Franchise Sales Key #1: Strong Unit-Level Economics

Franchise Performance Group has been studying and creating franchise sales "tipping points" since 2002. In this e-book we identify and explain the 10 Keys to Creating a Tipping Point. While these 10 keys apply equally to all franchise brands, each franchisor will need to craft their own tactics for each key. Even if you succeed in all 10 areas at the same time, when exactly your company will reach a tipping point is unpredictable. But I can tell you, based on my experience, it will happen. Conversely, if you fail in one or more of these 10 keys, regardless of how many franchises you are selling now, your development program runs the risk of coming to a grinding halt.

Strong unit-level economics. This single key is the greatest predictor of a franchisor's future success! All enduring franchise brands are built on a foundation of both the consistent successes of its existing franchisees and almost certain future financial successes of future franchisees. Bottom line: your business needs to be producing acceptable returns for the vast majority of franchisees according to the franchisees' definition of "acceptable." Also, these success stories need to be heard. Franchisors and franchisees need to aggressively share their stories.

Right now many thousands of potential franchisees are searching online for a way make a better life for themselves and their families. They may not contact you until they first satisfy three basic questions that every candidate has:

1. Does your business make money?
2. Is the business sustainable? Will it continue to make money into the foreseeable future?
3. Can I see myself in the business?

If, through your online presence, franchise candidates can predict that your model will satisfy these three concerns, you are much closer to your goal of filling your franchise sales pipeline with highly engaged and buyer-ready franchise candidates. Remember, these candidates often reach these conclusions through "guesstimation" before they talk to you.

If candidates can't quickly and almost effortlessly determine that your franchise model satisfies these three concerns, they'll quickly dismiss your opportunity before you have the chance to share the rest of your story. Most won't ever fill out a lead form or call, and you'll never realize how close you might have been to your tipping point.

Implications

If franchise candidates can't research your opportunity online and find some evidence that your business model produces highly predictable, long-term sustainable profits, they may automatically assume it doesn't. If they can't find evidence your franchisees are happy, then they may assume they aren't.

Right at this moment, somewhere in cyberspace, surfing the web, are franchise candidates who could and should buy your franchise. But perhaps they have either dismissed or glossed over your opportunity because they wrongly assume your business model won't work for them in the absence of information to the contrary.

Now we don't want to oversell the value of financial performance. While it's first and foremost on the list of what people are looking for, there is in fact more to the list. In his classic Harvard Business Review article entitled, "One More Time: How do you motivate employees?" psychologist Frederick Herzberg found that while an adequate income is critical to the satisfaction of an employee, money is by no means the only factor in this equation. On the one hand, Herzberg found money to be an "all or nothing" yardstick for bottom-line satisfaction. In other words, if the money is not right (by the employees' definition of "right"), people will discount all the other drivers and motivators, such as "making a difference," "learning," "new challenges," "loving the work," "flexibility," "control," and "personal achievement."

On the flip side, however, money alone typically isn't enough to keep someone's attention for very long. While many franchise candidates are unemployed or under-employed, other candidates in the franchisor's pipelines are already making a good living. However, aside from earning a steady paycheck, many can't find a compelling reason to go to work in the morning. Money alone isn't enough to keep their heads in the game. As long as the other quality of life and other drivers are available in your business model, many candidates will consider taking a short-term step back in earnings to experience the long-term quality of life and financial benefits.

Using a poker analogy, consider your financial returns as your ante to the franchise poker game. If you don't offer franchisees consistently strong returns, you don't have the ante, and therefore you don't have a seat at the table.

Carrying this logic forward, Item 19 and Financial Performance Representations are more important than ever. Make this information as public and as accessible as possible. On the PR materials, franchise opportunity website, and social media front (and under the scrutiny of your attorney), circulate stories highlighting your franchisees' financial success.

Keep in mind there is no universal measure for financial success. The financial results your opportunity predictably produce have to meet or exceed the expectations of your target franchisees. However, in the present economy many franchise candidates seem to have higher financial demands than in the past. Those heightened expectations include:

• Rapid break-even. Many current franchise candidates do not have as much financial staying power as they have had in the past. Because of their depleted net worth, reduced available liquid assets, and possible absence of other sources of income, they often have less tolerance for risk and red ink. Many of the higher-growth franchisors in today's market are crossing the break-even point before month 6 and are in sustainable cash flow positions by month 12.
• Replacement income. Many franchise candidates are willing to tighten their belts for only so long. They want to get back to past levels of earnings as quickly as possible. (Keep in mind "the way it was" is relative to each franchise candidate.) I believe many franchise candidates need to see a clear line of sight to "the way it was" between 13 and 24 months.
• Equity. Simply put, many of the franchisors we study produce little appreciable equity value. Many franchisees or many systems are lucky to sell their business for the money they put into it. While cash flow seems to be higher on the candidate's radar screen than equity appreciation, we believe more content and information than ever before is going to be posted by small business and franchising experts on blogs, online publications, and other forms of social media, waking the candidate up to important criteria they may be glossing over today.

Action items

Bite the bullet and create an FPR, and introduce this information early in the recruitment process. Your target franchise candidates should find this information attractive, enticing them to take a deeper dive into your recruitment process.

What is the typical entry cost for a new franchisee? What is the typical resale price of your existing businesses? Which is higher? If resale values are not higher than a new franchisee's entry cost, you have a unit-level economics problem. Address it.

How long does it take for a new franchisee to ramp up? If a new franchisee is not crossing the threshold of break-even in 6 to 12 months, you may have a unit-level economics problem. Deal with it.

How long does it take for typical franchisees to replace their past income and "get back to normal?" If franchisees manage the business full-time and cannot return to their past levels of income within 18 to 24 months, you may have a unit-level economics problem. Take action.

Many franchisors look at their top franchisees and say, "See? My model works." Then in the next breath they dismiss the results of average and underperforming franchisees, saying, "If they only followed the system, they would be winning too."

But that isn't how franchise candidates or financial institutions look at it. It's a simple fact that any franchise system of any scale has top performers who set the bar for everyone else. Put these performers in most franchise systems and they will replicate their success. On the flip side, each system gets infiltrated by some franchisees who have the uncanny ability to prove time and time again that there is no such thing as "idiot proof."

So dismiss the results of the best and the worst, and focus on the middle. If your middle-of-the-road franchisee is not producing acceptable results according to your typical franchise candidate's definition of "acceptable," then your growth will halt. If the franchisee is achieving a desirable outcome, then you are well positioned to hit your tipping point - as long as you pay attention to the other 9 keys!

Joe Mathews is a founding partner of Franchise Performance Group, which specializes in franchisee recruitment, sales, and performance. This article is from his free, downloadable e-book, The Franchise Sales Tipping Point: 10 Keys to Creating a Franchise Sales Breakthrough. Contact him at 860-567-3099 or joe@franchiseperformancegroup.com.