Money Changes Everything: Parlaying Unit-Level Economics into franchise sales

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.

Right now, as you read this, many thousands of potential franchisees are searching online for a way make a better life for themselves and their families. These candidates 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.

Implications

In the absence of credible information, human beings appear to be wired to make up a worst-case scenario to fill in their information gaps. 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, 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--in the absence of information to the contrary--they wrongly assume your business model won't work for them.

I 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 more to the list. In his classic 1968 Harvard Business Review article, "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. 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."

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 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.

Play up the ROI

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 (FPRs) are more important than ever. Make this information as public and as accessible as possible. On your 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 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. 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 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

• 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 breakeven in 6 to 12 months, you may have a unit-level economics problem. Take action.
• 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. 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 again that there is no such thing as "idiot-proof."

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.

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 for growth--as long as you pay attention to the other nine keys!

Joe Mathews is a founding partner of Franchise Performance Group, which specializes in franchisee recruitment, sales, and performance. He is a regular presenter at IFA conferences, an instructor with the ICFE, and a book author. 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.