In today’s economy, the profitability of your franchisees is being tested. And as leaders in the franchise industry, you are concerned about this situation, aren’t you?
In the business world, making profits is the goal of every company. Nothing new so far. However, in franchising, the profits belong to the franchisees, making their financial success their own responsibility. So far, so good.
But then, what is the essential role of the franchisor in the franchisee’s profitability?
In my opinion, the franchisor plays a crucial role in the profitability of their franchisees. Let me explain why. A competent franchisor has visibility into the profitability of each franchisee, at least on a monthly basis. They have also established mechanisms to transparently share this information with all franchisees in the network, allowing each one to compare their performance and find solutions for any gaps.
As a result, if the franchisor doesn’t care about the profitability of their franchisees, they also compromise their own profitability. It’s evident, isn’t it?
Let’s recall an important statistic: according to Franchise Business Review, 80% of franchise systems in America have fewer than 100 franchises, which means they generate limited revenues, ranging from a few million dollars at most. Therefore, franchisors are small and medium-sized enterprises (SMEs) with limited resources. If franchisee profitability is not an absolute priority, they are jeopardizing their own profitability.
What is a good Return on Investment (ROI) for a franchisee?
According to Franchise Performance Group:
Franchisees should be able to recoup their total investment within 3 years or less (excluding building and land).
For models with investors, the market rewards an ROI of 25% or more and a cash-on-cash return of 50% or more, with a minimum return of $75,000 per unit, after paying a manager and before debt repayment.
For owner-managed businesses, the owner should be able to replace their current income by the second year and experience replacement revenue growth of 25% to 35% or more by the third year.
For multi-unit franchise models, the owner should be able to draw an owner’s income while delivering an ROI of 25% or more after deductions by the third year.
Peter Drucker once said, “Good profit management is essential to ensure the growth and sustainability of a business.”
Therefore, it is worth paying special attention to the profitability of your franchisees!
A superior return on investment is, among other things, one of the reasons that justifies in the eyes of a franchisee all the fees associated with the franchise and the required investment.
A higher ROI also gives the franchisor the ability to accelerate necessary changes within the network to adapt to the market and safeguard the future profitability of franchisees.
A higher ROI acts as a magnet for new franchisees, thereby increasing your capacity to generate growth and offer solutions for the future of franchisees.
So, is it worthwhile to take care of the profitability of your franchisees? Ask yourself the question, the answer is evident.