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Franchise Creation & Consulting
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MCG helps its Clients create a franchise model by progressing through three development “phases.”

Phase I: Feasibility and Business Planning; Staging the Business
Phase II: Programs, Systems and Manual Development; Building the Business
Phase III: Legal Documentation, Marketing and Sales Preparation; Selling the Franchise

Phase I: Feasibility and Business Planning; Staging the Business

1. Feasibility:
 
a.  Preliminary Franchise Assessment. MCG will meet with the Client’s staff to determine if its concept and business is a reasonable candidate for franchising and to provide Client with more information about the advantages and disadvantages of franchising as compared with other sales and marketing methodologies and models. MCG will outline the steps involved in developing a franchise program, discuss whether start-up capital is required, and whether a franchise feasibility study or franchise development plan, is justifiable. MCG will provide feedback after this initial review and assessment.

b. Franchise Feasibility Study. MCG will evaluate the Client concept, mission, and business goals. MCG will analyze and evaluate Client’s present business: financial statements, investments required for a new start-up, operations, systems and controls, legal aspects, marketing and advertising approaches, and organizational structure. From this evaluation and analysis, MCG will provide a comprehensive written report summarizing its findings, and provide recommendations and financial projections regarding the feasibility of creating a franchise model.

c. Internal Franchisee and Franchisor Financial Projections. As a part of the Feasibility Study, MCG will create a detailed breakdown of investment requirements, working capital needs, operating income and expenses, and anticipated return on investment for a “case study” of the typical Franchisee operation. These projections will not be publicly disclosed but will be used to test the viability of the franchise as a salable business opportunity. The Franchisor may not disclosed these projections unless it is will to risk liability for what are known as "earnings claims" these projections of operating income and expenses and return on investment cannot be provided to a prospective Franchisee before the franchise is sold. For the Franchisor, MCG will also create a financial plan projecting five years of anticipated growth in number of operating units, franchise fees, royalty income, expenses, profits, and organizational requirements and costs must be created. This plan is needed as an operating budget to know initial funding and cash flow requirements. The Franchisor may also use these projections in the event private capital or operating debt is secured.

d. Master or Regional Franchisees. MCG will assess the interest and need to establish Master or Regional Franchisees to expand the market more quickly and/or to provide expansion capital to fund the cost of creating the franchise system as an alternative to private capital formation.

e. Business Plan for Franchise Development. Upon a determination of feasibility to proceed with the franchise development, MCG will review and analyze Client’s business to identify the operational, contractual, legal, financial and marketing needs of the franchise program. In addition there will be suggestions regarding changes and modifications that the existing system may require for adaptation to a franchise operation. MCG will also define the general policies and appropriate strategies under which your franchise should be operated. The end result will be a comprehensive business plan (described hereafter) that will review identified franchise issues, challenges and opportunities as they relate to Client’s business and the new franchise model.

 

2. Franchise Market Study.  Marketing will be key both to the success of the franchise program and to the success of the Franchisee's business. MCG will create a Franchise Marketing Study with the assistance of Client and marketing support professionals to address a number of marketing related issues, including but not limited to:
  
a. Client’s Brand. MCG will assist Client in creating and protecting its “Brand.” The public image established by Client through its public perception is a key factor in interesting a Franchisee to buy into the Franchisor's system. A distinctive and appealing Brand and identification strategy that establishes Client’s public image through its graphics, logo, exterior and interior design, and colors, etc., is important to the success of both the franchised business and the franchise program. The Brand process may include such items as office layout, colors, furnishings, decor, fixtures, design, advertising pitches and graphics to establish a distinctive brand and image. Similarly the company “story” must be documented to become part of the brand and the marketing appeal.

b. Assessing Market Viability and Creating an Overall Strategy. MCG will establish a strategy with Client for assessing market areas. An important decision that Client must make at the beginning of the franchise launch is where it will offer its first franchise location. Franchisors often cluster locations within established markets because these markets have been proven to be successful. Adding franchised locations within established markets may justify increased advertising funds to use in the market, thereby enhancing the market share, as well as helping to exclude competition. In analyzing the market areas where there are no existing competitors Client will need to consider: (1) the ability to service and support the new market area; (2) the sales potential of the new market area; (3) the level of competition that exists in the new market area; and (4) the evaluation of population, income, retail sales, and other factors that may influence the likely success of a market area.

c. Establish a “Protected Territory” Strategy. Depending on the type of exclusive territory offered by the franchise, a territory strategy will be developed to locate geographical areas in the states where the franchise will be offered.

 

3. Franchise Fee and Advertising Fee Analysis. MCG will work with Client to establish an appropriate structure of fees, including advertising assessments, that the Franchisee will be required to pay the Franchisor. It will assist in creating an understanding of the investment that a typical Franchisee will need to make to become a Franchisee. Such information must be developed not only for purposes of the disclosures that the Franchisor will be required to furnish to prospective Franchisees, but also for purposes of understanding the level and type of financing that Franchisees may need. An assessment will also be made to understand the financial results that the Franchisor and its Franchisees can expect to achieve with the fees that are a part of the franchise program (e.g. see item 1.c. above).
 
a. Franchise Fees. Determining a franchise fee requires the following considerations:
• The nature and extent of the services offered by the Franchisor
• The cost of the services to the Franchisor
• The need in time for the Franchisor to cover its overhead and show a profit
• The ability of the Franchisee to pay
• The amount the competition charges
• The value of the trademark
• The attractiveness of the franchise
• The size of the territory being offered
• The term of the franchise agreement
• Other assessments being charged
 
These and other relevant factors all need to be weighed in establishing the initial franchise fee. Initial Franchisees are sometimes offered “founder franchises” for a fee at the lower end of the range in order to make the franchise opportunity more appealing to early adopters.

b. Royalties and ongoing service fees. MCG will create a royalty fee recommendation for Client. Royalties are the major source of ongoing income for the Franchisor, the royalty needs to be large enough to generate sufficient revenue to support the functions and services which the Franchisor must perform if the network is to remain competitive and viable, and it must return a reasonable profit. The cost of support is the biggest cost item funded by royalties. Consequently, the amount and frequency of support that will be offered to the Franchisee needs to be established in order to set the appropriate royalty fee. A franchising “rule of thumb” suggests that royalty payments should not exceed 25% to 33% of the Franchisee's pre-royalty profits. The royalty fee has a major impact on the Franchisee's profit and thereby its return on investment; it is critical therefore that, in choosing a royalty, the Franchisee's anticipated sales, gross margin, and operating profit are understood.

c. Advertising fund payments. MCG will create an advertising fund fee recommendation for Client. A large benefit of a franchise for the Franchisee is the brand recognition and advertising power of the Franchisor and the franchise network. Franchisors typically collect a separate fee or contribution from Franchisees that is used solely to fund marketing and promotion activities. In determining the advertising contribution, the Franchisor must consider the amount of money required for effective regional and national advertising programs as well as the funds required for the development of advertising materials and promotions. This consideration must include the Franchisee's necessary local expenditures in order to make an impact in its market. Franchisors sometimes require a lower contribution for advertising, until there are sufficient numbers of Franchisees to warrant promotional or media campaigns funded by Franchisee contribution. Where this is the case, the Franchisor nonetheless has the right to charge its first franchisees the full amount of the anticipated advertising contribution.

 

4. Operations Review:
 
a. Franchise Support Programs and Services. MCG will analyze the operating characteristics of Client’s business to recommend the support package of services that the Franchisee needs in order to be successful. From this analysis, MCG will provide reports and documents on a variety of subjects such as guidelines for territory development, techniques for lease negotiation, procedures for pre-opening, programs for group purchasing, and revenue sources, etc.

b. Forms, Systems, Controls, and Procedures. MCG will evaluate existing Client forms, systems, software, controls, and procedures to ensure they will help monitor the franchise system and business and are appropriate for a franchise operation.

c. Operations Manual. As part of Phase II, MCG will develop an operations manual that includes detailed instructions on all the regular operations of the franchise business to ensure standardization and uniformity. This manual also becomes the framework for a systematic approach to training the Franchisees.

d. Training Materials. As part of Phase II, MCG will specify training needs; create outlines and materials; write objectives and lesson plans; select the training methods, media and techniques; prepare documents; format the materials; and provide instructor materials for training the Franchisees.

e. Management Support and Training Programs. As part of Phase II, MCG will provide materials to assist in the training of management and staff in supervisory skills for the Franchisor so that it will be able to maintain standards and guide, assist, and support the Franchisee and their staffs.

 

5. Franchise Financing. MCG will assist Client in designing a franchise financing plan to assist Franchisees in establishing the capital required to buy and operate the franchise. Traditional financing sources include:
 
a. Lenders and investors. A Franchisee can seek funds from private sources; banks; non-bank lenders such as credit unions, finance firms, and divisions of stock brokerage firms; SBA guaranteed loans; lease financing companies; private capital; and partners.

b. Franchisor assistance. Some Franchisors typically will help their Franchisees prepare loan applications or direct them to financing sources which have some familiarity with the franchise and an interest in servicing qualified Franchisees. Some Franchisor’s guarantees loans and commitments to lenders or they defers part of the franchise fee or carry back financing. 
 

6. Business Plan.  All of the assessments, evaluations and decisions set forth in sections 1-5 above will be consolidated in a written business plan which will describe the operation and plan for the growth of the Client franchise business. This plan will be the basis of (1) operating the business on a go forward basis, (2) marketing the business to potential Master or Regional Franchisees, and/or (3) offering an investment opportunity to capital investors or a loan opportunity to lenders.

 

7. Capital Formation (if necessary). MCG will make a recommendation regarding the raising or private equity capital and the process of securing investment funds according to Regulation D, of the 1933 U.S. Securities Act. As mentioned in the opening paragraph, the fees associated with such a process would be in addition to those set forth in this Agreement.
 
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Phase II: Programs, Systems and Manual Development; Building the Business

1. Operations Manual. The Operations Manual will be created by MCG to aid in maintaining product and service standards as well as overall uniformity. The manual will be the backbone for customer service issues and forms the basis of a systematic approach to training; it also becomes a source of reference for the Franchisee as well as a tool for evaluating supervisors.
 
An operations manual might include the following:

• Introduction and history of the company; new Franchisee introduction
• Company policies
• Business practices and procedures
• Standards, procedures, and documentation for hiring of staff
• Personnel administration
• Job descriptions and Employee Manual
• New Employee Orientation
• Ordering supplies and outside services
• Sales techniques
• Pre-opening procedures
• Opening and closing tasks
• Customer service
• Operation forms, record keeping forms, and procedures
• Bookkeeping and management-control systems
• Advertising and promotion
• Safety and Security
• Reports to Franchisor
• Use of trademarks and intellectual property
• Use of licensed software
• Approved Vendor List
 
2. Training Program and Manual. MCG will design a Franchisee training program to teach skills, knowledge, and management processes, but also soft management training. The training program will be structured and systematized and as described above, will follow the Operations Manual in outline format. Franchisee training is generally done at the home office for approximately five (5) business days, and includes meetings with senior management, field trips and some social activities. The design will include agendas, budgets and support material suggestions for the training and venue related issues.

 

3. Structure for the Franchisor to Operate the Franchise System.  MCG will assist in developing a design for a support structure for the Franchisor organization. The Franchisor is responsible for developing and maintaining a support organization which satisfies the needs of the Franchisees. To insure the effectiveness of the support organization, the Franchisor must create a clear organizational chart that shows the interdependence of each department. The Franchisor should also identify the required jobs, the staff necessary to perform those jobs, and the criteria for selecting and hiring the staff. After this evaluation, the Franchisor will determine the authority and responsibility for each position, and for each position, create compensation and benefit plans. Once the organization's positions and compensation levels have been determined, effective training programs for managers and executives may also be developed.

 

4. Systems and Software and Forms. MCG will assist in the developing of operating processes to efficiently operate the franchise business between the Franchisor and the Franchisees. These processes include:
 
a. Control systems, software, procedures, and forms are needed to ensure standardization and uniformity of operations, minimize problems, supply informational needs, monitor the Franchisee's performance, monitor the Franchisee's adherence to standards, and ensure the company's ability to audit the franchise operations.

b. Forms or software systems that are required typically relate to sales, cost of goods, labor costs, advertising expenditures and other major expenses. Such forms would include the activity forms, a monthly recaps, sales report, customer analysis forms, advertising analysis form, operations analysis form, etc.

c. An effective supervisory program is also necessary since someone must guide and assist the Franchisee. In most cases, someone who understands the business intimately acts in this capacity. As a representative of the Franchisor, this person ensures that the standards are maintained and detects and resolves problems and the development of the Franchisee through the introduction of new products, services, and promotional programs.

d. Effective communication with organized and planned systems of information sharing and reporting is necessary for the growth and development of the franchise organization. The following types of communication are typically used.
  • Telephone, mail, email, etc. are common methods of providing and explaining instructions, supplying advertising and promotional materials, reporting sales figures and changes in personnel, and handling other important business matters.
  • Newsletters are effective in explaining various activities within the franchising company, recognizing the top sales, expressing the opinions of Franchisor management, announcing new territories and franchisees, and presenting other information of a positive and helpful nature.
  • Personal visits are usually made by the field supervisor, general manager, franchising director, training director, and others. The personal visit is a good public relations tool that can be used to encourage and the attitude of Franchisees and their staffs.
  • Franchisee group meetings are one of the most commons forms of support for Franchisees. They promote sharing of experiences, best practices, marketing techniques, operational systems, and advice by other successful Franchisees within the network.
  • Franchisor sponsored meetings, such as regional meetings, semiannual meetings, and conventions, can be used by a Franchisor to bring its franchisees together on a regular basis to share information and provide training. Social relationships are foster through dinners and social gatherings and events.
  • Franchisee advisory groups working together on sales, technical support, customer service, advertising, retraining, etc. assist in creating a ownership mentality within the franchise organization.

     

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Phase III: Legal Documentation, Marketing and Sales Preparation; Selling the Franchise
 
1. Legal Documentation. Legal services related to the creation and marketing of the franchise include the following three (3) categories of service:
 
a. Franchise Agreement. MCG will develop a Franchise Agreement, which is both a legal and operating document outlining clearly the basis of understanding and the responsibilities of both the Franchisor and the Franchisee.

b. Franchise Disclosure Document (“FDD”). MCG will prepare the Franchise Disclosure Document, using either the Federal Trade Commissions regulation format required by the federal government or the Uniform Franchise Offering Circular format required in certain specific states. This document must be submitted to each prospective Franchisee.

c. Franchise Registration. MCG will prepare the necessary documentation for filing and registering the Franchise Agreement and Franchise Disclosure Document. These will then be submitted to the state regulatory authorities for the states where the franchise will be offered.

 

2. Franchise Marketing and Sales Planning. Marketing and sales related services provided by MCG will include the following:
 
a. Franchise Marketing and Sales Plan. MCG will assist in the creation of a franchise sales and marketing program based on a profile of the Franchisee, targeted market, budget, and media analysis. From this information appropriate media and sales materials, ads, brochures, publicity programs, forms and procedures for ad responses, phone and mail follow-up, sales methods, and presentations will be created.

b. Franchise Brochure Sales Materials. MCG will develop the copy, layout and design of the Franchise brochure and sales materials structured to the profile of the Franchisee. These materials will interest in the franchise and help interest the prospect to purchase the franchise. If required, the Company will submit the brochure and ads to various states for their approval, prior to use.

c. Franchise Website and Technical Systems. MCG will provided support to Client in the development of the franchise website and other technical systems (e.g. online programming) and will act as a liaison for Client in the development of these systems.

d. Selection of Franchisees. MCG will help establish screening methods, procedures, and formats for interviewing and testing potential Franchisees. These include: background checks, application questionnaires, psychological and attitudinal testing and other processes which help in the evaluation of a prospective Franchisee.

e. Initial Launch Strategy and Advertising Programs. MCG will assist in creating a launch strategy for marketing and starting the sale of the franchise opportunity. Additionally, a national advertising program might be created and funded by contributions from initial Franchisees and the Franchisor in a cooperative advertising program.

f. Creating and Recruiting a Franchise Sales Staff. MCG will assist in the recruiting and staffing of a franchise sales organization for Client. The sales professionals must be trained in the technical and regulatory world of franchise sales and offerings. There are also professional franchise sales organizations which can be interviewed and retained to sell on behalf of the Franchisor. These services include script preparation, interview techniques, commission and compensation structures and other staffing support assistance.

 

Our fees for franchise consulting are provided on a flat fee or hourly basis.
 
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For further information contact Mark Meyerdirk: 913-608-4236 or mmeyerdirk@meyerdirkconsulting.com