Strategic Decisions for Early Franchisors Whitepaper
WHITEPAPER: Strategic Decisions for Early-Stage Franchisors’ Sustainable Growth
Introduction
Franchising can be a powerful strategy for business growth, allowing entrepreneurs to scale their operations, expand their brand, and build sustainable revenue streams. However, the path to becoming a successful franchisor is complex and requires strategic decision-making.
That is why leveraging the knowledge and skills of experienced franchise development consultants can be of enormous value to emerging franchisors. The right resource, whether in-house staff or an outside consultant, can provide appropriate guidance on financial, legal, strategic, operational and marketing/ sales aspects of your franchise program, and set you up for success.
This whitepaper is designed to help early-stage franchisors navigate key challenges and opportunities, offering insight on creating a thriving franchise system.
Section 1: The Annuity Value of a Franchise System
Understanding Annuity Value
One of the most compelling benefits of franchising is the potential for long-term, recurring revenue— commonly referred to as the annuity value. By establishing a well-structured franchise system, franchisors can create a steady income stream from initial franchise fees and ongoing royalties.
Annuity Value of a Franchise
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
Over the course of 20 years, a single franchisee could generate revenues in excess of $1.2 million for the franchisor.
In making decisions about your franchise program, it is important to keep a long-term perspective on issues in which quality could impact outcomes. Consider this: if a franchise company charges a $40,000 franchise fee, a $10,000 renewal fee, makes $30,000 in annual royalties, sells some products to franchisees at a 20% margin, and takes some rebates, a single franchisee could generate over $1.2 million in revenue -- without even accounting for their contribution to the brand value through advertising funds and their contribution to the total enterprise value.
Key Takeaway:
Franchising isn’t just about rapid expansion; it’s about building a sustainable financial model that rewards long-term planning and investment. If a decision you make on a consultant, an advertising agency, a salesman, or business strategy results in a single incremental sale ever, it is probably a cost-justified decision.
Section 2: Building a Franchise Growth Plan
Essential Components of Successful Franchise Programs:
1. Strategic Analysis:
Understanding where your brand fits, how to structure your franchise offering, and identifying expansion targets and goals.
2. Operational Blueprint:
Comprehensive procedural manuals and training programs to ensure franchisee success and maintain quality control across the network.
3. Sales and Marketing Strategy:
A viable method for attracting and converting qualified franchisees.
Key Takeaway:
A well-developed growth plan is not optional; it’s the foundation of a thriving franchise system.
Section 3: The Importance of Strategic Planning
How a Solid Strategy Can Impact Both Short- and Long-Term Growth
There are countless examples of business recommendations, contract terms and other considerations that could account for hundreds of thousands or even millions of dollars in savings or revenues, maximized growth potential, and/or the prevention of a major, costly disasters for franchise systems.
• Benchmarking and Competitive Positioning: if proper positioning results in the sale of just one single additional franchise for you each year, you could receive hundreds of thousands in incremental royalties – multiplied times the number of years you are selling franchises.
• Comprehensive Fee Analysis: Even the slightest adjustment, perhaps 0.5% to a 1% increase in the royalty rate, can add millions in incremental bottom line profits each year, plus an increased enterprise value.*
• Territorial Recommendations: Proper definitions can improve territory allocation by 10%, and just through the sale of one added territory in the top ten markets, the result would be an increase of millions in royalty revenues.
Section 3: The Importance of Strategic Planning (Continued)
Incremental Lost Profits From Underestimated Royalty
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
$1 Million in lost profits over five years and an estimated $14 million in lost incremental enterprise value!
*For the sake of argument, let’s just assume that you opened 10 units in year one, 15 in year two, 20 in year three, 25 in year four, and 30 in year five, for a total of 100 open units and that each of those locations averaged $1 million a year in revenues. If your royalty was off by 1% (perhaps you were at 6% instead of 7%), over the course of five years, you would lose out on $1 million of profits that would come right off the bottom line. And if you were to sell the franchise entity for fourteen times EBITDA at the end of year five (a number that is not at all unrealistic), your selling price would likely be nearly $14 million lower than it would have been if you had optimized your royalty rate from day one. Of course, there are a lot of assumptions here, but you get the idea. A very small mistake in calculating your royalty can have a huge impact on your earnings and on the ultimate value of your business. Yet most consultants will never take the time to develop staffing plans, complex financial models, or run sensitivity analysis on those models before recommending fees. Instead, they will just look at what others in the industry have done and will “go with the flow.” The problem: This assumes that a) your competitors have the same value proposition as you, b) your competitors have the same staffing as you, c) your competitors have the same pricing as you, d) you want to present yourself as identical to your competitors, and e) your competitors did not make any mistakes when they did their analysis.
Section 4: The Critical Nature of Franchise Documentation
Operations Manuals, Training Programs, and Quality Control Documentation
Whoever creates a franchisor’s Operations Manual and other key documentation should be familiar with a lot more than just the business model. A deep understanding of how manuals and other documents can create liability – and how to craft those materials so that they do NOT – is of utmost importance.
• Comprehensive Documentation: The right documentation can help sell additional franchises, whether due to perceived quality and attention to detail, or due to improved actual performance by franchisees. This can represent hundreds of thousands of dollars in added revenues over time.
• Litigation Prevention: The role documentation plays in the prevention of a single lawsuit or dispute, and the related savings in time, money, and reputation is invaluable. Savvy franchisors understand that it is well worth investing in the creation of manuals and other documentation through outside resources, especially those who have developed materials for hundreds of franchisors – and not one having their manuals used as the basis for a single lawsuit.
Consider This:
The average cost to work with a lawyer to settle an employment lawsuit is $75,000, or $125,000 for one that goes to trial.
• Quality Control: Perhaps of equal importance, consistently operated franchise units, and those without any negative incidents, provide immense value in the preservation of a brand, which can also translate to improved consumer experience, increased revenues, and incremental royalty streams.
Section 5: Marketing and Sales: The True Test of a Franchisor
A franchisor is not a franchisor until it actually sells franchises. And while many business owners have general sales experience, the franchise sale is very different from what may have been done historically in a given organization. Here are some considerations when undertaking franchise marketing and sales activities:
• Website Best Practices: Websites that are written and built for franchising best practices, allow franchisors to be found by the prospective buyer without detracting from consumer marketing, and can maximize marketing and sales efforts. A separate franchise website with a unique URL is essential to properly optimize both franchise and consumer search results by ensuring that Google does not get “confused” as to what you are promoting.
• Legal Compliance: Using a resource or agency that knows how to market franchises can mean less involvement from your franchise law firm in the review of these materials. By selecting people or agencies that can write a compelling message that franchise lawyers and stage agencies will find acceptable, you can save yourself months in the registration process – as bureaucratic regulators are given weeks in the approval process to respond to an ad that they find unacceptable.
Did You Know?
Eight states require you to submit franchise marketing materials for approval prior to their use. Does your internal team or outside advisor know which states those are, and what is permissible in each?
• Allocating Marketing Dollars: The best marketing plans are based on historical data. Specialist agencies can use accumulated data from hundreds of brands and tens of thousands of leads to help you optimize cost-per-lead and close rates.
• Qualifying Prospects: Knowing how to qualify potential franchise buyers is incredibly important. Defined qualification tactics can save the franchisor time and money, by streamlining the entire sales process. Disqualifying certain candidates can help protect a franchisor against underperforming franchisees that do not follow systems and degrade the brand; and it can be a strong defense against potential litigation. In the end, well-qualified and well-performing franchisees can help improve franchise sales through better validation.
Section 5: Marketing and Sales: The True Test of a Franchisor
(Continued)
Improved Sales Closing Rates: The Impact of Selling More Franchises
The “average” close rate in franchise sales is about 2%. So, if your marketing plans, collateral materials, websites, and sales procedures are effectively designed and help to raise that just from 2% to 2.1%, for an average franchisor dealing with 50 leads a month, that equates to one incremental franchise sale every 18 months. And that one incremental sale means, again, millions of dollars over the long term, when it comes to both product sales and to royalty revenues.
Improved Sales Closing Rates: Incremental Franchise Sales Per Year
Planning a franchise marketing budget is based on determining how many leads are needed to achieve each franchise sale. For example, at a 2% close rate, about 50 leads are needed to get a single franchise sale. If the marketing budget and number of leads are kept constant, simply improving the franchise sales close rate, will result in more franchise sales. For example, a 10% improvement in close rate (improving the close rate to 2.2%) would be responsible for one extra franchise sale for every 500 leads – or for every 10 franchises budgeted for sale. If the budget calls for selling five franchises per year, an extra franchise would be sold every two years under this scenario. If targeting 15 franchise sales per year, one incremental franchise would be sold every eight months. And remember, the annuity value of a single sale is equal to the franchise fee, plus perhaps decades of royalties, product sales, technology fees, rebates, and other sources of revenue –potentially measured in the millions of dollars.
Section 5: Marketing and Sales: The True Test of a Franchisor
(Continued)
Impact of One Incremental Sale Per Year
$2.4 Million in incremental revenue over ten years and an estimated $4.7 million in incremental enterprise value!
$150,000
$100,000
$50,000
$0
The ability to sell one additional franchise per year will have a huge impact on the value of a company. If the combination of royalties, gross margin on product sales, and rebates are about $40,000 per year, the addition of one incremental franchise sale per year would put an incremental $440,000 to the top line while accounting for perhaps one additional hire. In aggregate, a franchisor could realize an additional $2.4 million in revenue over five years and an incremental $4.7 million in enterprise value at the sale of the company.
Section 6: Common Pitfalls and Challenges
Mistake #1: Rushing the
Process
Many early-stage franchisors attempt to launch their system without fully developing their operational and support infrastructure. This can lead to dissatisfaction among franchisees and stunted growth.
Mistake #2:
Relying on Less-Experienced Resources
While cost-saving measures can be appealing, entrusting the development of your franchise system to inexperienced or underqualified in-house staff or outside consultants can have long-term repercussions. If you are planning on franchising, remember, you are creating a new business. You will likely have only one chance to do it right.
Key Takeaway:
The initial investment in experienced advisors and robust systems pays dividends by preventing costly errors and ensuring long-term franchisee satisfaction.
Section 7: When to Seek Professional Help
If your team has the expertise to create a comprehensive growth plan, develop operational manuals, and establish a robust support system, you may not need external help.
However, if you’re seeking faster results, higher success rates, and reduced risk, engaging a top consultant can provide a significant competitive advantage.
Things to consider when evaluating professional guidance from an outside franchise consultant (by researching on websites, LinkedIn, or other channels):
• Consultant backgrounds and experience
• Client lists and testimonials
• Reputation, recognition, and awards
• Ethics, philosophy, and approach
Franchising is a journey that requires careful planning, strategic execution, and ongoing refinement. Building a solid growth plan, avoiding common pitfalls, and understanding the exponential value of the system can set a franchisor up for long-term success.
