How to drive higher network profitability and financial performance

By Sarah Stowe | 29 Oct 2015 View comments

Franchisors need to improve franchisee profitability and then success will follow. It is the goal of every franchisor to have their franchisees so successful that they become flag wavers for the brand, the very best references when a new prospect wants to learn about becoming a new franchisee.

In order to accomplish this goal the franchisees in your network need to be living the dream that they bought from you, not enduring the nightmare. In order for this to happen, one single, fundamental thing has to be in place: unit profitability for franchisees.

That is the key to franchisor success.

You, as the franchisor, receive your revenue in the form of a royalty check each month from your franchisees TOP line, their sales. Often, in a franchise network all you get is a royalty cheque and the sales report, you have no idea whether or not the franchisee is actually profitable.

However, your franchisees eat, support their families, and ultimately reinvest in their businesses off of their BOTTOM line, what’s left at the end of the month for them.

In Profit Mastery, we like to say that franchisors are very good at teaching their new franchisees how to “make it” and “sell it” but often leave the actual management of the business elements of the operation that creates profit to chance.

Here is a fundamental truth: in order to improve profits and cash flow in a business, you have to first improve the owner, by improving their financial acumen. There is no other way.

How is that accomplished? In Profit Mastery, we believe that improving the owner is a three-step process;

  • education
  • benchmarking
  • accountability.

When these three things are accomplished, profitability and cash flow at the unit level improve, giving your franchisees more resources to invest in the opportunities you provide them to drive up their top line, and improve their royalty payments to you.

Each of these steps follows the other in a logical sequence, and they are not a one-off event; this is a process of raising your entire network to a higher level of financial capability and performance which has proven to raise what we call owner’s discretionary profit (ODP) as much as 30 percent.

Believe me, when your franchisees receive more money for the efforts that they put into their business, it directly benefits you, the franchisor.

Education

7 steps to business success:

1. Plan properly: before you start your business and continue the planning process through your various levels of growth

2. Monitor financial position: using your financial statements; both your income statement and balance sheet as well as Profit Mastery tools which include a scorecard and a road map

3. Break-even analysis: understanding the relationship of price-volume-costs in your business and how a change in one dramatically affects the others and overall profitability

4. Managing cash flow: to avoid the cash crunches that often come if your business has a seasonal sales cycle

5. Managing growth: growing businesses require more assets which require more dollars to buy them. Understanding the four sources of money to grow is critically important in any business enjoying a sales increase

6. Borrowing properly: knowing how to communicate with your banker, understanding the five ‘Cs’ of credit and how to get the banker to that happy three letter word “Yes”

7. Planning for transition: maximizing the value of the business as you get ready to retire, as opposed to liquidating it for pennies on the dollar.

These seven steps provide the foundation for every business owner’s financial success. Each of the tools is important at various stages of a business’s lifecycle, and once learned serve the franchisee throughout their business career.

Information

However, it is not enough to know how well a business is doing. What is even more important is to understand the potential of the business for delivering profit to the franchisee, and that is accomplished by benchmarking.

There are many ways to get industry data that offers a comparison of performance, but the most valuable and directly applicable is to do a benchmark study of your network. A financial survey is submitted to your franchisees and this gives them the ability to provide financial data back in a common-size format, meaning that we actually have all the revenue and expense line items in the same buckets, which delivers consistent financial information for the network.

A typical benchmark study will show the following: on sales of $1M, the top 10 percent may be taking home $150,000-$200,000 ODP, the franchisees in the middle will be eking out a living at $50,000-$75,000 and the bottom tier will be losing about $25,000 up to perhaps making as much as $30,000.

It’s the same million dollars in revenue.

What’s different? Management

With the benchmark study, you now have the financial tool to be able to bring the rest of your network up to the same level of profitability and cash flow as your top performers. However, there is one more key component, which is actually motivating the franchisees to do that which is most difficult for every business owner, something different.

Accountability

As a franchisor you can send out your field staff to try to encourage your franchisees to do the processes and activities that you know will make them successful; often to no avail.

Just like back in high school, the single most powerful group that can influence a person’s behaviour is their peers, especially when they are fellow business owners.

Put them together in what we call a performance group with nine of their peers, have them meet four times a year, twice in person twice online, set goals and hold each other accountable to achieve them, and you will see a dramatic difference in their ability to affect change in their businesses.