unit level economics is a franchisors level economics...unit level economics is a difference maker...

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



NEW ORLEANS, LA

Your system's EBITDA, profitability and sustainable franchisor/franchisee relationships depend on transparent and accurate unit level economics.



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



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



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



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



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



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



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



NEW ORLEANS, LA

Driving profitability through benchmarking and performance groups is a critical aspect to the success of all franchise systems.



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



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



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%



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%



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



NEW ORLEANS, LA

QUARTERLY BUSINESS REVIEW

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.



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



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?



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



NEW ORLEANS, LA


• 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



NEW ORLEANS, LA


• 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



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)?



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

unit level economics is a franchisors level economics...unit level economics is a difference maker...

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