When working with clients that are franchising their existing business I draw upon my franchise operations experience. Because of this, the tactics and strategies I recommend can be applied to existing franchisors.

Following are six areas that I focus on when developing a new franchise program:

1. The Franchise Program Must Have "Stretch"

When designing the franchise program and determining the initial franchise, royalty and advertising fees don't base your decision on extraordinary performance. Its unrealistic to expect a new franchisee to achieve the same results as the founder of the business who may have spent years building the business and understanding the market place. The financial model that is used to determine the franchise fees should have some "stretch" to account for the fact that not all franchises will get off to a rousing start. My suggestion for start-up franchisors is: if you're going to err in calculating fees err on the side of the franchisees. In the end, franchisors depend on their franchisees to help sell franchises by validating the success of the franchise program. Remember, that the franchise agreement can always be changed.

2. Develop and Commit the Services You Can Deliver

Don't establish services than you can't deliver. When this happens you're making a commitment to provide services you can't deliver. Often times franchisors promise prospective franchisees a bundle of services and tools that are not yet developed or cannot be delivered. In presenting the franchise to prospective franchisees be sure that the franchisor staff avoid sales puffery intended to impress the prospect. Finally, don't depend upon the franchise agreement ( the Franchisor Obligations Section) to address claims by franchisees that the franchisor made promises that are not being kept. Although this may be an appropriate legal defense, you can end up with significant franchise relations problems.

3. Build an Effective Website

Make sure that your franchise is represented by a quality website. A well designed website can help to generate customer and franchise leads. Before budgeting advertising dollars for lead programs be sure that your website is properly built. Include search optimization as part of your website program. Once you've fulfilled this objective you'll be better able to take advantage of other advertising opportunities. It doesn't make sense to spend ad dollars to drive franchise prospects to a poor website.

4. Have a Quality Operations Manual and Training Program

Franchisees need to have the benefit of a well constructed operations manual and training program. For a franchise program to be successful there must be an effective training program. The basis for the training program is the operations manual, which serves as the guide, teaching tool and reference for operating the franchise. Both the manual and training program must be evaluated by the franchisees in order to measure their effectiveness. The evaluation process is on-going.

5. Management Must be Involved in Franchise Operations

Companies that embark on a franchise program face the challenge of managing their existing business while directing the emergence of the new franchise company. Be sure that the appropriate financial and human resources are available to launch the franchise program while still managing the core business. Launching a new franchise can result in job duties and responsibilities being doubled. This advice is applicable to existing franchisors who stray from their franchise operations to work on new projects and responsibilities.

6. Don't Expand Beyond Your Capabilities

Start-up and existing franchisors can both fall prey to granting franchises in markets that are difficult to service and monitor. Factors that need to be considered include the complexity and structure of the franchise. Unit franchisees rely upon the franchisor for training and support while regional development programs utilize a local presence to market, train and support local unit franchises. A franchisor with far flung operations must have the staff and financial resources capable of servicing these disparate locations.

" Everything that irritates us about others can lead us to an understanding of ourselves. " Carl Jung

" The vision must be followed by the venture. It is not enough to stare up the steps-we must step up the stairs." Vance Havne

The most common method of franchise growth is through direct franchising using unit franchise agreements. This program places the focus on expanding the franchise network via individual franchise agreements. Under the unit program the franchisee is granted the right to operate a single franchise in a specific geographic territory. The benefits of utilizing a unit franchise strategy includes more control over the selection and operation of the franchise, only one territory is at risk versus a large geographic area, the franchisor can more readily control the expansion of the franchise network and dealing with a smaller unit franchisee may be easier compared to a large well capitalized operator. The primary disadvantage can be much slower growth and the fact that the cost of franchise leads may not be as productive.

For more growth oriented franchisors there are options to the unit franchise model. These options can provide more rapid network growth and lend themselves to small scale franchise concepts.( I exclude the area development concept which represents a commitment by a single franchisee to open a specific a number of locations over a set period of time. )The most popular fast-track franchising vehicle in use is the regional or area developer program.

Regional Developer Agreement.

Under this arrangement the regional developer is a franchisee with the rights to develop a particular region or territory. The developer is usually responsible for marketing and selling new franchises, providing training and on-going support. For these services they may receive a portion of the initial franchise fee (50%) and the on-going royalty (40-50%). The individual franchise agreement is between the franchisor and each individual franchisee. The developer will pay an initial fee for the territory or region which could range from approximately $100,000 to $250,000 or more. This means that the developer has an investment in their initial franchise and the development rights.

Advantages of the Regional Development Strategy:

• The ability to achieve faster growth using well funded developers
• Outsourcing franchisee services to the regional developer allows a franchisor to digest a faster rate of growth without a diminution of services
• Maximize advertising budget and franchise leads by having a larger geographic area to franchise
• Share the development costs with the regional developers
• Maintain the contractual relationship with the franchisee. If the regional developer is terminated the franchise contracts remain in force between the franchisor and franchisee
• Introduce and promote the franchise brand into more markets

Some Potential Disadvantages to this Strategy:

• If the regional developer fails or creates problems, the franchise brand and image can negatively impact a large region or territory
• By virtue of the financial arrangement between the franchisor and regional developer some developers may not retain enough of the franchise fees to fund on- going growth. Hence the need for well capitalized developers
• The franchisor is delegating significant responsibility and control to the developer. If the developer fails the franchisor will bear a certain amount of responsibility in the eyes of the local franchisees.
• In some arrangements the developer pays the franchisor a portion of the initial and on-going franchise fees that is too high. This could ultimately lead to franchisor/developer relationship issues.
• Developers may be undercapitalized which prevents them from meeting their performance goals.

The regional development concept properly designed and implemented, provides an opportunity for franchisors to build a franchise network over a larger geographic area in less time.The objective is to design the right regional development program and use the best people you can find. This concept can also be used in distant territories in combination with a unit franchise program closer to the franchisor's base of operation.

" If you are failing to plan, you are planning to fail." Tariq Siddique

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McDonald's China to Issue Franchise Licenses `Slowly' By Stephen Engle and Samuel Shen .

Feb. 7 (Bloomberg) -- McDonald's Corp., which will grant four franchisee licenses in China this year, said it doesn't expect to issue more such permits in the world's fastest-growing major economy ``in the near future.''

``We're taking it very, very slowly,'' China Vice President Gary Rosen said in an interview in Shanghai on Feb. 5. ``The franchise business requires a lot of effort and right now, we have other priorities in China.'' The company will open at least 100 new stores in the country annually and half of them will be wholly owned drive-through outlets, he said.

The world's largest restaurant chain will transfer store operations this year to four Chinese women, who have been trained over the past 18 months, Rosen said. Of 789 McDonald's restaurants in China only one is franchised, while rival Yum! Brands Inc. has more than 1,700 KFC restaurants in the country, with about 37 franchised. Elsewhere, McDonald's is transferring store operations to franchisees at a faster pace, under pressure from activist investor Bill Ackman to boost the chain's share price. The Oak Brook, Illinois-based chain plans to reduce the percentage of restaurants it owns, Chief Executive Officer Jim Skinner said on Nov. 15. ``McDonald's is very cautious about franchising in China, as it wants to ensure its brand quality,'' said Chen Lei, a Shanghai-based analyst at BOCI Research Ltd. ``Though the franchise model enables chain stores to expand quickly and less costly, it's a challenge to management control.''

No other potential franchisees in China are currently being trained, as such licenses aren't a priority, McDonald's China spokeswoman, Stephanie Wang said yesterday. Tianjin Store McDonald's issued its first franchisee license in China three years ago in northern Tianjin, near Beijing. The fast-food chain owned 9,405 restaurants globally as of Sept. 30, or 29 percent of a total 32,065 outlets. The remaining units are run by franchisees and independent operators who use their own money to fund the businesses and pay McDonald's royalties. In the region comprising the Asia Pacific, Middle East and Africa, McDonald's has 2,616 franchised stores of a total of 7,822 outlets. In the U.S., 11,007 out of 13,774 stores are franchised. In Europe, 3,756 out of 6,403 are franchised, and in Latin America, 477 out of 1,656 are franchised. ``We're a franchise company and the long-term vision is franchising in China,'' Rosen said. ``But we want to continue to refine McDonald's China before we set up a franchising model.'' About 65 percent of McDonald's China outlets are wholly owned, with the remainder operated through joint ventures, Rosen said. Trailing Yum Louisville, Kentucky-based Yum, which also operates Taco Bell and Pizza Hut restaurants in China, had 1.5 percent of the nation's 1 trillion yuan ($125 billion) restaurant sales last year, the largest market share among food operators. To boost sales, McDonald's strategy has been to focus on selling beef in China and to open more 24- hour restaurants in the country. ``So many times, people say `are you localizing and will you develop Chinese food','' Rosen said. ``But we realized Chinese consumers do not want us to be another Chinese restaurant. We're a hamburger company.'' Another strategy is to increase the number of 24-hour outlets from 240 currently in China, as ``people don't stop moving around at 11 o'clock at night,'' Rosen said.

McDonald's is partnered with China Petroleum & Chemical Corp., or Sinopec, and will open 30 drive- through outlets at Sinopec gas stations in the next 18 months, the company said on Jan. 19. All the drive- through restaurants will be open for 24 hours a day, Rosen said. McDonald's' fourth-quarter net income more than doubled to $1.24 billion, the biggest increase in two years, spurred by rebounding sales in Europe, the company said last month. Shares of McDonald's gained 24 cents, or 0.5 percent, to $44.77 yesterday in New York. The stock climbed 31 percent last year, ahead of a 25 percent gain by Yum. To contact the reporter on this story: Samuel Shen in Shanghai Sshen3@bloomberg.net

In the next issue we'll report on KFC in China and their outstanding success.

" I am always ready to learn although I do not always like being taught." Winston Churchill

A great study for franchisors by Franchise Benchmark indicates the following key findings in color graphs:

• First E-mail click-through for Internet ads
• Completed franchise application time-lines

This information can help franchisors measure the effectiveness of their franchise marketing.

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