6 Key Financial Insights for Multi-Unit Franchisees
Aug 01, 2023
There are certain business principles that you need to know if you want to become a successful multi-unit enterprise owner because they will give you clarity in your journey of growing and scaling your franchise.
- The better you understand and apply these business principles, the more successful you're going to be.
In this blog post, we’ll review six of those business principles that will help you make better decisions for your business going forward.
Business Principle #1: Achieve financial freedom
This would depend on the cost of living for you and your family. But, on average, you need to have a minimum of two well-operated units.
The reason I say this is because usually, one unit is a job. And that one franchise unit usually gives a take-home revenue of $40,000 a year.
So, for example, if you are a corporate executive going into franchising, your salary hovered over $80,000 or more. That means you need at least two of them to replace the income you had.
The amount will also depend on the brand you have and your past salary. Having this financial understanding you’ll be able to determine how much money you can get from a franchise.
Business Principle #2: Achieve time freedom
This tends to be the other goal of becoming an entrepreneur and a business owner.
To fulfill this, you need to operate many units to grow into what we call a district manager area. That will provide enough cash flow to hire a district manager so that you can delegate operations and have them oversee the business on your behalf. Only then, you’ll be able to achieve that time freedom that you want.
Are you making the right franchise investment? Find out here!
Business Principle #3: Get enough revenue
- The average franchise unit makes about $600,000 in revenue.
Some franchise units go below that, others go above. I have to say that most of my clients look for a business that will give them between $800,000 to $1,000,000 in revenue because that way, they’ll have enough net profit, take-on profit, or cash flow, to achieve their business goals.
When you're making the selection of your franchise, it is critical to understand and be clear that the average franchise unit doesn’t make $1 to $3 million.
If you have already selected your franchise, understanding the unit economics will help you determine how many units will take to have financial and time freedom.
Don’t miss: 11 tips to select your first or second franchise brand
Business Principle #4: Define your investment non-negotiables
What are your financial non-negotiables? What I mean by that is what is the minimum revenue you want to have in a unit that will make it worthy of your investment?
Perhaps within your organization, some units make $600,000 and others $1 million. The difference has to do not only with the brand, but with the location, the demographics, and the consumers that you serve with that unit.
But, if you have a specific minimum revenue objective, you have to make sure that whatever units you operate, all of them meet that goal.
Another type of financial non-negotiable you have to define is the minimum number of stores you want to operate. Once you get there, decide if you want to go further, making sure the brand will allow you to make that happen.
Your list of non-negotiables should also include the minimum cash and cash returns you want from any new unit you open.
I have a client who did his financial analysis and determined that he wants each unit to provide at least 20% cash and cash returns. If it doesn't, he automatically declines the investment.
Business Principle #5: An acceptable rent
The next financial insight I want to share with you has to do with rental.
- The median rent of a brick-and-mortar franchise business should be around 8 to 12% of your average revenue.
If your rent is less than 8%, you have a pretty good unit economics model for this particular unit! This is very favorable and will help you achieve your financial goals for that unit a lot faster.
But, if your rent is above 12%, you really need to reconsider whether this is a good location for your franchise.
You also have to analyze and determine how much higher are you willing to go. Consider that every 10th of a percent you go over that number will take you farther from getting to a break-even point to then, start making money in that unit.
The only exception is for mall locations. In these commercial centers, rent is usually higher than 12%, but other costs are lower, which compensates for that increase in rental.
Business Principle #6: Control over your labor & COGs
For most brick-and-mortar franchise businesses, the labor costs and the cost of goods is over 50% of their expenses. This means that how you manage them can make or break your business.
- This is a financial insight that as a franchisee and a small business owner, you need to know! You must become an expert at managing your labor costs and your cost of goods because that is where most franchisees fail, regardless of the brand you acquire.
To do that, you need to truly understand what is the business model for the franchise brand you acquired, as well as the labor and cost of goods model they are operating under. That way, you’ll be able to deliver the quality product and service the customers expect.
You also need to comprehend what are the business objectives, what affects them, and the fine processes and procedures your team has to follow to minimize waste in those two areas.
Having this information and knowledge is critical for your financial success. And a lot of this information should be available in the Franchise Disclosure Document, item 19, assuming that your franchise provides that information.
You can also get it from friends, mentors, and other resources, such as The American Academy. We help franchise and business owners in their journey, providing them with the tools they need to grow into a multi-unit franchise enterprise and be in command of their franchise.
To do so, we have four best-in-class programs. If you'd like to learn more about this, visit: https://www.americanfranchiseacademy.com/programs
Follow us on our YouTube channel, subscribe to our podcast, and find us on social media to get more information for you to be successful.
Reflections:
- Do you understand the unit economics of your franchise?
- How much do you have to scale your business to hire a district manager so you can delegate operations?
- What are your financial non-negotiables?
- How are you keeping your costs and waste under control?
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