THE TOP 10 MISTAKES EVERY NEW FRANCHISOR SHOULD AVOID MICHAEL H. SEID Managing Director MSA Worldwide West Hartford, CT DAVID J. KAUFMANN, ESQ. Senior Partner Kaufmann, Gildin, Robbins & Oppenheim LLP

New York, NY

One: Franchising When Your Shouldn’t

Its just only one method of down-stream distribution Have you even evaluated whether you should become a franchisor?

Franchising – its only a method of distribution • Did you conduct a threshold analysis? – Do the unit economics - after fees – provide the necessary ROI for each class of franchisee? – Do you own and control your marks? – Do you have realistic expansion goal? – Can you provide effective support necessary for your franchisees to sustainably and consistently deliver on your Brand Promise? – Do system economics provide the necessary ROI for the franchisor? – Does franchising support your exit strategy?

Two: Focusing First On Franchise Sales

Its all about sustainable replication of your Brand Promise.

Slow and steady wins the race • Develop a sustainable strategy – Define your Brand Promise – Define what your franchisees will need to deliver consistently to consumers on your Brand Promise – Define your growth strategy • Geographic and classes of franchisees

– Determine how you will provide support to your franchisees – Geographic and class of franchisee impact on your cost to sustainably support franchisees

Three: Selling Instead Of Selecting

Its hard to turn down a warm body Especially when you know they have a check that will clear

You need them to succeed

• Your first franchisees become your best sales people or your barriers to growth – – – – –

Define the attributes they need for success How do you know if they are right for you Single unit v multi-unit Strategic buyer v investor How do you handle the “bad apples”

Four: Get The Economics Right

Lower fees do not necessarily make you more competitive Rolex does just fine charging more than Timex

Its not about the franchise fee alone • Don’t rely on your initial fees to earn a profit – You only collect them once – Used for capturing, training and providing initial support – They don’t need them to be uniform – Once collected, they don’t add a dime to your exit valuation

• Calibrate your continuing fees & payments – Sustainability + Growth + ROI = High Exit Multiples

Five: Having The Wrong Offering Single Unit Owner Operator, Multi-Unit Developer, Strategic Buyer, Investor Group, Conversion Franchisee….. Do you really think they all want the same thing or can be sold in the same way?

Develop the business case for each class • Its no longer sufficient to treat them all the same – Each class of franchisee provide different opportunities and challenges – Return on investment instead of salary replacement – Initial and continuing fees can vary – Rights and obligations can vary

• Align your advertising, marketing approach, selection process and offering documents

Six: Boiler Plate Franchise Documents When your franchise system is structured right and your offering documents are drafted with care, they can be an effective marketing tool; enable you to protect your brand; evolve your retail offering; protect your franchisees from the bad acts of other franchisees; avoid litigation; let you win litigation; exit the system with a better multiple; and more.

Great agreements meet the test of time

• Every FDD has 22 items and a receipt. • Most states don’t review your franchise agreement before you offer franchises. • Getting registered is not that hard. • Documents become important when you need them to be effective.

– at the beginning of the relationship – at the end of the relationship - if the relationship gets a bit rocky in the middle - when change happens

Great agreements meet the test of time • Modifying the system - new products, services and capital requirements • Renewal and maximizing franchisee’s exit value • Litigation avoidance and prevailing early on • Changes to the marks - sale of system - merger or acquisition • Lease, non-competes, confidential information, vicarious liability, co-employment, even who needs to sign and guarantee the agreement beyond the franchisee

Great agreements meet the test of time • Anticipate and reserve your rights for change: – – – – – – –

Retail pricing Technology Demographics Consumer preferences Population shifts Franchise unit upgrades Litigation avoidance

Seven: Staffing

You really cant effectively do it alone Don’t neglect the date that brought you to the party

What staff do you need – and not

• Company owned operations need care • Put together the franchise team you need and can afford – Your strategic growth and support decisions will define your organization • background, experience, training, cost, bandwidth

– Outsourcing your support – International expansion

Eight: Professionals Are Not All The Same We’re not here to sell you our services We’re here to guide you away from the bad players Lawyers – Consultants – CPAs – PE Firms are not fungible

It’s all about experience & track record • There is effectively no barrier to entry • Any lawyer can be a franchise lawyer and consulting is an unlicensed profession – Depth of experience – what have they really done, for whom and for how long – Who will you be working with – senior partner or 1st yr. associate or independent contractor – Established franchisors v emerging franchisors; domestic v international; transactional; litigation – Standing and reputation with their peers

Nine: It costs more than you were told

It always seems to cost more than you thought it would. And, it always takes longer than you want. The problem is that emerging franchises fail for the simplest of reason and most times, they just run out of money.

Making the most out of your investment • You have invested in the design and develop of your strategy and have a fully compliant franchise offering. – Local, regional or national roll out – how should you look at the opportunity and the cost – What is the best way to reduce your costs and not sacrifice quality? – Should you avoid the registration states and stay in the FTC states only? – What is the minimum net worth necessary to register with the franchise-regulating states?

Ten: Incumbent Inertia

Life is what happens to you while you’re busy making plans – John Lennon If you don’t keep moving forward and continually evolve your franchise offering you wont survive

Creating a culture for change

• Constantly communicate with your system • Understand your core competencies of and exploited them • Be clear about the relationship between the franchisor and franchisee • Keep the system informed about new initiatives

Creating a culture for change

• Include franchisees in the strategic process • Eliminate bureaucracy at every level • Push decision-making far down in the organization • Speed to decision and resolution is a virtue • Respect, Train and Trust – all the time and at all levels.

Manage change

Have a clearly defined vision of what you think is your change strategy. Have faith in your brand, the skills of your franchisees and staff and your ability to lead.