When I first entered the franchising space, two things were surprising. The first: franchising is very litigious and expensive. Everything is a contract and everyone is expected to play nice and within the confines of these documents. Second: tracking compliance and performance of franchise units is often relegated to spreadsheets. These spreadsheets are then passed around from franchisees to corporate officers. Something about these systems didn’t make me feel comfortable.
I’ve built a system designed to streamline the reporting process for franchises that don’t use centralized software. This means you no longer have to wait on franchisees to send in their monthly reports (or send multiple follows up asking for them). For example, if each of your units handles their own accounting platform (such as QuickBooks Online), you will now have access to the underlying data. And you won’t need to go chasing monthly reports.
A reporting system like this opens up a few new opportunities that weren’t available before. Such as easy stack ranking by region or cohort and near real-time analytics. For the purposes of this article, we’ll focus on benchmarking your franchisees against the FDD’s Item 19. Here are 3 reasons why you should consider using your Item 19 as a benchmark:
Reduces Risk
As stated before, franchising is a litigious business. Most of the risk comes in the form of compliance and delivering on promises made within the FDD. A financial performance representation, also known as Item 19, is often part of that promise. Using data to ensure that franchisees are on track to meet or exceed these promises is a low-cost way to reduce the likelihood of litigation. If you notice a unit falling short, it might be time to step in to offer some support.
In addition to reducing risk, having access to data also provides the opportunity to produce accurate and timely financials. Metrics such as highest earners, lowest earners, and averages are all good indicators to prospective buyers who might review your future Item 19. And you want to make sure they are correct.
Beyond reducing contract risk, measuring customer satisfaction is also important for every brand. Collecting feedback and identifying trends can help protect your brand. This feedback will also protect the investment of your franchise owners. Receiving multiple instances of negative feedback from customers of a certain location should trigger an investigation. The goal is to mitigate any future damage to both the brand and your franchise system.
Improves Franchise Support
By using data, your team is now provided an inside-look at each location. This allows them to gauge how each franchise is performing at a glance and benchmark locations against your Item 19. See a unit excelling? Figure out what they’re doing and if you can deploy it elsewhere. See a unit struggling? Let’s take a deeper look and find the cause. Well-supported franchisees are happy franchisees (mostly). Keeping up-to-date on franchise performance is an important task. Not just for keeping them happy, but also for making sure that they don’t feel left behind.
For asset-heavy franchises, support can be the difference between closing and making money. It’s always in your best interest to be ahead of potential problems. Having the data at hand means your support team spends less time asking questions and more time taking action.
Most Item 19s only disclose gross revenue, but some also include expected expenses. Being able to identify if a franchisee is over spending on certain expenses can also lead to better support. Some common areas of overspending include advertising, payroll, and rent. Help your franchisee by lowering their expenses, and you’ll be sure they’ll be happy long term.
Increases Royalties
Franchise systems exist to expand a brand as fast as possible. This allows a business to bring on like-minded entrepreneurs and “sell” locations. The business grows much faster than if the original team attempted to open the same locations. But this comes with an extra cost to the new owners: a royalty fee for licensing the original concept, branding, and processes.
Typically, franchisors collect a percentage of the revenue generated by a location as a royalty fee. This fee often covers support, marketing, and sometimes technology expenses. But how does tracking data and benchmarking against the FDD’s Item 19 help a franchisor collect MORE royalties?
A simple solution: your support team can now identify areas of opportunity for each franchise unit. Those units are able to take action and improve their metrics. These efforts should have a direct impact on the revenue they are generating. And thus, more franchise revenue = more royalty payments.
Some ways I’ve seen this work in the wild include:
- More frequent vehicle maintenance means less downtime. Less downtime means more jobs and more revenue.
- Franchise owner hires a salesperson to help close deals (turns out the owner wasn’t that great at sales). The extra revenue paid for the salesperson twice over and everyone was happy.
- And unfortunately, we were also able to catch some attempts to manipulate reporting. When owners download and send in their reports, they have the opportunity to make adjustments as they see fit.
The Item 19 can be a powerful tool when it comes to benchmarking and tracking your franchisees. When advertising any kind of financial performance representation, it’s important to have a plan in place to ensure that your new owners are able to meet these. If not, they may have grounds for litigation. On top of reducing risk, leveraging your Item 19 can also spotlight successful practices that are worth studying. Areas for improvement will also come to light. Addressing these could end up benefiting the business both financially and increase satisfaction.
If you’re interested in learning more about how your organization can use your data, please schedule a call with our team! We’re familiar with working with franchisors and your need for fast and reliable data.