What support are you offering your franchisees, and is it effective?
Whether support is based around training, field support, marketing and networking, or includes technology, an efficient supply chain, human resources or technical back-up, franchisors need to stay on top of what is required to effectively support franchisees as the business grows.
Setting up the right metrics is an important step in this process, believes Darryn McAuliffe, CEO of FranData.
“Analysing key support metrics against outcomes helps to provide guidance and insight into efficient levels of human resource support,” he says.
For example, he highlights calculating specific metrics such as:
- the ratio of initial franchise fees to training hours
- the ratio of field support to franchised units
- the ratio of field support to royalty revenue
- evaluating the relationship between those metrics against a brand's continuity rate
While many franchisors are familiar with failure rates, FranData has turned to what McAuliffe considers to be a more precise measurement.
“Continuity is a success metric. A brand's continuity rate is measured by counting all franchised stores that were in operation at the end of the year as a percentage of all stores that existed throughout the year.
“Having a high continuity rate demonstrates a brand's ability to keep franchise units continually operating. Therefore, having a high continuity rate is a success metric which is an industry standard for lenders and private equity firms when evaluating whether a franchise system is successfully operating.”
McAuliffe says this method allows franchisors to discover whether their support is sufficient and have guidance for how to evaluate new support over time.
Measuring support and ROI
In the US, FranData recently analysed 100 brands to evaluate how measurements are applied in the support field.
The selected group all had a FranData prepared Bank Credit Report; this is an objective evaluation of a brand's credit risk which historically has resulted in a more sustainable growth than is seen in the broader franchise population.
Across the group of 59 food and 41 non-food brands, franchisee support was measured as a percentage of total general expenses.
The results show that on average, 43 percent of franchisor general expenses is spent in direct support of franchisee operations: this includes franchise development, site selection/pre-opening activities, training, field operations, compliance, marketing, legal, and human resources.
But franchisors need to evaluate the efficacy of the investment and use of resources, suggests McAuliffe.
“From a franchisor's perspective, a lot of money is spent up front to get a franchised unit started. This includes such things as development, training and site selection expenses. Recovery of those funds is in the form of initial franchise fees and royalty fees. Generally, it takes a franchisor the better part of two years or more to break even," he says.
FranData found there is a relationship between initial franchisee fees and the amount of support a prospective franchisee should expect.
And the same holds true for other functional support levels.
But does higher support lead to better outcomes?
Examining a sample of 38 franchise concepts, FranData discovered brands with a below-average ratio of both field support staff to franchised units and field support staff to franchisees, tend to experience lower continuity rates and higher real business failure rates.
And the reverse is true too: brands with an above-average support ratio are likely to maintain a higher continuity rate than brands with a below-average support ratio.
In the context of unit closures, this can translate into significant money.
McAuliffe says “Much like the tale of Goldilocks and the three bears, gauging the amount of franchisee support is a matter of getting things just right for your system. Sometimes it is a matter of trial and error, but even with trial and error, measurements need to be put in place to trigger a change in approach or focus.
“As your business grows and changes the need to recalibrate expectations or investments in franchisee support grows in importance as well. It can never be highlighted enough that as important as pushing your brand out to new markets is, supporting the growth of your franchisee family with adequate operational guidance and support mechanisms help you in the long run.”