Franchising in the USA

the Stagecoach Theatre Arts experience

• Introduction and background

•How to enter the US

•What are the legal requirements

•Ongoing legal requirements

•Further Advice

Introduction Presentation by Richard

Dawson1. Chartered Accountant, KPMG2. BoS Corporate Finance3. Co-founded Internet Shopping

Website4. Group Finance Director, Stagecoach

Theatre Arts plc – appointed 20015. CEO, StageCoach Theatre Arts USA

– appointed 2003

Background Stagecoach Theatre Arts

•Founded in 1988 by Stephanie Manuel and David Sprigg in Surrey, UK

•Franchisor of part-time performing arts schools •Children aged 6 to 16 attend for 3 hours per week,

learning:DanceDramaSinging

•Emphasis on confidence-building, creativity, life skills

•31 May 07 Financial Year: £26.5 million network turnover, 39,200 students worldwide and £310,000 profit

Statistics - last Financial YearUK USA Germa

nyOthe

r

Network turnover, £ 24.2m 0.4m 0.5m 1.4m

Commenced franchising

1994 2004 2005 2000

Franchisees 261 10 8 39

Students 34,974 542 725 2,957

Company profit, £ Profit Break-even

Loss Profit

Population 60m 300m 82m n/a

GDP/Capita $ (IMF) 35k (11th)

43k(4th) 31k(17t

h)n/a

Direct Franchising from UK•Medium risk, medium reward. Costs are

significantly higher than a UK franchise because of travel (as expected) and local legal, accountancy and tax advice (higher than expected). eg Spain and Ireland

•Stagecoach’s direct franchises outside the UK have developed organically as UK staff have emigrated. They are happy to continue to deal direct with the UK.

•Success is dependant upon both the UK Head Office and local franchisee

•But to truly develop a country I believe a local operation within that country will be needed

Licensing• Low risk. Low reward.

• This has proved to be the correct vehicle for Stagecoach to develop a territory that is small or inaccessible and to which one must commit limited resources in order to achieve a return eg Malta

• A strategic method of protecting trade marks and copyright materials ready for later expansion eg Canada

• Success is heavily dependent on the Licensee

Master Franchise• Medium risk, low reward

• The correct vehicle for Stagecoach to develop a Territory that is inaccessible and/or where one would not wish to run company-owned operations or to joint venture eg Australia

• The Master Franchisee takes on the risk and deserves the majority of the rewards

• Success is heavily dependant on the Master Franchisee

Joint Ventures• Medium risk, medium reward • JV’s have been an essential part of

Stagecoach’s successful overseas expansion eg initially in Germany and USA

• They reduce capital requirements and management commitment in the initial stages

• But are they the correct vehicle for the long-term?

• For the long-term the type of Joint Venture partner may need to change

Direct Franchising via Subsidiary

• High cost, high risk, high reward. We believe that Stagecoach can be just as successful in North America and the major European markets as it has been in the UK

• Prior to the IPO Stagecoach did not have the resources to develop these markets

• Post IPO Stagecoach has invested in those markets where it expects to achieve the greatest return eg USA

Managed units or franchise units?

• Managed units are an important part of franchising – testing new concepts, current experience, quality control

• Cost – money and management time• Different States• Short-term/long-term strategy

Conclusion –on how to enter the US

• Overseas expansion should be driven by long-term strategy

• Appropriate resources must be devoted to it

• However, for smaller companies, a low cost start-up strategy may be the only option

• Arrangements should be kept flexible to take advantage of longer term opportunities

Legal requirements for franchising in USA:

• You will need a franchising lawyer!

• Federal Trade Commission (FTC)

• State Specific laws on franchising

• Uniform Franchise Disclosure Document (until recently called the Uniform Franchise Offer Document, UFOC)

Uniform Franchise Disclosure Document Contents:

1. The Franchisor and any Parents, Predecessors and Affiliates2. Business Experience3. Litigation4. Bankruptcy5. Initial Fees6. Other Fees7. Estimated Initial Investment8. Restrictions on Sources of Products and Services9. Franchisee’s Obligations10.Financing11.Franchisor’s Assistance, Advertising, Computer Systems and

Training12.Territory13.Trademarks

Contents continued14. Patents, Copyrights and Proprietary Information15. Obligation to Participate in the Actual Operation of the

Franchise Business16. Restrictions on What the Franchisee may sell17. Renewal, Termination, Transfer and Dispute Resolution18. Public Figures19. Financial Performance Representations20. Outlets and Franchisee Information21. Financial Statements22. Contracts23. Receipts

ExhibitsA. Franchise Agreement

AddendaB. Subsequent Franchise AgreementsC. Financing DocumentsD. Ownership Agreement

Uniform Franchise Disclosure Document

(UFDD)• 2007 Franchise Rule adopted by the FTC in January 2007 – after a 12 years Regulatory Review

• New requirements for franchisors preparing franchise disclosure documents (offering circulars)

• Follows closely the old UFOC Guidelines• Some areas the 2007 Franchise Rule omits or streamlines

the UFOC Guidelines (eg broker disclosures, cover page risk factors and detailed computer requirements).

• Some new areas (eg parent company disclosures, Franchisor initiated litigations, confidentiality clauses)

• The biggest change appears to be more statistical information to be provided on franchise and managed outlets over the last 3 years

Registration States• Registration States – since 1993, 15 States (the

Registration States) require franchisors to prepare UFOC’s to comply with their State Laws

• Many States have additional State specific requirements (we found Illinois particularly challenging and time consuming)

• Franchisors may continue to file and use in the Registration States Franchise Disclosure Documents prepared under the UFOC Guidelines until July 1 2008

Other documents required by the

Registration States:A. Uniform Franchise Registration Application PageB. Supplemental Information page(s)C. Certification pageD. Uniform Consent to Service of ProcessE. Sales Agent Disclosure FormF. If the applicant is a corporation or partnership or limited

liability company, an authorising resolution if the application is verified by a person other than applicant’s officer or general partner

G. Uniform Franchise Offering Circular or Uniform Franchise Disclosure Document

H. Application Fee (varies by state)I. Auditor’s consent (or a photocopy of the consent) to the

use of the latest audited financial statements in the offering circular

J. Advertising or promotional materials, if required

Marketing• UFDD is not a ‘natural’ marketing

tool• 3 stage interview process (product,

financials + legals) using the UFDD as part of this process can be helpful

• Some states require pre-approval of additional marketing materials

• New York requires additional disclosure note on all adverts

Cost of Entry• Franchising, Joint Venture or

Licencing? Cost/benefits analysis• Franchise Consultants• Initial Legal Costs• You need a good Franchise Lawyer

(I recommend Mary Beth Brody at Faerge & Benson, MN)

• Audited Accounts required• State Application Fees

Cost of the Uniform Franchise Disclosure

DocumentFactors effecting the cost:• Is there already an existing franchise agreement or can

the existing one be simply “Americanized”?• Whether any kind of franchise disclosure document has

been used for other countries (eg Australia)• The complexities of the business model (a straight

forward restaurant/retail model or more complex services concept)

• Use of area developers or sales representatives• Up to $50,000

• In total,with legal, accounting, state filing, flights, expenses etc - do not expect any change from $100,000

• Allow up to 6 months planning and implementation

Ongoing requirements:

• Annual submission of the UFDD (UFOC)• State specific requirements• Marketing – updating the Earnings

Estimate• Issuing new Franchise Agreements,

addendums, termination agreements etc

• In-house Franchising expertise to keep legal costs down

Further advice?For more information on the legal

requirements:1. Speak to a US Franchise Lawyer (eg

Mary Beth Brody at Faegre & Benson, mbrody@faegre.com, www.faegre.com)

2. Visit the NASSA website (North American Administration Association Inc.) for some useful FAQ’s: http://www.ftc.gov/bcp/franchise/amended-rule-faqs-shtml