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CHAPTER 3: The Franchisor Business Plan

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Hazelle Yasis

on 3 July 2014

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Transcript of CHAPTER 3: The Franchisor Business Plan

In this chapter, we will be able to:
• Understand what is meant by a business plan

• Identify and understand the elements of a franchisee recruitment package

• Learn how to do a franchisor business plan feasibility study.

The franchise feasibility study will show if it is or is not beneficial to both franchisor and franchisee to enter the franchising field. If only one particular party will benefit then the business will not be likely successful.
The six content sections of a feasibility study:

Executive summary
Marketing segment
Management segment
Finance, accounting, and taxes
Legal requirements

Franchisor Business Plan (FBP)
Management, organization, and administrative policy
Managing the marketing process
Sales and marketing research
Managing the operations process
Location and site selection
Accounting practices and fiscal responsibilities deemed appropriate, along with the realistic financial projections
Based on the strategy to be followed and the market conditions anticipated; management information systems
And legal documentation for determining the franchisor-franchisee relationship and anticipated activities of each party
Franchisee recruitment package
The objectives of the franchisor firm
The initial capital and expected investment required of a potential franchisee
Personal and other qualifications a potential franchisee must have
Training provided by the franchisor to the franchisee
Anticipated benefits and responsibilities of becoming a franchisee

Franchisee Operations and Success Package
The third component of the franchise plan, which generally contains elements of the following items:

Operations manual
Financial and bookkeeping systems
Advertising and promotional packages
Sales manual
The franchisor or franchisee support package
Training manual

Feasibility study should contain sufficient information to enable either a franchisor or a franchisee to make a "go or no go" decision.
Franchisor's position must be properly analyzed if the franchisor will or will not be able to properly administer franchising.
CHAPTER 3: The Franchisor Business Plan
Thank you!
Franchise Feasibility Study
Executive summary
It tells the story of the franchise venture and sparks the interest of any outsiders. This summary must not be more than three (3) pages. Attached to it is the complete business plan or proposal.
It concerns the distribution of goods and services to existing and potential customers to satisfy some want or need.
Major marketing objectives
– major goals and objectives of the organization will explain what the franchisor ultimately wants to do and when the franchisor plans to do this.
Marketing plan and pricing strategy
– this section needs to include a description of the product or services, it is important to list in detail the products or services.
Target market analysis
– it is important to analyze the market’s primary characteristics, to determine the potential buyer power available through that market. Particular type of demographic data like age, gender, ranges, income would be helpful for you to identify who will be your target and potential market.

Pricing strategy
– the price at which a product or service is offered must cover relevant costs and ensure an adequate profit for the franchisee and the franchisor. it is important to identify cost schedules at various anticipated production and to compare the ideal price with the price offered by direct competitors for the same product or services offered.
Mark up pricing
– it determines actual costs of the product (including all overhead) at the anticipated production/ sales volume, and to add the profit margin.

Franchisee recruitment plan and flowchart
– it includes the basic description of the franchisee profile describing who you are trying to recruit. It is also important to understand what locations where you are trying to recruit these individuals. It is also important to provide recruitment flowchart which explains the steps to follow in working with prospective franchisees.
Franchisee prospectus
– it discusses the franchise opportunity. It is basically the sales brochure.
Franchisee sales and advertising
– it will explain how to promote the franchise opportunity to prospective franchisees.

Franchisee location criteria selection
– it allows the franchisor to describe where and why they are going to locate a franchise. The franchisor should list the criteria which they are going to select the best possible franchise location.
Site location
– one of the most important factors in the success of a retail business is to have a properly determined location. Two, three or perhaps five sites need to be initially analyzed and screened by the franchisee to determine the best alternative sites for the proposed business. The goal is to find a location with convenient access that does not have heavy competition within a market sector with sufficient numbers of people displaying the “profile” which the business wishes to attract.

Grand opening plan
– the grand opening should explain who is doing what, when, where, how and why. The opening should be advertise and promote before the time of the expected plan.
Promotion and advertising
– advertising is meant in many cases, to promote the overall goodwill of the franchise or the attributes of the product line.
Marketing to the franchisee
– to have a successful franchisee recruitment program, a franchisor should develop a recruitment book designed to present the prospective franchisees the benefits a franchisee would gain by joining the particular franchise system.

It is simply defined as “getting things done through people”
The management section of the franchise feasibility study should include detailed information on the following five elements.
Headquarters’ organization
Franchisee organization
Operations manual
Training manual
PERT chart

Policies and procedures
serves as guidelines for employee actions.

identify the steps or elements within a process that are considered appropriate for performing assigned task. Policies exist for the benefit of the organization and its employees.

Personnel Management
The franchisor should define and describe the personnel practices of the organization. It should have job descriptions and policies relative to the operations and functions of each employee, guidelines for their wage and salary and how raises the bonuses are to be administered.
Franchisee Organization
Sufficient directions should be provided by the franchisor to the franchisee so that they will know what is the expected concerning operations and management of the franchised unit. The franchisee organization should also need to include organization structure, policies, and personnel management.
Operations Manual and Training Manual
Operational instructions should include an operations manual and training manual for the franchisee. Operations manual provides step by step illustrations and descriptions for each set of required activities. Training manual provides information necessary to train unit of employees to perform on required function within the specific business environment
PERT Chart
It is a clearly delineated set of related events presented in sequence. A PERT chart can be a useful tool for a franchisor in establishing franchised units. It can be used as a guide as well as an implementation tool for both the franchisor and the franchisee.
Finance and Accounting
The major accounting records to be kept by a franchisor and a franchisee would at the very least include the following:
Start-up or turnkey costs (itemized) Financial position for starting franchisor’s system
Pro forma balance sheet
Pro forma income statement
Pro forma cash flow statement
Breakeven analysis
Ratio analysis
Provision for taxation

Start-up turnkey costs
Generally includes land, building, furniture, fixtures, equipment, and personnel costs which are required to the business. Costs should be itemized providing a complete picture to the franchisee and franchisor required starting a franchised unit business.
Financial Position
The franchisor needs to look at his or her own financial position to determine the availability of money to start a franchising program.
Balance sheet
It is a snapshot of the financial condition of the franchised business. This financial statement shows how a business utilizes its resources and assets in comparison with the debt and ownership of the business.
Income statement
The income statement is prepared monthly, quarterly or yearly to identify the profit-loss relationship resulting from the use of asset in the business.
Cash flow statement
Shows the sources from which the firm obtained its income during an accounting period and how it was spent. It illustrates the flow of cash through the business across time. In general the cash flow statement helps the franchisee anticipate cash needs and adjust expenses as well as possible to ensure a smooth outflow of payments, even though the income tends to come in seasonally or cyclically
Breakeven Analysis
Refers to a determination of that point in the franchised business activity where revenues exactly equal expenses. This financial condition can be expressed in mathematical equations or depicted in line graphs, with separate lines representing the costs and the revenues of the firm
Ratio Analysis
It is a method of determining the various financial relationships which would suggest the degree of financial health of a firm.
Provision for Taxation
Provisions for taxes are an important consideration. Both franchisor and franchisee must recognize and understand the various tax filings required by federal, state, and local governments. The four main areas of taxation are:

Sales taxes
Business taxes
Property taxes
Employee-related taxes

The important financial records or position statements for a franchisee would include:
Start-up or turnkey costs (itemized)
Financial position for starting franchisor’s system
Pro forma balance sheet
Pro forma income statement
Pro forma cash flow statement
Breakeven analysis
Ratio analysis
Provision for taxation

Financial records for the franchisee
The more information a prospective franchisee develops before the final decision is made whether to open a franchised unit, the wiser the decision. In the long run, fewer problems, misunderstandings, and potential litigations are likely to take place.
Legal Requirements
It must be Satisfied, such requirements usually rest on legal opinion versed in franchising law. Typical factors covered in the legal agreement include:

Business structure
License, contracts, and permits
Types and anticipated cost of insurance
Disclosure documents (uniform franchise offering circular – UFOC)
The franchising agreement itself
Conditions integral to the franchisor-franchisee relationship
Possible termination

Business structure
It is important that the franchisor develop a proper business structure which generally would be a sole proprietorship, a partnership, a corporation, an L.L.C. or a holding company. The franchisee should have proper coverage in the areas of property insurance, liability insurance, and personal insurance. Insurance is important to cover natural disasters, accidents, emergencies or other contingencies which can arise and alter the normal course of business activity.
Franchising agreement or relationship
The franchising agreement or contract, between franchisor and franchisee should be drawn up by lawyers, and franchisor and franchisee should have separate legal counsel.
It is an important visual aid containing illustrations, diagrams, analysis, and exhibits referenced throughout the franchise feasibility study.
A well-prepared appendix can enhance the possibility of successful recruitment of prospective franchisees.

The Franchise Pert Chart
A complete franchise PERT chart would include the following phases:
The chart identifies the steps necessary
to begin a franchise system.
This phase is meant to develop those analyzes which are necessary for a wise decision about whether to start a franchise
A complete accounting and financial review is in order for the franchisor to understand the overall fiscal limitations or constraints as well as the current financial strengths and weaknesses of the existing organization.

It focuses on internal factors necessary in order to develop a franchise system.
It involves an in depth analysis and compilation of the marketing package to be used to attract prospective franchisees to the franchise system.
It is a critical importance to the franchisor. As in the draft processes followed in professional sports, proper selection of franchisees can have outstanding results, whereas poor choices can result in problems for the firm.
Some franchising organizations focus more on site selection and building design than others.
Good site selection requires three steps.

1. Determining markets in a geographical area or region that possess the customer demographics closely associated with existing successful business in the same field.
2. Selecting the market area with the best combination of demographics that exist within the region or area analyzed, and then studying the specific locations in this area that are most likely to produce high volume sales.
3. Examining a number of sites in terms of the ‘’need’’ for an outlet or store, and forecasting the demand through an appropriate method of trade or primary service area delineation.

One of the most exciting moments in any franchise business is the grand opening of a new outlet. Following the grand opening, the franchisor needs to follow up with activities that assist the new franchisee during these early days, as well as to collect information about start-up business activity to apply toward the next grand opening. Feedback can be us unwelcome as reminders to make tax payments, but appropriate and regular feedback and the franchisor response to such feedback are accurate and helpful, problems rarely become insurmountable.
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