THE FRANCHISOR FEASIBILITY STUDY - the "Plan for Success"

The very first step in the establishment of a franchisor feasibility study is to determine the feasibility of developing a potential or existing business into a franchise system. The feasibility study should contain that information in the following five areas which will help the franchisor make a "go or no-go" decision:  (1)  marketing, (2)  management, (3)  accounting, (4)  finance, and (5)  legal.

For the franchisor this will allow them the opportunity to put in writing the vision and dream which they have been developing. The franchisor needs to properly determine and analyze their position to know if they will be able to:

(1) properly administer the franchising program, 

(2) to support the franchisees through administrative and marketing functions in a profitable fashion, and 

(3) will or will not benefit by franchising the business setting. 

When these questions are answered affirmatively by the franchisor, then the franchisor needs to take the next step in deciding to become a franchise organization.

The franchisor and franchisee will both deal with the market place. The franchisor must recognize, though, that they have two distinct target markets: 

(1) franchisees and 

(2) consumers. 

The franchisor, therefore, needs to develop a feasibility study that will show them: 

(1) if the prospective franchisee will or will not be profitable, 

(2) if the proposed product or service does or does not have sufficient "utility" or customer demand to develop profits, 

(3) if the business operation is sufficiently attractive for the consumer public and 

(4) if the prospective franchisee will be more successful developing a business through this franchise unit than through an independent business. 

When all these questions are answered in the affirmative, then the franchisor has the strong possibility of developing and succeeding when building a franchise organization.

The feasibility study should show that it is, or is not, beneficial for both parties to enter the franchising arena. If the plan shows that it is beneficial to only one of the two players, then the franchising program will not succeed in the long run and neither the franchisor nor franchisee should become involved. It is important to understand that the failure of one unit generally results in the failure of other units for similar reasons.

The well prepared franchising feasibility study addresses critical areas found in most business plans. However, this "Franchisor Feasibility Study" contains certain elements that are not found in any other business plans. The franchisor feasibility study contains six content sections including:

(1) executive summary, 

(2) marketing, 

(3) management, 

(4) finance and accounting, 

(5) legal aspects, and 

(6) appendices. 

Each of the five "substantive" areas (items 2 through 6), explain the franchising approach that will be followed in your particular franchise. These areas will indicate the prospects for success or failure when properly developed. This business plan will allow the franchisor to see in writing the vision and direction that they have been dreaming about. The feasibility study is the "plan for success."

 

EXECUTIVE SUMMARY

The executive summary (limited to a maximum of 1,000 words, or three pages) serves to summarize and capsulize the information contained in the franchisor feasibility business plan and is written after the other sections have been

developed. This section highlights the major findings in each of the primary content areas and explains the overall feasibility of the franchising program. 

The executive summary will also discuss the key personnel, start-up schedule, competition, funds requested, collateral required, fund uses explained and even the fund repayment schedule. The executive summary may change from time to time after the initial business plan has been developed because of the changing conditions of the economy and of the franchise itself.

The executive summary should include paragraphs about:

A.  Company name, address and contact person.

B.  Type of Business - Mission or Vision statement

C.  Company Description

D.  Key Personnel

E.  Start-up schedule

F.  Competition

G.  Funds needed and/or requested

H.  Fund Use Statement

I.  Fund Repayment - (how money borrowed will be repaid) 

MARKETING

The marketing section discusses the processes of the distribution of goods and services to potential customers to satisfy their wants and needs. However, it is important that the franchisor recognize and realize that there are two separate and distinct target markets.  These two target markets include (1) the franchisee and (2) the end consumer.  

The marketing section will investigate the vision or mission statement of the franchisor coupled with the major marketing objectives or goals which they have been developing.  In addition, this section will investigate the market potential of the products and services, the competition, site locations, price recommendations, customer promotion/marketing/advertising, and even the grand opening plans.             

The marketing section of the feasibility study is terribly important to the success of the franchise. It should be developed with the utmost care and thoroughness.  The franchisor should be able to write down and explain each and every item contained therein.

   VISION/MISSION STATEMENT

What is the big picture?  What do we want to be doing in the long run?  What is the vision or dream which the franchisor has for the start-up, growth, and development of the franchise business?  This is of critical importance to the franchise organization.  

RULE OF THUMB: Without a vision, the business will perish.

  Marketing Objectives and Goals

The franchisor should list down what the basic and goals are for the next three to five years.  These objectives may often include the start-up of the first franchise, as well as the awarding of the 100th franchise unit.  The franchisor needs to determine what they ultimately want to do and when they are planning on doing this.  The goals and objectives should specify what marketing plans are to be developed for the next three to five years. 

  Products/Services

Probably one of the most difficult aspects of any business plan is the explanation for all the products and/or services that are going to be provided by the business.  This may sound rather mundane and simple.  However, when you finally develop it, you need to explain in detail what products are going to be offered and how are they going to be used.  

You also need to discuss in this section the target market including who, where, and how many people will buy.  Included in this section will also be the demographics of the target markets such as age, sex, income, marital status, and education.  All products or services to be offered need to be listed.  If you choose to open a men's shirt store, then you need to list down all the brands, sizes, and general descriptions of shirts that will be offered as well as any socks, or t-shirts which might also be sold.

  Customer Promotion/Marketing/Advertising

What promotion or advertising are you going to use to promote to the prospective franchisee? Remember that the franchisor has two distinct target markets: (1) franchisees and (2) end consumers.  You need to develop the advertising to promote to the franchise as well as to promote to the end consumer.  You need to be able to develop the media mix (newspapers, billboards, yellow pages, etc.) that you will use in developing and promoting your products.  You also need to explain which promotions, and direct selling or public relation announcements that you wish to use in developing your system. 

  Pricing Strategy

The franchisors are allowed to only suggest prices or pricing structures to franchisees.  The franchisor is not allowed to dictate price requirements for this is a violation of antitrust regulations.  Before making any final determination, however, about a specific price recommendation it is important to determine the costs schedules at various levels of production or promotion cost per unit.  The "ideal" price is based upon the costs, as well as the profit desired but this may of necessity be changed because of direct competitors and their pricing structures. 

Site Selection Criteria

It is not that terribly important where the franchisor locates their headquarters' organization.  It is, however, terribly important that the franchisee be located in the right place to attract and draw customers.  Among location theorists there is a rule for retail business success.  

RULE OF THUMB: The three major criteria for retail business success include: (1) location, (2) location, and (3) location.  

Where are you going to locate the franchise and why?  What are the basic demographics associated with each site selection including: sex, income, marital status, and education.  What are the psychographics or lifestyles of the customers in that area?

  GRAND OPENING PLAN

Many franchisors have learned that it is appropriate to help provide the franchisees with a grand opening plan and program.  This allows the franchisees to not only to be open but also provides them with the excitement of drawing larger crowds to the grand opening affair.  The grand opening plan will explain who is going to be doing what, when, where, how and why.  This grand opening plan should also reflect the costs of both the franchisor and the franchisee.  The

franchisor at times will assume some costs for the presence of staff personnel that will assist the franchisee and their new staff in the development, training, and opening of the franchise unit.   

CUSTOMER ADVERTISING

The franchisor may help the franchisee by preparing the initial advertising slicks, yellow page advertisements,  Grand Opening advertisements, newspaper and media advertisements, an annual advertising calendar (if appropriate), public relations / human interest news stories for the press, and any other promotions and direct selling materials that the franchisee should use.  Advertising is a positive way of informing the general public about your products and services. 

MANAGEMENT

Management is generally defined as "getting things done through people."  In franchising, management may be the most crucial element of the franchise program.  The management personnel are going to help lead you to success or failure. The two main reasons for failure in business are (1) poor management and (2) lack of capital.  The management section is designed to outline who the franchise key people are and what they will be doing, the organization structure, the basic policies, the operations manual, training manual, and franchise pert chart. 

  Key Personnel  

Any organization is going to be structured around the key personnel in that organization.  Whether in a one man operation or a ten man operation, a franchising organization is going to be structured around the key individuals.  The major key player is going to be the franchisor, sales manager and operations manager.  The franchisor, sales manager and operations may be simply two people, but the sales manager and operations manager need to be distinct and different people.  In addition, there may be other staff members (trainers, sales people, field staff and marketers) who are the key personnel in the development of the franchise system.  This section needs to answer the question of which key personnel are going to be doing what, when, where, how, and why. 

  Organizational Structure

The franchisor needs to be able to develop an organizational chart which diagrams and describes the organization relationships of their own operation.  In franchising, this initially consists of two distinct and different business classifications: (1) sales -- to prospective franchisees, and (2) operations -- of the franchise units.  This organizational structure may consist simply of a franchisor with a director of sales and a director of operations.  However, more complex franchising organizations would consist of the CEO who oversees the operations of sales with operations being divided into training, products, services, marketing/advertising/promotion, finance and record keeping.  The franchise system initially is fairly simple but needs to be divided distinctly between sales to prospective franchisees and operation development. 

The person over sales is generally the individual who will recruit and solicit prospective franchisees. They will court, date, and propose to the potential franchisee.  If the franchisee is awarded a franchise unit and agrees to the contract conditions, then a marriage date is proposed and everyone comes to the altar.  Surprisingly, the franchisee leaves with the operations director and will seldom see the sales director throughout the remainder of their franchising period of time.  

While every organization whether a family, household, complex giant corporation, or franchise unit requires organization, the franchisee also, to be a success, needs to develop organization relationships to function effectively.  The organization structure develops a chart that describes the organizational relationships between individuals within the franchise unit.  This may simply describe the relationship between the franchisee and one or two employees.  However, this may also describe the relationship between the franchisee, the managers, assistant managers, and staff persons. 

  Franchisor's Policies

The franchisor should develop policies to regulate the activities of the franchisor organization and also suggests policies to help regulate the operations of the franchisee organization.  These policies should include the salary and wage structures of individuals involved.  Additionally, the franchisor should explain the recruiting techniques, job descriptions and performance evaluations which will be used in the franchisor headquarter organization, as well as those recommended for the franchisee organization.  The wage and salary structure should be developed including all benefits and incentives which may be provided for each organization.  Additionally, internal policies such as sales, employee grievances, general policies, and financial controls should be developed for both organizations.  Also, external policies such as credit, checks, layaways, returns, and general external policies dealing with the customer should be developed for both the franchisor and franchisee operations. 

  Franchise Operations Manual

One of the most arduous and burdensome tasks of franchising is the development of a franchisee operations manual.  The franchise operations manual is obtained by the franchisee from the franchisor on a loan basis.  This means the franchisor is going to have

to develop a franchisee operations manual.  The operations manual should explain how to run every aspect and operation of the business.  This is a time consuming task and is best handled by those people who are actually involved in the day-to-day operations of the business.  They should be involved in writing down the details of what they are doing and how they should best be done. 

  Franchising Training Manual

In the initial start-up stage of many franchising organizations the training manual will be the same as the operations manual.  However, as the organization grows, a training manual is generally developed separately from the operations manual. The manuals generally explain how much training and what kind of training the franchisor will offer not just to the franchisee but also to the franchisee managers, assistant managers, and staff people. 

  Pert Chart

Pert is an acronym for project, evaluation, review, technique.  The pert chart is a simple delineated set of related events presented in sequence of their happening.  Generally time periods are identified to reflect the time requirements for each activity or event.  By identifying all the time required, the franchisor would be able to develop a critical path which allows sufficient time to complete all the tasks of the project.  The pert chart is a simple useful tool which the franchisor should use in establishing a franchise unit.  These charts illustrate the required steps from the initiation of the franchise idea to the "grand opening" of the first unit by a franchisee.  

Additional pert charts can be developed for the prospective franchisee from the time they are originally contacted to the "grand opening" of their franchise unit.  These two pert charts then allow the franchisor to look at the various task and time elements required to accomplish all tasks necessary to start a franchise.  The pert chart is a useful tool for the franchisor and allows them to determine all steps absolutely essential for the development and start-up of the franchise system as well as for each and every franchise unit.  By utilizing these charts the franchisor can follow the development of the franchising system and the development of each prospective franchise as they complete the steps required to complete their individual units. 

FINANCING AND ACCOUNTING

The priests of Ur in Mesopotamia created record keeping systems around 3200 B.C. to keep track of the transactions between the priests and the public.  Today these record keeping systems are referred to as accounting systems and have developed into major financial systems which allow us to understand the use and flow of cash in a business operation.  It is essential to the proper start-up and conducting of a franchise business to determine the financial projections necessary for the franchisor to begin operations, as well as to estimate the finances required for a franchisee to start a business.  Therefore, the franchisor needs to develop and keep two sets of financial records: (1) franchisor financial records, and (2) franchisee financial start-up records.

The franchisor records may be broken into the following sections: start-up or turnkey costs, funds available, equity available and investment cash, pro forma income statement, pro forma balance sheets, pro forma cash flow statements, break-even analysis, ratio analysis, and provisions for taxation.  These records need to be developed for both the franchisor's system as well as the individual franchisee unit system.   

Start-up or Turnkey Costs

The franchisor should list down all start-up or turnkey costs required to actually start the franchising system.  Many franchisors believe that all you have to do is say franchising and you go out and sell franchises to friends, relatives, or neighbors.  This is not true.  Franchising is regulated by the U.S. government through the Federal Trade Commission and certain regulatory requirements require financial outlays even before franchising is started.  Part of the start-up costs for franchising would be the legal costs which include the development of the Uniform Franchising Offering Circular (UFOC) and the franchise agreement or contract.  These legal costs have been known to be anywhere from $10,000 to $60,000.  In addition, other start-up costs may include separate land and building, as well as staff, before beginning the franchising process.  It is quite often that the franchisor will bring aboard someone specifically to direct the sales component of the franchising system as well as someone to direct the development of the operation system for the franchising program.   

Pro Forma Income Statements

The major accounting records kept by a franchisor and a franchisee at the very least would include:

(1) the income statement (profit and loss statement)

(2) the balance sheet

(3) cash flow statement

These three financial statements provide valuable information for the franchisor to make the correct financial decisions concerning the initiation, growth, or expansion of the franchise system.   

  Income Statement

The income statement (profit and loss statement) is simply a record of the revenues and expenses developed by the business in a given time period, generally one year.  The profit is shown on the income statement through the identification of sales from  which expenses are subtracted leaving the profit.  The income statement is usually prepared on a monthly, quarterly, or yearly basis and indicates the profit/loss relationship resulting from the sales and expenses incurred by the business.   

Balance Sheet

The balance sheet is an accounting statement which is a "snapshot" of the financial condition of the franchise business at a specific period of time.  This financial statement relies on the basic accounting equation and is often called a "statement of financial position of the business." The accounting equation is:

          Assets = Liabilities + Owners Equity  

The balance sheet differentiates between money used by the franchisor for a short period of time -- less than one year (current assets), and money used for longer periods of time -- more than one year (fixed assets).  The balance sheet will also indicate the different between the monies received from creditors or loans (liabilities or debts) and funds put into the business by the owners (owner's equity, investment, or retained earnings).   

Cash Flow Budget Statement

Probably one of the most useful financial statements used by franchisors or franchisees is the cash flow budget statement which indicates the flow of money through the business.  The cash flow statement is generally developed on a monthly basis and depicts the business over a period of time on a monthly basis generally from one to five years.  The monthly cash flow statement indicates all cash received as revenues and cash expended as expenditures.  The net total is the cash flow or "profits" of the business during that time period.  The cash flow statement (pro forma statement) anticipates the short falls of money during specific seasons or cycles of the business.  The cash flow statement allows the franchisor to see when funds will be short or when there may be an excess of funds.     

Break-even Analysis, Ratio Analysis and Taxes

The break-even analysis refers to that point in the franchise business when revenues (income) exactly equal expenses (costs of doing business). This financial position is often expressed in mathematical equations or in line graphs with separate lines representing variable costs, fixed costs, and total revenues of the firm.  At the point of the intersection of the total costs and revenue lines, the business is neither making nor losing money and is referred to as the break-even point. 

The ratio analysis is a method of determining the financial strengths or weaknesses of the franchise business.  Ratios may be used by the franchisor from one year to the next to determine if business is growing or failing.  Financial ratios may also be used to compare one business against another and ratios are often used by franchisors to compare one franchisee with another franchisee.      

The franchisor should also look at provisions for taxes which must be paid.  These taxes should include federal, state, social security, workman's compensation, sales taxes, business taxes, property taxes, and employer related taxes.  All businesses need to work and adhere to the taxing liabilities in their state and nation.    

LEGAL ASPECTS

There are certain legal requirements that a franchise operation must be aware of. These legal requirements generally are based upon federal or state laws. The legal obligations of a franchisor before starting a franchise include the development of a Uniform Franchise Offering Circular (UFOC) as well as a franchise contract or agreement. 

The uniform franchise offering circular is explained in much greater detail in Chapter 7 of this guide. The UFOC is basically a requirement of the Federal Trade Commission adhering to the federal franchise disclosure rules of 1979 and requires the disclosure of twenty-three specific items relating to the franchising business.

In addition, a franchise agreement or contract needs to be developed for the franchisee to sign. The franchise contract or agreement generally lasts from ten to twenty years in most cases, although some may be for as little as one year and some are for perpetuity. The franchise agreement is designed to explain all the contractual relationships between the franchisor and franchisee including exclusive territory, fees, royalties, training, obligations of franchisor and obligations of franchisee. In addition, an important section concerning terminations and nonrenewals is also contained in both the UFOC and franchise agreement.

 

Appendix

The appendix is an important, useful visual aid which contains layouts, diagrams, analyses, exhibits, and illustrations which refer to the franchisor and franchisee systems. An expanded appendix could even include complete training manuals, advertising manuals, operations manuals, sales manuals, and all site or store layouts. The well developed appendix often enhances the possibility of the successful recruiting of prospective franchisees.

 

SUMMARY

One of the most important aspects of developing the franchise is the actual development of the franchisor feasibility business plan. This business plan will

determine whether the franchisor should go or not go into the franchise business. The feasibility study is generally divided into six major areas including executive summary, marketing, management, finance and accounting, legal, and appendices. Each section provides important knowledge and information to the franchisor. This document should and can be used as the guide for the new franchisor and what they do during the first one to five years of operation.

The franchise plan is one of the most useful and important tools the franchisor will even develop. Once the franchise plan has been properly developed, it can be updated on an annual or bi-annual period.