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  • Nick Powills

Should You Fight to be a $1 Million Franchise Brand?

Let's fight through a counterpoint to see if there is as much value in a $1 Million AUV versus an $800,000 one.

Call me a crazy person, but stick with me on this topic: is the juice worth the squeeze when growing a franchise business to $1 million AUVs?

I have thought a lot about the fight for more and more average unit volumes—and I certainly understand the why behind it—but, let me fight through a counterpoint to see if there is as much value in a $1 million AUV versus an $800,000 one.

Let’s start with the positives:

  • You have a stronger Item 19—or at least a marketable term in creating a $1 million business opportunity.

  • In theory, more money should create higher EBITA.

  • There is something magical about owning a million-dollar business – thus, maybe (just maybe) that helps the perception of the franchisees and increases validation.

  • $1 million AUVs means $50,000 (5 percent royalty) per location back to the franchisor.

How about some variables:

  • Sure, there are businesses that are meant to be over $1 million in business. But it is not an all-encompassing message for all franchisors. The message is more so around not being what you aren’t.

  • Viral brands that have the operational support should be able to crush limitations – meaning, if you have an incredible product that people rave about, then, that buzz will automatically drive your unit sales higher.

Now, let’s make some assumptions:

  • There is a lot of buzz around low-cost franchise brands. Some of the fastest growing brands have nailed the price point that reaches the masses.

  • Those low-cost franchise brands rarely reach millions in gross revenue.

  • There is also a lot of buzz around the idea that everyone wants to own a restaurant.

  • The reality is, not everyone can afford a restaurant.

  • The more the investment costs climb, the fewer prospects exist. More money means fewer buyers.

So, for argument’s sake, let’s take a $500,000 investment and say you have 100 locations. Then, let’s say 30 percent of your franchisees produce volumes more than $1 million, 30 percent are between $800,000 and $1 million and 40 percent are below $800,000. Within that grouping, the top 30 percent then averages $1.3 million, the next 30 percent averages $900,000 and the bottom averages $700,000. For this example:

  • Top 30 percent: 30 locations X $1,300,000 = $39 million

  • Next 30 percent: 30 locations X $900,000 = $27 million

  • Bottom 40 percent: 40 locations X $700,000 = $28 million

  • Total System-Wide Sales: $94 million

  • Actualized AUV: $94 million / 100 = $940,000

  • Total Royalty to Franchisor (5 percent): $4.7 million

Some notes about the above:

  • We sure as hell know the bottom 40 will complain a lot. A LOT. Why?

  • You sold them on the fact that the top 30 percent did $1.3 million in sales. It doesn’t matter if you disclose the fact that it is your top 30 percent; that’s the number prospects listen to.

  • The initial investment is really built around the potential for $1.3 million in sales (or perhaps $1 million). For argument’s sake, let’s say the average ticket is $15. That’s 66,666 transactions/year, 5662/month or 182/day. It helps you figure out seats, labor, food/product, etc.

  • When they think they will make, for argument’s sake, at least $1 million, 70 percent of your system is not reaching their so-called potential and has some sense of frustration.

  • For every franchisee who doesn’t validate, add more $$$ in franchise marketing to find new franchisees.

  • The reality is this brand is upside down, even though it appears it isn’t.

Example 2: A franchisor who’s actual AUV is $800,000 and the investment is 20 percent less than example one ($500,000 X .20 = $100,000 less) at $400,000.

  • Top 30 percent: 30 locations X $900,000 = $27 million

  • Next 30 percent: 30 locations X $800,000 = $24 million

  • Bottom 40 percent: 40 locations X $700,000 = $28 million

  • Total System-wide Sales: $79 million

  • Total Royalty to Franchisor (5 percent): $3.95 million

Some more points:

  • Franchisors will pull in $750,000/less/year.

  • Question: Is a $400,000 unit easier to grow?

  • How about marketing? Easier to drive fewer people?

  • Does real estate change at all?

  • Do operations become easier?

  • The bottom 40 percent is frustrated because they are not hitting their full potential ($800,000 AUV). That’s slightly better than 70.

  • Which brand has more growth potential in today’s market?

  • Is it worth giving true AUVs even if it doesn’t give the marketing hook?

  • What’s more valuable, expectations met long-term or not (for franchisees)?

Now, if I have kept you engaged this long, you are probably saying sure, makes sense, but won’t happen in reality. But, do brands take steps toward rearranging their sell? Do they re-engineer their models to fit more humans who could potentially buy? Doesn’t a lower investment and a lower return help with validation in that expectations are more aligned?

The truth is, I don’t know the complete answer. But, I have certainly spent a lot of time thinking about it. I would love for you to share your thoughts with me on this topic.

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