Franchising: How 5 Pennies can Make or Break a Franchise System

How 5 Pennies Can Make or Break a Franchise System!-4

Why 5 Pennies Are Important To You!

I have served on the Board of Advisors for the International Institute for Franchise Executives (IIFE) at Nova Southeastern University in Ft. Lauderdale, FL for many years.

A fellow IIFE board member is Carolyn Bolton, Director of Special Projects for SUBWAY® Restaurants. Previously she was Brand Manager at Franchise Brands, LLC which was created in 2005 with the support and guidance of the founders of SUBWAY® Restaurants. Last year after a Nova Board meeting, Carolyn and I were chatting about how we are introducing our business experience to our kid’s.

I shared with her that to teach my son Chandler some basic business skills I have him generate an invoice after cleaning my home office so I will pay him.

She told me that when she was still working with Franchise Brands, LLC her son Matthew, who was 8 or 9 at the time, would suggest to her that the company buy a doughnut chain or other concepts whose food he really liked.

Because of the frequency of his suggestions, she decided to teach him how they evaluate a franchise concept for acquisition – beginning with the store-level economics.

She told him that for every dollar (a hundred pennies) a store brings in a certain number of pennies must go to rent, others buy food for resale, some pay for insurance and labor, and so forth.

Finally, there must be room for five pennies (royalty) to go to the franchisor. She stressed that the payment of those five pennies must not compromise the ability of the franchisee to keep a good profit margin of pennies for themselves.

After Carolyn told me this story, I told her that I felt some franchise companies have forgotten about, or are not paying enough attention to those “5 Pennies” or franchisee profits these days.

We both agreed that it is an unfortunate fact that too many new franchisors quickly focus on how many locations they have, or how many stores they have sold rather than on the profits that a franchisee derives from them.

The bottom line: Without unit profits, there are no pennies available for a franchisor!

As an example, I remember standing in line waiting to get my badge at the International Franchise Association’s 2007 annual convention in Las Vegas when I overheard two new franchisors talking about the big money they were going to make from their franchise fees. They had surmised that at $20K per franchise, if they sold only 10 locations they would have a nice $200,000 pot of money for themselves.

Before I could ask them if they thought that there might be more to franchising than getting rich off of large franchise fees, the staff waited on me, and when I turned around they were gone. As I walked away, I hoped that the convention would provide them an “awakening” to the reality and the seriousness of building a franchise system.

I have to wonder if since then they have gone out of business or have learned the importance of the “5 Pennies” and are still be operating.

How 5 Pennies can Make or Break a Franchise System

The hallmark of a franchise Mega-Brand (Mega=Great) is its intense attention to the unit economics of the system, or if you’re new to franchising, the profitability of each individual operating store or unit.

The reality is that every system, no matter how large or well known, will have some locations that do not produce acceptable profits or perform at optimum levels. The key word here is “some”, not “many”, a “majority”, or certainly not all of them.

There are simply too many variables involved with the operation of a franchised location not to have one or two low performers in a system. It may be in a poor location, unexpected construction takes place, bad management by the franchisee, not enough training, dirty restrooms, parking lot and facilities, bad tasting food or poor customer service. – the list goes on and on. The problems can spread throughout an entire system if not policed or intensely managed by the franchisor.

While these problems may initially appear small to deal with, they will wreak havoc on your brand equity through diminished sales and poor customer perception. Think about the last time that you stayed in a motel that was dirty, or ate in a restaurant that you had to wait forever to get your food. Have you gone back to them recently? Probably not.

Now imagine this problem happening to a franchise concept that struggles to make money, or doesn’t fundamentally produce profits at all, and you have a recipe for disaster!

It is not only paramount that a concept makes enough money to cover the franchisors’ 5 Pennies and still produce a good profit for the franchisee, but the franchisor must continuously protect that store’s profitability with a strong system.

Joe DePinto, CEO of 7-Eleven® (a best of class franchise Mega-Brand) refers to the depth of financial partnership with their franchisees as “co-prosperity” – meaning their franchisees are true financial partners in the brand.

The leaders of franchise Mega-Brands inherently understand the importance of franchisee profitability and focus the majority of their resources ensuring and growing it.

Franchising Fact: – If the 5 Pennies are not produced or guarded at the store level a franchise system is doomed for failure.

The above is an excerpt from my book Five Pennies: Ten Rules to Successfully Building a Franchise Mega-Brand and Maximizing System Profits. 

Need some fine-tuning in your franchise system? Give me a shout for a free consultation.     

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