” Work people “really, really” want to do
– Organizes Global Teams to Support Local Projects
– http://www.newworknewculture.com/

• Lift Africa Technologies (a New Work Affiliate)

– Advanced Technologies for economically independent communities
• Identifies and deploys community technologies
• Trains people to use them
– Integrates Technologies into Community Manufacturing Enterprises
– http://www.liftafrica.org.za/

• Incite Focus (Detroit)

– Centralized manufacturing equipment
– Hands-On Training
– Micro-Enterprises
– www.incite-focus.org
DEVELOPING FRANCHISE
CONCEPTS FOR MSMES

Day 3
Capacity Building Program for Existing Franchisors
Bottlenecks
 Developing Franchise Concepts for
MSMEs
Financial Services Volunteer Corps

Consultations on Developing Franchising

Concepts for MSMEs

Delivered by:
Bachir Mihoubi
John Glazer

Egyptian Junior Business Association

January 4-8, 2015
Cairo, Egypt
Financial Services Volunteer Corps
FSVC Egypt Program
Key Indicators: 2003-2013
Non-for-Profit,
Years Since
Public-Private Partnership Inception
11

Projects
150
Completed
Mission:
Help build sound financial People
3,650+
Impacted
systems to support robust
economies in transitional and Pro Bono
Hours 24,800
developing countries. Delivered
•
Bachir Mihoubi
Founder & CEO of FranCounsel Group, an international franchise
consultancy firm.
• International Transactions Attorney with several major U.S. law firms,
representing both foreign clients doing business in the U.S. and
American companies with international business interests.
• Developed major U.S. brands in more than 35 countries.
• Has lived and worked in France, England, Canada, and the United
States.
• Serves as an Advisor to several Boards of Directors of major U.S. and
Canadian brands.
• Lectures Extensively on International Law and Franchising in numerous
countries.
• Appointed by the U.S. Department of Commerce to act as Expert
Franchise Advisor to the governments of several developing countries.
• Author of numerous articles on franchising and transactions of legal
publications.
• Member of the International Franchise Association.
 John Glazer
• Over 30 years experience as President/CEO of start-up companies,
franchises, and venture development organizations.

• Specialties:
• Pre-Seed and Early-Stage Venture Capital
• Innovation Capital and Social Impact Investing
• Entrepreneurial Consulting
• Small and Medium Business Development
• Technology Commercialization
• International Economic Development
• Rural Economies

• Director, TechGROWTH Ohio

A venture development organization delivering services, capital, and talent for early-stage
technology companies in Appalachia Ohio, USA
What Can be Franchised

Every conceivable business or activity

including franchising of professionals
– pharmacies
– optometrists
– audiologists
– etc. etc.
 Advantages and Disadvantages of
Franchising
From point of view of franchisor
Advantages

• rapid expansion
• capital of others
• motivated business owner
– exploiting entrepreneurial spirit
– sales comparisons
– comparative labour costs

• incentive to franchisee
– owner versus manager
– development of saleable asset
– build up of capital
Advantages and Disadvantages of
Franchising
• less vulnerability
– statistics

• higher return on capital

– small organisation controlling large business

• control over employees

– ability to motivate

• expansion into small markets

– Knowledge of markets

• business referrals
– Hotels and car rentals
Advantages and Disadvantages of
Franchising

• incentive for employees of franchisor

• ideas/information resources
• low risk for purchaser
– statistics

• Pools advertising funds

• Pools purchasing power
 Advantages and Disadvantages of
Franchising
From point of view of franchisor
Disadvantages

• less control
• tensions in relationship
– sales vs. profits
– resistance to investment
– control vs. independence
– system changes

• litigation
• franchise groups
 Advantages and Disadvantages of
Franchising

• break away franchisees

– Problem of competing businesses
– Use of confidential information

• choice of wrong franchisee

• short memories
 Advantages and Disadvantages of
Franchising
From point of view of franchisee
Advantages
– success factor
– statistics

• lack of knowledge, no draw back

– professional franchisee exception
– affinities

• caters to entrepreneurial spirit

• established name, concept and track record
 Advantages and Disadvantages of
Franchising
• bugs in system eliminated
• economical to establish
• pools advertising and promotion
• site selection expertise
• lease arrangements
• purchasing power
• ongoing research and development
• financial and performance feed back
 Advantages and Disadvantages of
Franchising

• financing
– established trademark
– information on business
– easier to obtain bank financing

• sale of business
• compared to purchasing independent business
• initial and ongoing training
 Advantages and Disadvantages of
Franchising
Disadvantages
• controls of franchisor
– independence versus compliance

• necessity of following franchise system

• incompetent franchisor
– lack of research and development
– outdated system

• problem of other franchisees

• controls on sale of business
 Advantages and Disadvantages of
Franchising

• one-sided agreement
• misconceptions on work ethic
• negative policies of franchisor
– full time and attention

• inability to introduce new products or services

• policies of franchisor may impact profits
• long term commitment
 Critical Elements in Creating a
Franchise System
Franchisable concept
• uniqueness
– of product
– of service
– of décor

• ease of duplication
• general acceptance of product or service
• few limitations on expansion
• easily identifiable
• know-how transferable
 Critical Elements in Creating a
Franchise System
Elements of a franchise system

• methods and procedures for development, furnishing, opening

and operations of a franchised business

• formula methods and know-how for preparation of products or

offering of services

• guidelines for sourcing of products and/or services

• suppliers
• quality
• Pricing
 Critical Elements in Creating a
Franchise System
• quality control methods
• management programs and control systems
– inventory
– food costs labour costs
– occupancy costs

• staff management and training

– employer/employee relationships
– unions
– salary scale
– accounting and bookkeeping
 Critical Elements in Creating a
Franchise System
• plans and specifications of standardised premises
– leasehold improvements
– signage
– furniture and fixtures
– machinery and equipment
– size
– seating capacity
– Parking

• distinctive accessories

• marketing and advertising

– trade mark usage
– standardised advertisements
 Critical Elements in Creating a
Franchise System

• uniform image
– colours
– decor
– Presentation

• packaging
• banking programs
• store openings
• continued supervision
 Critical Elements in Creating a
Franchise System
• system must be:
– idiot proof
– bugs worked out
– each and every element critical
– no shortcuts
– sole responsibility of franchisor
 Franchisor Franchisee Relationship

Qualities of a successful franchisor

• track record
– Existence of different prototypes

• confidence factor
– leadership qualities
– help in overcoming franchisee’s problems
– deal with competition

• experienced team

• financial resources
 Franchisor Franchisee Relationship
• cannot rely on initial franchise fees
• business ability
• banking facilities for franchisees
• commitment

Understanding franchising
• win/win understanding
• Need for transparency by franchisor
– supply of products and services
– proprietary vs. non-proprietary products
– use of buying commissions, etc.
– supply of equipment
 Franchisor Franchisee Relationship

• administration of advertising fund

• too many sources of revenue
• Adversarial position vs. trust
• Do not create debtor/creditor relations
• Training of franchisor personnel
• understanding role of franchisees
• franchisees not employees
• franchisees are independent businessmen

• understand and appreciates franchisor/franchisee relationship

– different type of relationship
 Franchisor Franchisee Relationship
Role of a franchisor
• protector of integrity of franchise system
– impact on decisions effecting franchisees
– paramount emphasis on network of franchisees
– impact on franchisor’s self-interest
– concept of “partnership” of interest
– tripartite relationship

• leadership qualities
• inspire confidence
• not a partner of franchisee
• not a guarantor of franchisees success
 Franchisor Franchisee Relationship

• image of franchisor
– dress
– conduct
– lifestyle and cars
– image of TRUST and CONFIDENCE
– understand why a person becomes a franchisee and not a franchisor

• one sided agreement

 Franchisor Franchisee Relationship
Business of franchisor
• in the franchise business and not restaurant business
• guarantor of franchisee debts
• guarantor of franchisee services
• debtor/creditor relationship
• financing franchisee

Obligations of franchisor
• Contractual and non-contractual
– limited contractual obligations
– examples of non contractual obligations
• Protect integrity of franchise system
• Maintaining respect by all franchisees for franchise system
Franchisor Franchisee Relationship
• Taking decisive action where necessary
• Maintain competitiveness of franchise system
• Research and development
– new products and services
– preparation methods
– new equipment
– enforceability issues

• Make sure products and services available to franchisee at

competitive prices
– basket of products and services
– pricing of products and services
– use of commission, allowances, etc.
– proprietary vs non proprietary products
– franchisor as supplier of products and services
– designated suppliers
Franchisor Franchisee Relationship
• Need for transparency
• Site selection and leasing
– surveys
– negotiating leases

• Provide continuous feedback to franchisees

• Supervision and guidance of franchise network
– business advice
– financial advice and help
– general problem solving

• Be a good listener

Obligations of franchisor to Franchise Network

Franchisor Franchisee Relationship
Identification of franchisees
Franchisee profile
– qualities of franchisee
– financial
– operating ability
– no trouble makers
– re-invention of the wheel
– franchisees of other systems

How to identify potential franchisees

– advertising
– newspapers (articles)
– magazines (articles)
– franchise trade shows
– franchise associations
– banks
Franchisor Franchisee Relationship
• use of professionals
• use of consultants or agents
• choice of franchisee -- most critical decision
• application forms
• initial screening
• final screening by committee
• single ethnic franchisees
• selling practices

Use of pro-formas
• based on actual experience
• disclaimers
Franchisor Franchisee Relationship

• Understanding by franchisees of efforts required for their success

• Truthfulness
• Misrepresentations
• Training of in-house personnel

Role of a franchisee
• follow franchise system
• owns and operates own business
• working culture
• team player
Administration of a Franchise
System
Creation of franchise manual(s) The Bible
different manuals
• operations
• management
• construction, fixturing and maintenance
• machinery and equipment
• accounting
• employer/employee
• use of trademarks
• advertising and promotion
Administration of a Franchise
System
• maintenance of manuals
• updating manuals
• proprietary nature and ownership

Training and transfer of know-how

• initial training
– duration
– curriculum
– use of manuals

• ongoing training and assistance

– duration
Administration of a Franchise
System
• preparation of detailed training program
• place of training
– franchisor’s offices
– franchisees place of business

• language of training
• training manuals

Leasing Issues
• Negotiating the head lease
• Reasons why franchisor should be on head lease
• Reasons why franchisor should not be on the head lease
Administration of a Franchise System
• Franchisor as guarantor of lease
• Use of lease option agreements

Locations
• Types of location
– free standing
– street front
– strip malls
– regional malls
– food courts
– In-line
– non-traditional
– airports
– train stations
– stadiums
– office buildings
– other
Administration of a Franchise System

• Optimum size of location

• Choosing locations
– who is responsible:
– use of professionals

Construction, Improvements And Fixturing Of Franchise Premises

• Preparation of standard plans and specifications by franchisor
– need for several prototypes

• Preparation of specific plans and specs by franchisee based on

franchisor’s plans and specifications
– specific plans requires franchisor’s approval
Administration of a Franchise System
• Approval of contractor and trades by franchisor
• Turnkey by franchisor and resale to franchisee
• Built by franchisor on account of franchisee for a fee
• Equipping, furnishing and decorating premises
• Equipment
• Information supplied by franchisor
• Responsibility for purchasing
• Approval by franchisor
• Franchisor as a supplier or suppliers designated by franchisor

Supply of products
• Sell only approved products and services
• Sell all approved products and services
 Administration of a Franchise System

• Proprietary products
– negotiating deals with suppliers
– who is vendor of record, supplier, franchisor or other
– methods of distribution
– mandatory or not
– form of source of revenue
– Pricing

• Non-proprietary products
– negotiating deal
– designating suppliers
– designating standards
– mandatory or not
 Administration of a Franchise System

• Source of revenue
– for whose account
– pricing

• Casual products
– listing

• Proprietary products of third parties

– who is responsible for negotiating
– source of revenue
– for whose account

• Prices must be competitive

• Term of Agreement
 Sources of Revenue for
Franchisor
• Initial franchise fee
• Royalty
– different forms

• Advertising and promotion fees

– separate funds

• Mark up on products and/or services supplied by franchisor

– proprietary products
– non proprietary products
 Sources of Revenue for
Franchisor
• Commissions, volume rebates, allowances, etc.:
– treatment by franchisor
– proprietary products vs. non-proprietary products
– alternative options for franchisor

• Alternative methods of distribution

– using same trademarks
– using same or different trademarks

• Mark-up on leases
• Sale of services
• Supply of equipment
 Franchisor Model:
Monetize Everything
Franchisor Basics:
• Initial Fee:
– Consideration for Access to IP
– Down Payment on Risk
Reduction
• On-Going Royalties:
– Consideration for use of
Intellectual Property
– Amortization of Value of Risk
Reduction
Franchisor Value-Add:
• Opening Process:
– Financing
– Training
– Opening Capital Costs
• On-Going Operations
– Inventories
– Advertising
– Services & Supplies
– Continuing Training
– Meetings and Conventions
• Franchisee “Exit”
– Sale of the Business
– Franchise Transfer
 Different Commercial Vehicles
Used in Franchising
Direct franchising
• unit agreements definition
– situations where used
– advantages of this form of agreement
– disadvantages of agreement

• multiple unit agreements definition

– situations where used
– advantages of this form of agreement
– disadvantages of agreement

• development agreements definition

– situations where used
– advantages of this form of agreement
– disadvantages of agreement
Different Commercial Vehicles Used in
Franchising
Master franchise agreements definition
• situations where used
• advantages of this form of agreement
• disadvantages of agreement

Representative agreements definition

• situations where used
• advantages of this form of agreement
• disadvantages of agreement

Joint venture agreements definition

• situations where used
• advantages of this form of agreement
• disadvantages of agreement
 Important Elements of a Master
Franchise Agreement
When Used
• because of:
– lack of human and/ financial resources
– distance between countries
– cultural, commercial etc, differences
– need to entrust to a third party
• Grant of rights
• right to use trade marks in connection with business
• right to grant subfranchises to subfranchisees to use trade marks
and franchise system

Exclusivity
• reservation of rights
 Important Elements of a Master
Franchise Agreement
Territory
• country, state or province
• rights of first refusal

Duties and obligations of franchisor

Duties and obligations of master franchisee
• open company owned units before sub franchising
• act as franchisor

Use of unit franchise agreement

• use of franchisor’s standard form adapted to realities of territory
 Important Elements of a Master
Franchise Agreement
Franchise outlets to be owned by master franchisee
• use of different legal entity

Term
• long term
• rights of renewal

Fees
• initial master franchise fee
• continuing royalties
• initial unit franchise fee
• renewals
• advertising contributions
• supply of products and services
 Important Elements of a Master
Franchise Agreement
Development schedule
• minimum schedule
• maintain outlets in operation

Default under development schedule

• termination
• loss of exclusivity
• phantom royalties
• option to purchase

Protection of franchise system and trade marks

• obligation of master franchisee
• effected through unit franchise agreement
Important Elements of a Master
Franchise Agreement

Adaptation of franchise system

• only permitted in international franchising

Default of sub franchisee

Trade mark matters
Pilot outlet(s)
• use as training facility

Termination of agreement
 Important Elements of a Master
Franchise Agreement

Effect of termination
• impact on unit franchise agreements
• expiration of the term of agreement

Restrictive covenants
• territorial application
• period covered

Sale, assignment and transfer

 Important Elements of
Development Agreements
Umbrella Agreement
When Used
Developer has significant resources
• Developer has significant business experience
• Advisable to have only one franchisee in territory
• reduced obligations for franchisor
• Increased obligations for franchisee/ developer

Grant
• exclusivity
• to open franchise outlets and to enter into unit franchise
agreements
 Important Elements of
Development Agreements
Territory
Development schedule
• minimum versus goals
• minimum versus absolute

Default of development schedule

• termination of all agreements
• termination of all agreements
• loss of exclusivity
• phantom royalties
• reduction of territory
Important Elements of Development
Agreements
Expiration of development schedule and agreement
• good faith negotiation
• automatic extension

Term of agreement
• limited in duration
• fees
• development fee

Termination of development agreement

• cross defaults
• termination of unit franchise agreements
 Important Elements of
Development Agreements

Effect of termination

Restrictive covenants

Sale, transfer and assignment

 Issues Involved in Entering a
Master Franchise Agreement or a
Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor
Definition
Reputation of franchisor
• experience in international franchising

Commitment by franchisor
• historical prospective
• adaptation of franchise system

Quality of franchise system

 Issues Involved in Entering a Master Franchise
Agreement or a Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor
Need of product or service
Acceptability of product or service
• market study
– responsibility
– ownership
– acceptability varies from country to country
– acceptability of trademark
Fees
• master franchise fee
– non-recurring
– reflection of training and assistance
– terms for payment
 Issues Involved in Entering a
Master Franchise Agreement or a
Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor
– factors to be taking into account
• training and trips
• number of outlets
• population
• notoriety / recognition

• split of initial franchise fee

– split of royalty
– how calculated
– experience
– enough money in master franchising?

• use of advertising and promotion fees

 Issues Involved in Entering a
Master Franchise Agreement or a
Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor
Supply of product and service
• availability
• import restrictions, quotas and duties
• identifying suppliers

Trademark identification
Exclusive Territory
• size
• standard of living
 Issues Involved in Entering a
Master Franchise Agreement or a
Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor

Resources of the Master Franchisee

• financial
• human
• experience and business acumen

COUNTRY SPECIFIC FRANCHISE LEGISLATION

• Disclosure
• Relationship
 Issues Involved in Entering a Master Franchise
Agreement or a Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor
Country
• U.S.A.
• Canada
• France
• Brazil
• Mexico
• Spain
• Korea
• Indonesia
• Malaysia
• Australia
• Russia
• Peoples Republic of China
 Issues Involved in Entering a
Master Franchise Agreement or a
Development Agreement
by a Domestic Master Franchisee
with a Foreign Franchisor

• UNIDROIT

• Transfer of Technology

• Franchises (Registration and Control) Act of Barbados.

 Thank You
for Your Attention
 Our Sponsors
This project is funded through the U.S. Department of State,
Bureau of Near Eastern Affairs, Office of the Middle East
Partnership Initiative (MEPI). MEPI is a unique program
designed to engage directly with and invest in the people of the
Middle East and North Africa (MENA). MEPI works to create
vibrant partnerships with citizens to foster the development of
pluralistic, participatory, and prosperous societies throughout
the MENA region. To do this, MEPI partners with local,
regional and international non-government organizations, the
private sector, academic institutions, and governments. More
information about MEPI can be found at: www.mepi.state.gov.
 Thank You!
John Glazer Bachir Mihoubi
Director, TechGROWTH, Ohio Chief Executive Officer, FranCounsel Group, LLC
glazerj@ohio.edu (www.francounselgroup.com)

Naomi Joseph Nevine Dakroury Basma Ghanem

FSVC Program Officer FSVC Country Director FSVC Program Officer
njoseph@fsvc.org ndakroury@fsvc.org bghanem@fsvc.org
Tel.: +1-212-771-1417 Tel. +201 001 555 688 Tel. +201 112 000 269

Financial Services Volunteer Corps

10 East 53rd Street, 36th Floor
New York, USA
Tel. +1 (212) 771 1412
Fax +1 (212) 421 2162
Visit our website at www.fsvc.org