Understanding Franchising

Who is HILL MAYOH ?

HILL MAYOH are a team of CPA’s who understand Franchising. We assist people who are looking to buy a franchise, those who are looking to franchise their business & existing Franchisors who want specialist accounting & taxation advice.

HILL MAYOH is a member of the Franchise Council of Australia with Brian having assisted via participation on the NSW Chapter committee of the FCA for the last 8 years, writing articles, presentations etc.

Our business…………… HILL MAYOH …specialist franchise work includes:

Concept advice,Franchise Development strategies,Specialist Accounting & Taxation advice… eg Marketing Funds, Business Valuations, Business Structures Health checks, Documentation…….for

Businesses looking to Franchise - including conversion of Contractor and Distributor models.

Franchisors - existing.

Prospective Franchisees – Evaluation, Business Valuations, Structures Finance - assistance in sourcing.

Introduction Advantages and Disadvantages of Franchising

Evaluating a Franchise

Key Accounting & Management Issues

Tax Considerations – Franchisee & Franchisor

Can the Business be Franchised?

The process of Franchising a business.

Because franchising offers solutions to:-

Capital

People

Time

Why Franchise ?

Reduced risk.

Enhances cost savings and purchasing power.

Improves Quality control / best purchasing.

Increases brand exposure and market penetration.

Provides a platform for asset growth.

Is a solution to Contractors, Agent or Dealership issues.

Exit Strategy.

Advantages of franchising

Potential goal conflict.

Share potential customer base.

Corporate policies.

Potential restrictions on sales/assignment.

Disadvantages of franchising

Evaluating a Franchise

Initial Enquiry

Initial Meeting

Start Work

Decision Meeting

Finance Approval

Legal Advice

Ready to Buy

Key Accounting & Mgt Issues Actual Trading Key Performance Indicators (KPI’s) Greenfield v Resale The Learning Curve Sales / Income levels Cost of Goods Sold & Labour Franchisor Ongoing Costs Contribution Margin Rent Equipment expenses Other expenses Owners Draw (living & financing expenses) Cash Flow Items – Initial Costs (Franchisor & other), Working

Capital Borrowing – Serviceability & Security

Tax Considerations

Business Structure

Initial Franchisor Costs – capital v expense

Marketing / other Funds – how to treat?

Chart of Accounts – standard

The Five Essentials:

Proven Business System – USP.

Profitable with strong margins.

Relatively easy to learn.

Passion & long term Commitment.

Investment Capital

Can the business be Franchised?

?

Franchising Model

Begin with the endin mind’

The Process

Feasibility

System Design

Legal Brief

Franchise Documentation

Ongoing Coaching / Consulting

Project Completion

Franchisor Training

Legal Documentation

Stage One - Feasibility Study The Feasibility takes many hours studying the business

including time with the management and staff. The subsequent report advises on issues such as;

U.S.P.’s (Unique Selling Propositions)

Intellectual property

Examining the Current Distribution Model

The ability to replicate the business unit

Ongoing support requirements

Splitting the Pie

Equitable returns for all parties

So why conduct a Feasibility?

To understand the business to be franchised.

To determine if the business can be franchised.

To determine the key structural elements of the business under a franchise system.

To assess the financial feasibility of franchising

The Feasibility may, or may not, give the green light to franchising as the preferred development method.

If a red light is revealed, an alternative development may be proposed. e.g. Licensing

If a green light emerges, the process commences and we proceed to the Stage 2.

Stage One outcomes

Stage Two – System Design

Key Structural Components;

Franchisee and Franchisor obligations

Franchise model

Franchise Support Structure

Franchisor and Franchisee structures

Income Streams

Territorial delineations and protocols

Franchise terms and renewals

Systems and documentation

Some Forms of Franchising

FRANCHISOR

Single Unit Model

FRANCHISEE FRANCHISEE FRANCHISEE FRANCHISEE FRANCHISEE

FRANCHISOR

Some Forms of Franchising

Master Franchising Model

MASTER FRANCHISEE MASTER FRANCHISEE

FRANCHISEE FRANCHISEEFRANCHISEE FRANCHISEE FRANCHISEE FRANCHISEE

Example of a Business StructureLicensor

XYZ Trust

Franchisor Trading EntityXYZ Pty Ltd atf

XYZ Franchising Trust

FRANCHISEE FRANCHISEE FRANCHISEE FRANCHISEE

License Agreement

Should not hold assets or build equity

in its balance sheet

Holds IP

Factors influencing System Design

Market size

Dispersion of demand for the business

Complexity of the product/service offering

Managerial implications of running the system under franchise

Financial and managerial resources

Personal and business objectives of the Principals

System Design financial modeling“Splitting the Pie”

We will examine the following:-Discover the key business driversDetermine the environment for successCarry out a future value testMatch or better the market on ROI for the franchiseeUnit potentialsFranchisee then FranchisorCapital requirementsIncome streams & operating costsRealistic G.P.’s, sales and costs for SUSTAINABLE net profit.Strike equity in profitability

Growth rate

System Design financial modelling continued.

Franchise terms and renewal

Site selection procedures and supporting manual

Territorial structures

Communication and reporting structures

Induction and ongoing training

etc etc

Stage Three - Documentation Stage Three is the production of all the documents

necessary under the Franchising Code of Conduct (Trade Practices Act).

Legal Documents Confidentiality Agreement

Disclosure Document, Franchise Agreement, Licence Agreement,

Franchisee Advice Statement,

We work directly with the lawyers - our experience assists to significantly shorten this process. We suggest a choice of experienced franchise lawyers and review all documents before the prospective franchisor sees them.

Stage Three - Operational

Stage Three also provides the necessary documents and systems for a Franchisor and Franchisee to work effectively under a strictly defined system.

Further systems documentation is developed according to your specific requirements.

We organise the production of the Operations Manual/s which involves specialists working closely with client management and project mgt from HILL MAYOH.

This stage of the project is intrusive and can sometimes impose upon daily business activities.

Documents

Franchise Compliance Manual Operations Manual Site Selection Guide (if applicable) Franchisee Recruitment Manual Franchisee Selection Criteria Recruitment Brochure draft

The following documents are normally required to enable the business to reach the point of readiness to recruit Franchisees:-

Note: If other Manuals are required, such as technical manuals, these are quoted separately.

Stage Four involves the creation of a recruitment process and conducting training with management to ensure compliance with procedures.

We also to develop a Franchisee selection criteria based upon :-

Background and experience

Personal attributes

Financial stability

Personal factors

Technical requirements

Stage Four

Stage Five

Stage Five is our Project Completion where everything is reviewed to ensure a complete understanding of all aspects of the new franchised business by key management.

The Franchisor is fully trained in all aspects of the business including The Operations Manual.

We say to the prospective Franchisor…

Be prepared for this exercise to an investment in both time and money.

Invest in professional help fromFranchise Consultant (franchise structure and system)

Specialist Lawyer (franchising experience and legal structure)

Specialist Accountant (Business structure and tax advice)

Franchise Division of a major Bank Be prepared that despite all the best planning, preparation and

investment that the market may not automatically accept the concept.

Conversely, be prepared to be hugely successful. This brings its own problems to the table – are you prepared?

Is that it allows people from all walks of life fulfill their dream of

successfully owning and operating a small to medium business with little to no business management skills or

experience!

HEART OF FRANCHISING

Brian Mayoh - Principal

Initial 11 years in charted and commercial accounting.

6 years as a franchisor with Kwik-Kopy.

3 years in corporate marketing and general management.

15 years in franchise advisory & CPA with Franchise Systems, Franchise Alliance & Hill Mayoh.

Independent franchise and business consultancy work ongoing.

Brian holds a Diploma of Business (Franchising) and the qualification of FCA Fellow with the Franchise Council of Australia.

Brian is also a Certified Practicing Accountant.