How to set a franchise recruitment budget

Budgeting what to spend on franchise recruitment (and where to spend it) is a vexing issue for franchisors.  Spending too little will often lead to disappointing results, but equally, spending too much can also lead to disappointment if it has not generated enough franchise inquiry.

For start-up franchisors, it is very difficult to estimate how much to spend, and sometimes they even spend so much that it leaves them short to provide support services to any franchisees who join, and in some cases, cause financial hardship for the aspiring franchisor.

To avoid this problem, start-up and growing franchisors can use the following methods to determine a recruitment budget. It should be noted in all cases below that the budgets do not include the salary and associated costs of employing a franchise recruitment officer, as this job function often performs many non-recruitment activities as well (eg. site selection, field support, etc) and therefore this cost tends to be amortised across the franchisor’s business overall.

The proposed activity method

This method is based on a blank sheet of paper. In other words, if the franchisor lists all the different types of promotional activities it could undertake, including advertising in franchising magazines, websites, expos, brochures, seminars, Google Ad words, social media, etc, and assigns a value to each based on the cost required to get some reasonable effect, the total amount will often come to something beyond the franchisor’s reach.

After drawing-up and costing this wish-list of activities, the franchisor may be shocked at just how expensive this all becomes, and then needs to start pruning back to an amount they can live with.

The advantage to this method is that it requires the franchisor to basically write their recruitment marketing plan first, then cost it, and then cut the cloth to fit their wallet. The downside is that it is time consuming, and may result in half of the proposed activities to be subsequently removed in order to achieve an affordable budget figure.

The target acquisition method

This is a much simpler budgeting method whereby a franchisor takes an educated case as to how much it will cost them to recruit a franchisee, and then multiply this figure by the number of franchisees they would like to recruit in the budgeted period.

Let’s say the franchisor guesses that it will cost about $10,000 in marketing activity to recruit each franchisee, and the franchisor is expecting to recruit another 10 new franchisees in the coming financial year. This would require setting a recruitment budget of $100,000 for the year.

The target acquisition method assumes what it will actually cost to recruit one franchisee, and $10,000 is not an unreasonable amount to start with. For mobile service brands with a modest initial investment (eg. under $50,000 for a franchisee to buy in), the target acquisition amount may be well under $10,000, however for fixed-location service and retail brands with much greater investment requirements, the target acquisition cost may need to be closer to $15,000 per franchise or more.

Both of these budgeting methods are forward looking. There are also two budgeting methods that are more retrospective, as follows.

Past budget plus or minus

This method of budgeting basically takes whatever was spent last financial year or budgeting period, and seeks to either increase or decrease this amount by a token (and often arbitrary) percentage amount. It doesn’t require a great deal of thought because it is so simple (ie. add or subtract x% to what was spent last year).

While the benefit of this method is that it is simple, it is also largely unaligned to the franchisor’s growth projections for the year ahead, so may result in an inadequate budget to deliver the growth expected or required by the franchisor.

Acquisition cost method

The acquisition cost method is ideally the best way to budget for new franchise recruitment. The acquisition cost per new franchisee is a key performance metric every franchisor should measure. Note that this is calculated on franchisees opening new outlets for the group, rather than including resales of existing franchises (for which the advertising cost is largely funded individually by the franchisees who are selling their businesses).

So if a franchisor spent $100,000 on franchise recruitment marketing last year, and recruited 10 new franchisees over the course of the year, this gives an acquisition cost of $10,000 per new franchise granted. By this same logic, if a franchisor then seeks to add another 20 franchisees in the next year, they would need to set their franchise recruitment budget to be 20 times this amount, or $200,000.

It should be noted that no budget method will guarantee any number of franchisees joining as a result of the expenditure. There are many steps between spending money on recruitment activities, and franchisees actually signing a franchise agreement, so anything can happen along the way to defer or impede a franchise grant.

Also, as it typically takes a potential franchisee from three months up three years to move from initial inquiry to final, signed documents, any recruitment budget spent this year may not generate a result in the same year, and so a measure such as acquisition cost should be averaged over multiple years to be most accurate.

Of course how much a franchisor can afford to spend is entirely up to them, and none of these four proposed methods for determining a recruitment budget may suit a franchisor’s future cash flow needs. Still, these methods provide a basis to consider how to set a recruitment budget, which the franchisor must then balance against the ongoing operational needs of their business.

The topic of franchise recruitment budgeting and marketing will be explored in detail at this year’s Franchise Marketing Forum, to held in Brisbane on October 31.