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.