This article was featured in the April issue of Franchise Dictionary Magazine.
Unit Economics: The Horse that Pulls the Cart
Franchisees need to make money. That sounds so simple and obvious; however, not all franchisors have this as their most important guiding principle. The value proposition for a franchisor is their future growth, scalability and sustainability of the business model. Those factors are ultimately judged by the unit economics of the franchisees. I have had this conversation with countless early-stage franchisors frustrated with their own unit economics. The most successful franchisors lost money in their first few years, building out their systems and infrastructure. If your goal when you started was to double or triple your earnings, maybe franchising wasn’t the best growth strategy. But, if your goal is to build an enterprise worth 50x or 100x from where it is today, franchising is the best business growth strategy around (in my humble and biased opinion).
In order to achieve exponential growth, franchisors need to stay long-term greedy and avoid being short-term greedy. The franchisor who constantly reinvests in their system, knows their business model and has created a system, culture and environment for franchisees to be successful, will win the long game. The goal of the emerging franchisor should not be to drive this year’s EBIDTA by nickel-and-diming their franchisees. They need to help drive the unit economics and profitability of their franchisees, which will ultimately drive future EBIDTA and skyrocket their enterprise value.
When it comes time to harvest your brand with a private-equity exit, the first question your potential suitors will ask is if your franchisees make money. We have been through several dances with our clients and it always comes down to the strength of the numbers and the unit economics of your franchisees. If you are years away from an exit, think about the investments you can make now to improve your franchisees’ margins, their efficiency, and their overall profitability. Eat those costs today, so you can feast on the rewards tomorrow.
To see all of Tom’s featured articles on The Franchise Dictionary Magazine, visit this page.