We are all sometimes guilty of living in our own little bubble. In business, it is vital to know what is going on around you. I have learned in my time in franchising that if you are experiencing a problem or issue, several others are going through the same.
In the spirit, here are seven (hopefully) interesting and insightful facts to know about franchising and how you can position your brand to take advantage of them.
According to Statista, there are currently 785,316 franchise establishments in the United States. That number has stayed relatively flat since 2007. Only one out of every five brands ever reaches 100 units. The odds are better that you have less than ten units (29%).
What does this mean? Franchise brands must plan to have a good amount of capital so they can grow the business to a sustainable level. “Undercapitalization is the biggest challenge for start-up businesses and emerging franchisors are no different,” points out Lori Kiser, CEO of The Decide Group.
If you have been in franchising for years and are frustrated with the growth, now is the time to make a change. Don’t be unwilling to make changes and continue to waste resources. Have a group of advisors that will give you an honest assessment of where the brand is and be willing to help move it forward.
According to the Francorp, the average initial investment across 3,500 brands in 200 sectors is $520,000….in 2013. While this data is somewhat old, two trends are happening today in franchising. First, there has been an emergence of lower-cost franchise brands. On the flip side, costs for brands that must have a physical location have skyrocketed in some markets since 2013.
What is the takeaway? Brands must financially qualify prospects early in their sales process. There is nothing worse than spending significant time walking a prospect through your brand only to find out they can’t financially qualify.
Brands also must have an understanding of how prospects are going to finance their investment. This will have a significant bearing on what type of liquidity and net worth a prospect must possess. Too many brands pull numbers out of thin air when it comes to setting these targets. Use an advisor to understand this process better and set these targets.
While the younger generation should be applauded for their entrepreneurial spirit, only 12% of franchisees are younger than 34 years old, according to FranDATA. One potential reason for this is because of the lack of capital these individuals generally have. Think of where you were when you were under 34….you were most likely saving to buy a home, possibly starting your family, and incurring other major life expenses. It’s hard for people under 34 to have enough capital to open a franchise.
Franchisors that wish to grow must make sure they are targeting the right demographics in their prospecting. Prospecting correctly saves both times and money. They must be realistic about the type of prospect that is going to have the finances and savings to start their concept.
54% and 18%
While multiunit operators own 54% of all franchises, only 18% of franchisees own more than one unit. For smaller systems, they should think of the multiunit owner as a unicorn…do they exist sure (just go with me), but are they likely to come around, probably not.
I have run into too many young franchise brands that tell me they are looking for someone to open up multiple units. Odds are, this isn’t happening until you get to a certain size with a steady track record. However, some franchisors waste tons of time and money, preparing a robust program for people who want to buy multiple units.
Wait until one of your current franchisees wants to open up a second location. Then work with them to develop your multiunit structure. You can then use the fees from this second location to help finance the costs associated with putting this program in place.
According to the Franchise Business Review, owners report a median pre-tax income of $50,000-$75,000. I will let you in on a secret; your average prospect has no idea how much money business owners make. Most people think if someone owns a business, they must be easily making six figures. Well, based on the statistics, this simply isn’t true.
It is essential early on in the process to discuss what the earnings potential with the brand. I am not advocating breaking any Federal Trade Commission rules. But I am saying you should ask good enough questions to figure out how much a prospect is earning, do they plan on replacing their earnings, and how quickly do they need to replace those earnings. You most likely have an idea of how much a prospect can make in your system and if it is realistic that they can earn that by partnering with your brand.
The best in class brands, those that are growing, also have a process in place to make sure a prospect can determine their approximate earnings. Again, I am not advocating breaking any FTC rules. But, you should have a process in place to be able to coach your prospect to develop a financial projection so they can have a reasonable expectation of how the business will perform.
According to Statista, approximately 38% of the franchise units are in the quick-service restaurant space. This is both good and bad news for those of you in this space. First, the good news….there is a lot of demand and desire to open up a restaurant in the United States. Now the bad news…there is a ton of competition in this space.
Restaurant concepts that are depending on some great recipes and cool interior designs are going to have a hard time succeeding. I say this because there are a lot of them and they struggle to differentiate themselves within the market place. The restaurant or QSR concepts that succeed have robust systems and support in place. It’s much more powerful to talk about food costs, software systems, supply chains, and delivery process to a prospect than it is a recipe or color pattern. You need to be using advisors from both operational and financial perspectives to help you think through and execute on putting these systems in place.
7 of 10
According to Entreprenuer.com, seven of the ten fastest-growing franchises have initial estimated opening costs of less than $265,000. Five of these have initial costs lower than $100,000.
This shouldn’t be a surprise. First off, many more people have the finances and savings to invest in a business that requires a smaller level of commitment. With my franchise, Monkey Bizness, we have taken several steps to reduce the amount of initial investment.
If your system hasn’t used a financial consultant or outsourced CFO to look at your initial cost structure, you should consider it. Too many franchise systems put down values in their estimated opening costs that are not well researched or thought out. Too many franchisors also try to build Ferrari’s when a Cadillac or a Ford would do. Have a CFO lead you through a value engineering process could save your franchisees thousands, help you sell more units, and make for more a durable franchise systems.
My name is Matt Krieger, and I am the founder of Krieger Analytics, a CFO advisory partner for small businesses and franchisors. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), I am also involved in much more. I partner with my clients by coaching them on strategy, gaining clarity on their business, building efficient and effective processes, and making confident business decisions. Conversations are free, so don’t hesitate to reach out to me at firstname.lastname@example.org.