unit level economics is a franchisors level economics...unit level economics is a difference maker...
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NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Unit Level Economics is a Difference Maker for Emerging
Franchisors
Joe Lewis Vice President and General Counsel Smoothie King Franchises, Inc.
Brian Schnell Partner, CFE Faegre Baker Daniels LLP
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Your system's EBITDA, profitability and sustainable franchisor/franchisee relationships depend on transparent and accurate unit level economics.
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
UNIT ECOMOMICS: WHY IS IT IMPORTANT?
• Your Success Depends Upon It
• Your Zees Success Depends Upon It
• Best Way to Increase Franchise Sales
• Attracts High Quality & Multi-Unit Candidates
• Reduces the Amount of Unit Closures
• Reduces Risk Of Litigation
• Supports High Growth
• Attracts Private Equity/IPO
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
What Separates Franchisors on Unit Level Economics?
• Develop relationships that encourage compliance so that you can help educate your franchisees with the benchmark tools that they should be utilizing in their business
• Establish franchisee forums that share best practices (examples, new unit build-out costs; operating margins)
• The franchisor should operate the business model too; “Skin in the game” approach
• Be results driven. Compensate franchisor employees for improving franchisee profitability
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
What Separates Franchisors on Unit Level Economics?
• Starts at the top… the CEO [owner] sets tone. Then hire the right people at all levels who embrace franchisee success, most importantly at the emotional level
• Develop benchmarks with the input of franchisees and industry experts
• Publish those benchmarks on a regular basis, including how they are measured
• Bake progress against those benchmarks into company goals and compensation plans
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
CREATING A CULTURE
• Profitability of Your Franchisees Matters!
• Make it Part of Your Strategic Planning
• Set Long-Term & Near-Term Goals
• Assign Responsibility & Accountability
• Break Down Objectives To Accomplish Goals
• Develop an Action Plan
• Set Measurables & Report at Meetings
• Communicate To Team & Franchisees
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
TOTAL INVESTMENT TRACKING • Track All Pre-Opening/Open Costs (“All-In”) • Set Up By FDD Categories (Item 7) • Provide Detailed Form At Orientation • Make It A Mandatory Report (It’s Important!) • Designate Responsible Party To Collect • Update During Unit Opening Process • Note All Variances & Why • Final Report Turned In After Opening • Evaluate Your “True” Costs & Variances • Track Different Models & ADA
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
EBITDA (P&L) TRACKING
• Establish Financial Disciplines Up Front
• Set Up Standard Chart Of Accounts
• Make It A Mandatory Report (It’s Important!)
• Make It Easy – Focus On The P&L
• Set Up Financial Statement Discipline, Also
• EBITDAR (Rent) Allows Unit-To-Unit Comp
• Require Monthly P&L’s
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
EBITDA (P&L) TRACKING
• Develop Weekly KPI Reports
• Begins With Opening Of Unit – 1ST Week!
• Provide Value With Information
• Food, Labor, Expense Comparisons
• Operations Consultant Reporting
• Benchmarks
• Quarterly Business Reviews
• Performance Groups
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Driving profitability through benchmarking and performance groups is a critical aspect to the success of all franchise systems.
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Benchmarking and Performance Groups
• Financial education is the first, critical piece in the benchmarking and performance group process
• If franchisees do not understand the financial information they receive and the “management intelligence” it provides, they are unqualified to participate in a benchmark study or a performance group
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Benchmarking and Performance Groups
• Benchmarking metrics and industry statistics create a yardstick of comparison that identifies the top performers
• Participation in a performance group begins to refocus franchisees working together in the group. Developing within the group a culture of accountability to implement change can be a brutal process
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
EBITDA (P&L) TYPICAL UNIT Projected Projected
Annual Monthly
Sales $1,000,000 $83,333 100.0%
Cost of Goods Sold
Food Costs $300,000 $25,000 30.0%
Direct Labor Costs $300,000 $25,000 30.0%
Total Cost of Goods Sold $600,000 $50,000 60.0%
Gross Profit $400,000 $33,333 40.0%
Operating Expenses $150,000 $12,500 15.0%
EBITDAR $250,000 $20,833 25.0%
Rent $100,000 $8,333 10.0%
COMPANY UNIT EBITDA $150,000 $12,500 15.0%
Royalties $50,000 $4,167 5.0%
FRANCHISE UNIT EBITDA $100,000 $8,333 10.0%
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
INVESTMENT/EBITDA RELATIONSHIP
Cash-On-Cash Return #1 #2 #3 #4 #5
Total Investment $500,000 $500,000 $475,000 $450,000 $450,000
EBITDA $100,000 $125,000 $145,000 $158,000 $180,000
Annual Cash-On-Cash ROI 20.0% 25.0% 30.5% 35.1% 40.0%
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
WEEKLY KPI REPORT KEY PERFORMANCE INDICATORS Goal/Bgt 1 2 3 4 Total/Avg.
NET SALES $0
Prior Year Net Sales $0
Difference $0
% Change $0
Same-Store-Sales Goal % % Ave
Lead Measure: (Daily LSM) 0
FOOD COST % % % Ave
Goal
Difference (From Goal) % Ave
Lead Measure: (Daily Waste Rpt)
LABOR COSTS % % % Ave
Goal
Difference (From Goal) % % Ave
Lead Measure: (Daily Tracking)
TOTAL FC & LC % % % Ave
Goal
Difference (From Goal) % % Ave
KEY CONTROLS
Inventory (Reconciled)
Weekly Audit Completed
Supplies v. Budget
Repairs v. Budget
Customer Feedback Rpts
Pop-In Visits
Mktg Schedule Executed
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
QUARTERLY BUSINESS REVIEW
Prior Month YTD Prior Month YTD Prior Month YTD
Prior Month YTD Prior Month YTD Prior Month YTD
Prior Month YTD Prior Month YTD Prior Month YTD
Prior Month YTD Prior Month YTD Prior Month YTD
Labor %
Void % (of Sales)
Maximizing Profit
SWAP Track
Discount % (of Sales)
Retail %
Catering %
Avg. Check Count (#)
Enhancer/Extra %
Daily Sales Average #DIV/0! $0 $0
Overall Satisfaction
Speed of Service
Store
Store Territory Avg.
Territory Avg.
Store Territory Avg.
Store Territory Avg.
Territory Avg. System Avg.
Prior Month 0.00%
2016 Projected Sales 2015 2014 2013
#DIV/0!Net Sales
Upsize %
System Avg.
System Avg.
System Avg.
System Avg.
$0
Survey Counts
YTD
Comp Sales Growth Store
Avg. Check Amount ($)
Business Drivers
Transactions
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
How do you lead system change as sustainable unit level economics hinge on a
franchisor and franchisees effectively adopting system change in light of external
forces to the business model and ever changing customer demands and
expectations?
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
How to Successfully Lead System Change
• Be able to justify the change and explain the benefits to franchisees in terms they understand
– These benefits should include savings in time and money, improvements in profits and customer service and a stronger competitive position in their local market
• Be sensitive to how a change could undermine the organization’s culture or the franchisees’ sense of identity
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
How to Successfully Lead System Change
• Test or pilot the change initiatives to ensure they work before releasing them into the network
• Over communicate and be clear and concise in your communications as franchisees don’t have time to read long-winded documents that fail to address their concerns
• Don’t mistake silence for agreement - thinking that because franchisees do not question the change that they agree with it
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
How to Successfully Lead System Change
• Consult with the people who have to implement the change and ask them what they need in order to make it work
– Do the franchisees feel like they have a voice
• Don’t treat legitimate franchisee concerns and questions as negativity
– A franchisee who asks a question is giving you an opportunity to explain the benefits of the change – if you can’t answer the question then you have something that you need to work on
• Document and publish progress of the change along the way… over communicate
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
How do you effectively engage your franchisees so they are committed to driving performance and are passionate about the
brand (the franchisees’ views of what is effective, fair and reasonable)?
NOVEMBER 16-18, 2016
JW MARRIOT NEW ORLEANS
NEW ORLEANS, LA
Franchisee Engagement
• Find out what drives them - why did they buy? Then direct every energy into delivering their profitability so that they can truly see the brand as a vehicle for providing results
• Franchisees are usually competitive by nature - specifically the highest performing ones. The A team players. Drive performance by transparency in the numbers. Produce those monthly KPI results nationally and regionally
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