Unit Economics: Translating Unit Performance Into Franchise Sales

By: Joe Mathews
Published: November 2nd, 2011

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 financial successes of future franchisees.

As you read this, thousands of potential franchisees are online searching for a way to make a better life for themselves and their families. They may not contact you until they first satisfy three basic questions 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.

So 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 a sale.

Play up the ROI

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 FPRs are more important than ever. Make this information as public and as accessible as possible. In your PR materials, on your franchise opportunity website, and on the social media front (and under the scrutiny of your attorney), circulate stories highlighting your franchisees' financial successes.

Keep in mind there is no universal measure for financial success. The financial results your opportunity predictably produces must 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. These include:

• Rapid break-even. Many current franchise candidates do not have as much financial staying power as they had in the past. Because of their depleted net worth, reduced 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 offer franchisees the opportunity to cross the break-even point before month 6 and to be in sustainable cash flow positions by month 12.
• Replacement income. Many franchise candidates are willing to tighten their belts only for so long. They want to get back to past earnings levels as quickly as possible. (Keep in mind "the way it was" is relative to each 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 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, more content and information than ever before will be posted by small business and franchising experts on blogs, online publications, and other forms of social media, waking up candidates to an important criterion they may be glossing over today.

Action items

1. 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.
2. 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.
3. How long does it take for a new franchisee to ramp up? If a new franchisee is not crossing the threshold of breakeven in 6 to 12 months, you may have a unit-level economics problem. Take action.
4. 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. Fix it.

Bottom line

Your business needs to be producing acceptable returns for the vast majority of franchisees according to the franchisees' definition of "acceptable." Also, your success stories need to be heard. Franchisors and franchisees need to aggressively share their stories.

So dismiss the results of the best and the worst, and focus on the middle. If these franchisees are not producing acceptable results according to your typical candidate's definition of "acceptable," your growth will halt. If the franchisee is achieving a desirable outcome, you are well positioned for growth!

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.

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