Seven key benchmarks franchisors should measure themselves against
Monday, September 29, 2014/
Much has been written in recent years about the need for benchmarking of franchisees so that franchisors can more effectively manage underperformers in their networks.
Through the analysis of meaningful data provided by benchmarking within a network, franchisors can act early to intervene if a franchisee begins to stray off course, and potentially save both the franchisor and franchisee much future pain by avoiding a problem before it becomes too big to solve.
As important as benchmarking is within a system, franchisors do little active benchmarking among themselves to rate their own performance measures.
Whereas benchmarking within a system compares franchisees of the same brand, benchmarking franchisors with different brands, and which operate in completely different industries is much more problematic.
This means that any meaningful comparison between franchisors should acknowledge obvious differences in their business models, particularly the distinction between retail and service businesses.
It’s easy to argue that retail and service businesses sit at opposite ends of the same spectrum, and that separating the two requires establishing a midpoint where service businesses sell retail products and or retail businesses sell services.
Once the distinction has been made, there are a number of very useful benchmarks that franchisors in either category can use to compare their performance relative to other franchise brands.
Here are seven benchmarks that can be very useful to measure:
1. Field support ratio
This is the proportion of field support staff to franchisees. Field support staff are directly engaged in supporting franchisees on the front line, and therefore this ratio does not include any other staff in the franchisor’s business, including senior executives, marketing and administration staff.
For retail systems, the field support ratio commonly ranges from 1:10 to 1:30. For service systems, field support staff are often spread more thinly, with ranges of 1:20 up to 1:50 not uncommon.
2. Overall support staff ratio
This is similar to the field support ratio, except that it counts all franchisor personnel, including those directly and indirectly involved with supporting franchisees, except for personnel involved in manufacturing and distribution of products supplied to franchisees.
Typically, the overall support staff ratio is much higher than the field support ratio, and in some retail systems can be as high as one person in head office for every two or three franchisees.
3. Franchisee tenure
The Franchising Australia surveys conducted by Griffith University have typically found that franchisees stay an average of seven years, compared to an average initial term of five years.
Tenure, the average length of time a franchisee stays in a network (especially compared to relatively short franchise terms) can indicate a high level of satisfaction with the business. For example, if a franchise term is five years, and a franchisee has operated for 20 years (i.e. four consecutive franchise terms), this would indicate a very high level of satisfaction with the business.
An average tenure that is less than the initial term of a franchise (e.g. a tenure of three years compared to a franchise term of five) indicates potentially a very young system, or a system which has experienced sudden growth, or a system where dissatisfied or unviable franchisees are exiting early.
4. Resales ratio
The resales ratio is a measure of the proportion of existing franchises in a network available for sale compared to the total number of outlets in the network, and expressed as a percentage.
For example, if 10 outlets out of a total of 100 are available for sale, then the resales ratio is 10%. The lower the resales ratio, the more likely it is that franchisees are satisfied with their businesses. The higher the resales ratio the more likely it is that franchisees are dissatisfied (which is why their business is for sale).
If the resale ratio exceeds 20%, this may indicate serious distress within a network.
5. Abandonment ratio
In a perfect world, every franchisor would have an abandonment ratio of zero. That is, no franchisee in the network has ever walked away from their business and abandoned it compared to the franchisees who stay.
Unfortunately abandonment does occasionally occur, and is more common in mobile service businesses, which generally involve much lower investment levels and do not require the additional constraint of a shop lease compared to a retail business.
The abandonment ratio should be as close as possible to zero (or zero itself).
6. Conference participation rate
While many franchisors require franchisees to attend the annual conference as a condition of the franchise agreement, few ever enforce it.
Attendance by 100% of franchisees at a brand’s annual conference is so rare it almost never happens, and realistically, there will always be at least one franchisee in any network who will have to attend a wedding, or give birth whenever the conference is due to be held.
In the absence of such understandable reasons for non-attendance, every other franchisee should be able to attend but probably won’t. A benchmark for conference attendance is 85% or more of the franchisees in the network should attend. Anything less than this may indicate a level of dissatisfaction with the franchisor or the business.
7. Proportion of multi-unit franchisees
In recent years, franchisors have increasingly looked for growth from within as a variety of external factors make it more difficult to recruit franchisees. Growing from within means finding franchise candidates from among the existing employees in the network, or finding existing franchisees willing and able to open additional outlets.
This latter form of growth, using multi-unit franchisees, does not always provide the best outcomes for the franchisor or the franchisee in all cases, but in the main seems to work for both parties.
Consequently, a measure of the health of a franchise network is the proportion of existing franchisees who are multi-unit operators. If for example, there are 100 franchisees (not outlets, but franchisees), and 30 of these have two or more franchises, then 30% of the network are multi-unit franchisees.
Unfortunately for many service systems, the nature of their business model can make it extremely difficult if not impossible for franchisees to be mult-unit operators, so this measure is generally more relevant to retail systems.
The higher the proportion of multi-unit franchisees, the more likely it is that franchisees are satisfied with their businesses and willing to expand their investment in the brand.
Individually, any one of these benchmarks can provide a useful insight into a franchisor’s business and the performance of its network as a whole. Where benchmarks provide insights into franchisee satisfaction, it follows that franchisee satisifaction is predicated largely on profitability, among other things.
Collectively, these seven benchmarks provide a holistic view of a franchisor’s performance, but should only be used in comparison with other networks that operate relatively similar business models, as comparisons between service and retail brands may not be meaningful or valid.
If these benchmarks are not currently being measured in a franchise network, it is highly advisable for senior management to add these to their management reports and track them regularly.
Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.