IS IT A FRANCHISE IN NAME ONLY? SBA’S NEW RULES, A FRANDATA STUDY ASSIST ANCE T O HAVE F E WE R L OSSE S IN YOUR PORT F OL IO I nfo rma tio n a nd Ana lysis fro m the F ra nc hise Busine ss Mo de l E xpe rts
WHY ARE WE HERE? Share insights on how the SBA Franchise Directory process is working, and an easy way to understand navigating the new rules with practical tips. Understand the role of the Franchise Directory and the Franchise Registry in your lending process. What you don’t want to do! Insights from a study on over 1,700 franchisors to help you understand and assess emerging franchise brands – and avoid unnecessary losses! What else do you want to make sure we cover before leaving today?
FRANCHISE EXPERTISE DELIVERS FRANCHISOR VERTICAL Franchisor Best Practices Provide best practices on the 12 pillars of responsibility of a franchisor to LENDER VERTICAL improve the business model that franchisees invest in. Franchise International Market Research Improve And Grow Bank Cost of failure internationally is enormous. Franchise Portfolios Franchise Development Services Improve Franchisor Capital Access Advance Bank Franchise Private Equity Due Diligence Underwriting Capabilities Advise PE firms purchasing franchisees and franchisors whether to buy. 2018 PE firms either backed out of transactions, lowered the purchase price, and advised to how to realize white space
VALUES OF FRANCHISE EXPERTISE FRANCHISOR LENDER VERTICAL VERTICAL FRANdata brought forward quality analysis and “The Franchise Registry, combined with FRANdata’s perspective in the Franchising and Dry Cleaning arenas. support team, is a great service that includes a unique They were able to gather and analyze financial and franchise system credit scoring model to augment our operational information as well as provide us with helpful internal underwriting process. It provides analytics and insights and metrics that enabled us to focus our strategy. credit risk information that is accessible and useful in – Jeff Wampler CEO, Tide Dry Cleaning developing and monitoring our underwriting framework, as well as industry details that are helpful in our discussions with regulators.” We have relied upon FRANdata to deliver extensive and – John Coffin, Atlantic Capital Bank relevant country analysis. Given their unique expertise around the franchise model, they have provided us with information that helps us ensure successful expansion. We evaluated the FUND score with its supporting attributes and – Kathy Daniel, Home Instead, Director of International discovered that by combining FRANdata’s brand-level risk Business Development information with Experian’s Financial Stability Rating, clients can get a more complete picture of severe delinquency or business failure I use FranData because they get me the exact risk for individual franchisees. This should be particularly useful to information I need, allowing for laser focus in my clients with portfolios that are rich with franchise customers. marketing efforts. – Piew Datta, Experian, Director of Commercial Data Science - Oliver Campbell, –1- 800-Radiator FRANdata has been a tremendous resource for helping us build out our The financial consultation call with Darrell Johnson was target marketing lists. Their research is comprehensive, and data is extremely valuable. The insights into the lending community complete and accurate. Plus, everyone I deal with is pleasure to work and my company were helpful and provided me with additional with and extremely responsive with all of our last-minute requests. information that will aid me in future decisions. Well worth the - Intuit time. – Rebath
WHAT IS A FRANCHISE? Business in a box Proven success Support Training Small business American dream A chance. An opportunity Hard work Quick buck Hot Investment
FEDERAL LAW – FTC RULE Under the FTC Franchise Rule, there are 3 elements of a franchise: 1. Trademark. The franchisee is given the right to distribute goods and services that bear the franchisor's trademark, service mark, trade name, logo, or other commercial symbol. 2. Significant Control or Assistance. The franchisor has significant control of, or provides significance to the franchisee’s method of operation. Examples of significant control or assistance include: approval of the site requirements for site design or appearance designated hours of operation specified production techniques required accounting practices required participation in promotional campaigns training programs providing an operations manual 3. Required Payment. The franchisee is required to pay the franchisor (or an affiliate of the franchisor) at least US$500 either before (or within 6 months after) opening for business. Required payments include any payments the franchisee makes to the franchisor for the right to be a franchisee. These include franchise fees, royalties, training fees, payments for services, and payments from the sale of products (unless reasonable amounts are sold at bona fide wholesale prices). If all 3 elements are present, then the relationship will be a "franchise" for purposes of the FTC Franchise Rule and for purposes of the SBA rule.
RED WING SHOES CASE STUDY FACTS » Dealer Agreement » No FDD » Agreement is entered into with Your Borrower and Red Wing Brands Of America (in Red Wing Minnesota!) » Dealer wants to open and operate a new Red Wing Shoe Store » Non Exclusive Right to sell Red Wing Shoes products in the Market » Red Wing will supply deal with dealer requirements of products, packaging, forms and other store supplies at prices and on order, delivery and payment terms that Red Wing determines. (b) Make available to Dealer for a reasonable fee, and at Dealer’s option, signs, advertising and promotional materials, catalogues and other sales aids that Company periodically develops for use in operating a Red Wing Shoe Store; (c) Make available for a reasonable fee, and at Dealer’s option, a training program for operating a Red Wing Shoe Store and the sale of Company Products; (d) Make available for a reasonable fee, and at Dealer’s option, Company’s Point of Sale (POS) system, an integrated point of sale and accounting system; (e) Make available for a reasonable fee, and at Dealer’s option, marketing services to assist Dealer in operating the Store; (f) At least annually, discuss and establish with Dealer inventory levels, annual sales goals, and other operational and business objectives;
RED WING SHOES CASE STUDY » Dealer has to construct, remodel, equip, establish and open Store as a Red Wing Shoe branded store » Must maintain Store premise in strict compliance with Company’s trademark guidelines, standards, operating procedures, etc outlines in SOP Manual » Must Refresh Store from Time to Time » Store Manager and sales personnel must successfully complete training programs » Must achieve and maintain minimum annual sales requirements Company may allow for other products to be sold not manufactured by Red Wing » Must purchase minimum inventory agreed to in advance, and continuously maintain » an inventory turn for the store of not more than 2.5, based on trailing 12 month same store sales » Term 5 Years and an additional 5 year term
IS RED WINGS SHOES A FRANCHISE? What doesn’t meet the test? What meets the test?
RED WING SHOES CASE STUDY Red Wing Shoes does not create an FDD for its dealers because it does not meet the Federal Trade Commission’s definition of a franchise. It does not meet the third part of the FTC test which is a required payment . Dealer and Company agree that the phrase “at Dealer’s option” means that Dealer is under no obligation to order, use, or accept the service or item offered by Company. Dealer represents That Dealer is willing and able to establish and operate the Store without the use of any optional services or items offered by Company. Dealer is required to purchase inventory. The FTC does not consider inventory purchases a required fee. » The Commission recognizes that it is, as a practical matter, virtually impossible to draw a clear line between start-up inventory that is purchased at the franchisee's option, and that which is purchased as a matter of practical or contractual necessity. In order to minimize the ambiguity in this respect, but consistent with the Commission's objective that "required payment" capture all sources of hidden franchise fees, the Commission will not construe as "required payments" any payments made by a person at a bona fide wholesale price for reasonable amounts of merchandise to be used for resale. The Commission will construe "reasonable amounts" to mean amounts not in excess of those which a reasonable businessman normally would purchase by way of a starting inventory or supply or to maintain a going inventory or supply. » BOTTOM LINE: There aren’t any fees paid to Red Wing to start the business – SBA questioned fees such as their mood media and measure fit device, but those were paid to vendors who are not affiliated with the franchisor
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