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Continuing with the previous discussion of what it costs to acquire a franchise (or a customer; and a franchisee is indeed a customer), let’s take a look at the value of a franchise, and then we’ll discuss the importance of keeping a franchise.
My focus in this blog series is: Capturing & Keeping Franchisees — an extremely critical lesson, especially in harsh economic times. And while I’m up on the soapbox I may as well add that most franchisors—most business owners!—neglect the “keeping” portion of the lesson, much to the detriment of their business.
Revisiting the cost of a sale
So, Franchisor, what does it cost you to sell a franchise and acquire a franchisee (that is, a customer)? Total cost is likely in the range of $25,000 to $40,000 per sale (this varies from franchise company to franchise company, and it’s based on the previous blog).
Is it a good deal?
You can’t know unless you understand the value of a franchisee.
Putting a value on a franchisee
Here’s how that works. A franchisee pays you a franchise fee, let’s say it’s $50,000. After lead acquisition costs and paying commissions to brokers and selling agents, you’re probably netting less than $30,000—that’s money that you need to train the franchisee and provide initial support.
In my experience, franchisors do a very good job of reinvesting franchise fees in their franchisees. I tell prospective franchisees that they should think of the franchise fee as the cost of an education (what’s an MBA cost?), and after two to six weeks of intense training, they’ll know just about everything they need to know to open and operate a business. It’s not always the case—and in fairness I point that out, too—but I’ve worked with world-class franchisors who excel at providing training to franchisees. It’s a good investment, even if it costs the franchisor a few dollars.
Franchisor starts out at break-even
I’m going to assume that after you train the franchisee and provide some initial support, possibly including a field trip where you send a member of your team to work alongside the franchisee in a franchise unit, you’re at break-even financially. You could be a few dollars ahead, or a few dollars behind.
I’ve worked with franchisors who earned a tidy profit on the franchise fee, and I’ve worked with franchisors who lost a chunk of money each time they trained a new franchisee. In this blog I’m not going to discuss either of those outcomes—but I will sometime in the future. For now, this discussion is about calculating the value of a franchise.
And so far, that value is zero to the franchisor who breaks even after training. On the other hand, there’s a huge upside to the value proposition!
How good is the value proposition?
A fully trained and supported franchisee is ready to do business! And every time the franchisee generates $1 of revenue, the franchisor earns 6 cents! Obviously that’s true if the royalty fee is 6% of gross sales—a standard percentage. Royalties swing from a low of 3% to as much as 15%.
So if the franchise unit generates $350,000 of gross revenue after 12 months in business, that franchisee’s value to the franchisor is $21,000!
It could be more. It should be more!
There’s more than just a royalty fee
In addition to the royalty fee, the franchisee also purchased products from the franchisor, generating additional revenue for the franchisor. Let’s assume that in the scenario above, it’s another $15,000 (in fees beyond the cost of the product) . . . now the franchisee’s total value for one year is $36,000!
It may still be more. If the franchisor sold services to the franchisee—either directly or through approved vendors—the franchisor earned more money. Services could include advertising, financing, insurance, accounting, etc. Let’s assume that sales of services add another $7,000 to the franchisee’s value . . . so now it’s $43,000.
There’s still more to a franchisee’s value
Want more?
There is more! At least potentially there’s more.
If the franchisee is making money, and feels good about his investment and overall relationship with the franchisor and the franchise network—in other words, a satisfied customer—the franchisee is likely to recruit a franchisee. And that’s more value!
But is it worth it?
Is the value worth it?
If it cost you $40,000 to recruit and sign a new franchisee, and after 12 months the new franchisee pays you $43,000 in royalties and other service fees, you’re ahead $3,000. Not very exciting, is it? Even if the franchisee recruited another franchisee for you (and by the way, that probably happens less than 20% of the time for most franchisors), you may decide it’s not worth the risk.
And you’d be right, especially if you weren’t prepared to keep that franchisee for a lifetime.
Next time, we’ll talk about that lifetime!
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