Grow Market Lead
Market
trends
BY JACOB GROSSHANDLER
Support Your Local
Franchisees
Strong field support boosts
continuity and profitability
F
ranchising has proven itself to be a bellwether
business model, surviving the financial crisis and
adding units since the early days of the current
economic recovery. Between 2008 and 2013, the
franchise community netted more than 25,000 units, a
CAGR of 1 percent. This is impressive, given the economic
environment. Praise should be given to the hard work of
development staffs across all of franchising for executing
in a tough environment.
Given these successes and the emphasis franchising places
on growth, it is easy to continue to push for market share and
to allocate additional dollars to development efforts. However, before finalizing your budget, answer this question: How
many of your units, regardless of the reason, closed their doors in
the last 3 years? If the answer is more than zero your brand is
likely leaving hundreds of thousands of dollars on the table.
Every unit closure represents a lower return on dollars
allocated to development and training. In other words, if you
are not adequately supporting your franchisees you are driving your ROI, earnings, and cash flow lower.
Examining a sample of 38 franchise concepts, FRANdata
found that brands with a below-average ratio of field support
staff to franchised units and franchisees tend to experience
lower continuity rates and higher real business failure rates;
and brands with an above-average support ratio tended to
maintain a higher continuity rate than brands with a belowaverage support ratio.
Although the differences were less than 2 basis points in
both cases, in the context of unit closures, this translates into
significant money.
To be clear, there are more dynamics at work here than
just the impact of field support. To dissect these dynamics, it’s
best to start with simple relationships that can be measured,
which is what we have done here.
Let’s shift our attention from broad trends to a specific
case. We examined a top-performing brand in franchising
with above-average support. At the end of 2012, the brand
operated approximately 400 franchised units and maintained
a continuity rate of 100 percent, meaning that no units closed
in that calendar year. The franchisor had one field support
staff for every nine units and generated about $87,700 in
royalty revenue per franchised unit.
If this brand had a below-average support level, it would
have shed five units that year, with a resulting loss in royalty
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revenue of about $485,500 for that year. Assuming an average remaining term of five years for those five units, the total
revenue loss over time would have been $2,292,500. What
impact would $2.3 million have on your brand’s ROI?
For this brand to maintain its 1:9 support ratio, it must
add head count to keep up with unit growth. For the past
three years, this franchisor opened an average of 14 units. If
14 franchised units were added in 2013, two new field staff
would have to be hired to maintain that support level. The
average salary expense for this brand’s field support staff is
$61,000. Thus, the franchisor nets a gross profit, even when
accounting for taxes, healthcare costs, and other associated
labor costs.
Over the total life of those 14 unit agreements, the franchisor will spend approximately $1.5 million on the two additional field support employees’ labor costs (this assumes
2012 employment cost remained level for the life of the
agreement). Over that 10-year unit agreement period, this
would generate a gross profit, net labor, of $9.9 million (this
figure excludes any development and training costs associated with the 14 franchised units, and any travel and other
non-labor expenses related to providing ongoing support; and
assumes that average unit revenues for 2012 remain level for
the life of the agreement).
Without proper support, a brand’s continuity rate is likely
to decline. If five of those 14 new units were to close halfway
through their terms, the gross profit would fall 42 percent,
to $5.7 million. What successful business accepts 58 cents
on each dollar owed, when they can take steps to improve
remittance?
A unit failure is not just a loss of market share, it also triggers a diminished ROI for the franchisor. It is not enough just
to sell additional units. Look across departments and measure
outcomes. Empower your employees and provide incentives
for them to collaborate across functions. Does your head of
support have the means to voice concerns and effect change
on specific selection criteria likely triggering unit failures?
Can your finance officer project the expected return for each
additional unit sold? Are you paying commission just on unit
sales, or is there also a continuity component? Have you defined your development and support KPIs? Are you tracking
the right data and measuring the right outcomes?
A franchise system is a dynamic organization. Unit growth
and corresponding market share are only one component.
Managing across departments while measuring outcomes can
produce higher financial returns. While development should
be applauded for each unit sale, the long-term success comes
in keeping it open for the full term of the agreement. In the
end it is not just about how large your franchise system is,
but also how profitably it is run. n
Jacob Grosshandler is a research analyst at FRANdata, an independent research company supplying information and analysis
for the franchising sector since 1989. He can be reached at 703740-4713 or [email protected].