Franchise ROI: Turning Your Results into Success Stories
In the realm of franchising, three foundational pillars shape the competency of franchisors: controlled growth, operational excellence, and an unwavering pursuit of Return on Investment (ROI) for franchisees. Today, we delve into the third installment of our series: the ROI obsession. An ROI that enables franchisees to swiftly recoup their initial investment undoubtedly serves as the gateway to triumph within a franchise network.
According to experts at Franchise Performance Group, franchisees should ideally recover their total investment within a maximum of three years, excluding buildings and land. For models involving investors, the market acknowledges an ROI of 25% or more, coupled with a cash on cash return of 50% or more. Additionally, a minimum return of $75,000 per unit is expected once manager fees are covered and before debt repayment.
If the business is in the hands of the owner, they should be able to replace their current income by the second year. Furthermore, a growth in replacement revenues of 25% to 35% or more should be achieved by the third year.
In the case of multi-unit franchise models, the owner must both secure an owner’s income and provide an ROI of 25% after deductions by the third year.
But why should this insatiable appetite for a high ROI concern you? We easily comprehend the benefits of a robust ROI for franchisees, but what about you, as a franchisor? Why invest so many resources and efforts into ensuring substantial ROI for your franchisees?
Catalyst for Growth
First and foremost, externally, when it comes to attracting new franchisees. A high ROI provides assurance for a new franchisee, and we know that most franchisees opt for a franchise to reduce business risks. With a high ROI, they transform into passionate ambassadors, your most convincing spokespeople, arousing the interest of potential franchisees.
Organic Growth
Internally, your current franchisees will not only be more inclined to invest in new franchises but will also have the necessary means to increase their unit sales.
Cost Reduction
Moreover, franchisees with a solid financial foundation require less assistance, whether it’s for expanding with a new franchise or for day-to-day operational management. In parallel, unlike their financially challenged counterparts, their financial stability leads to fewer immediate or indirect legal concerns.
A high ROI not only paves the way for accelerated growth but also for enhanced profitability.
The question then arises: why do so many franchisors neglect the crucial significance of ROI for their franchisees and act like firefighters, intervening only when financial flames are already devastating?
My hypothesis? It’s a lack of clarity on the actions to take.
Here are the essential steps to ensure a high ROI for your franchisees:
- Establish a comprehensive budgeting system, both for the franchisor and franchisees. This clear vision of desired performance should be reviewed monthly with the assistance of a coach or supervisor.
- Communicate sales weekly, with the ability to identify the 5 to 10 franchisees displaying the weakest performance or those falling below the desired profitability threshold. This will enable you to react promptly to rectify the situation if objectives are not met.
- Each quarter, compile a dashboard containing key performance indicators for each franchisee. An ideal opportunity to share best practices within the network during group meetings.
- In case of difficulties, collaboratively develop a concrete and signed recovery plan with the franchisee, aiming to rectify the situation promptly.
- Finally, once a year, subject each franchise to a financial analysis to assess the ROI and propose tangible measures for its short and medium-term improvement.
Let’s take a concrete example to illustrate the importance of ROI obsession within a franchise network.
Imagine yourself as a thriving franchisor in the fast-food sector. Your network already comprises several franchisees who successfully manage their establishments. However, you notice that some of them are facing financial challenges, compromising their ability to achieve satisfactory ROI.
One of your franchisees, Sophie, owns a franchise in a strategic location in the heart of the city. Despite this advantage, Sophie struggles to generate sufficient sales and recover her initial investment. You understand that this financial challenge could not only impact Sophie’s profitability but also the overall image of your brand. This is where the ROI obsession comes into play.
Rather than reacting passively, you choose to take proactive measures to help Sophie reverse the situation and achieve a solid ROI. You start by conducting a thorough analysis of her franchise’s performance. By studying sales data, you identify a decrease in activity during peak hours. You decide to collaborate closely with Sophie to develop a concrete action plan. This plan includes a reorganization of staff schedules and the launch of a targeted marketing campaign to attract more customers during these slow periods. Over the months, you closely monitor the results of this plan.
Thanks to your proactive involvement and ROI obsession, Sophie experiences a significant improvement in her sales during peak hours. Not only does she manage to recover her initial investment more quickly, but she also starts generating substantial profits.
Sophie’s example tangibly demonstrates why it is imperative for a franchisor to emphasize the ROI of their franchisees. Your proactive approach and determination to ensure a solid ROI have not only saved Sophie’s business but also reinforced the confidence of all franchisees in your ability to support and guide them towards success.
This story illustrates that ROI obsession goes beyond merely reaping the rewards of investment. It fosters a culture of growth, creativity, and resilience within your franchise network.
Conclusion
While these actions might not solve all problems, they represent strategic steps to instill the discipline that will inevitably lead to specific, well-organized, and rigorous actions aimed at enhancing the profitability of each individual. Let’s remember Deming’s words: “What gets measured gets improved.”
Our next article addresses the importance of trust in the franchisor as a cornerstone of franchisees’ success.
