Facts (and a myth!) about franchise development

Fotolia_139616127_smIf you’ve attended the International Franchise Association convention, you’ve probably noticed how a surprisingly large portion of the attendance is in franchise development. We were curious to learn more about this critical role in franchise growth. This article presents some of our findings.

Quick side note on terminology: in the franchise world, the franchise development team does not sell franchises, they recruit franchisees and award franchises. This terminology better represents the relationship the new franchisee will have within the system as a whole. We strongly believe that a franchisor should find the candidate that is a perfect fit for their system in the long run, rather than selling units on a first come first served basis. However, it’s no secret that franchise development is a sales position. As such, we will use the terms franchise sales and franchise development interchangeably in this article.

Fact: Franchise sales teams are relatively small.

Anecdotally, we asked a few friends about the size of their franchise development teams:

  • 250 locations: three people in franchise development
  • 400 locations, half corporate: two people
  • 325 locations, opened up 90 units the past year: three people
  • 1,200 locations: usually four people but one quit six months ago and hasn’t been replaced

According to FRANdata, there are over 3,000 franchise systems in the United States. Some claim that there are actually up to 6,000 franchise systems in the United States when you include small corporate chains jumping in and out of franchising every year, but 3,000 gives us a rough order of magnitude.

On LinkedIn, the popular professional social networking site, searching for people with franchise development in their title reveals approximately 4,500 people in franchise development worldwide, with 2,800 of them being in the United States. In the USA, under 1,800 people have a title associated with franchise sales (although this includes some of the same franchise development people). If we are generous and account for the people not on LinkedIn and the CEOs who participate in franchise development in emerging franchisors, we still end up with roughly three people in sales per franchise system.

Compared to the operations team, the development team is much smaller. Although results vary based on geography and proportion of multi-unit operators, most franchises utilizing our franchise field audits app average 30 locations per franchise coach. Although both teams are similarly sized in an emerging concept, this ratio implies that in an average 270 location franchise, there will be three times as many franchise business coaches as people in franchise development.

An average of three salespeople is small compared to most sales teams. I would not be surprised that most franchisees selling B2B services have comparable sales teams to that of their franchisor. Admittedly, LinkedIn counts is an unscientific approach; let’s look at some concrete data.

Fact: Franchises are not signing that many deals every year

In a recent study about the economic impact of franchised businesses published on the International Franchise Association’s website, franchised businesses operated over 801,000 establishments in the United States in 2016. Franchising has a huge impact on the economy. If there are 3,000 different franchise systems in the USA, this implies an average of 267 units (or less in certain verticals, if we remove anomalies like Subway with over 25,000 domestic units).

In an analysis performed that same year, FRANdata and the Franchise Performance Group estimate that there are between 14,000 and 20,000 people who invest in new franchises every year  This may seem like a lot of deals, but this implies less than 2.5% in unit growth. More importantly, this averages out to under 7 units sold per franchise system. Obviously, some systems are growing much more rapidly and others are shrinking, but the average is less than a deal per month!

Even in systems growing at the mind boggling rate of 50%, the average franchise mentioned above with 267 locations would close 134 deals during that year, or just over 11 per month. That growth rate is very hard to sustain operationally, but the absolute number of deals signed is tiny in the broader scheme of things. Your local car dealership sells more cars than that!

Astute readers will rightfully assert that the franchise sales process is completely different than selling cars. Let’s dive into this.

Fact: Franchise development is not transactional

You can’t compare awarding a franchise with the sale of a car, as selling a car is transaction in nature. The seller and buyer are not embarking on a journey together. The seller is incentivized to close the deal immediately without considering if the car is an adequate long term choice for the buyer.

It is indeed more like the recruitment process: you need to work with the people you select. Using our example above, making 134 sales in a year may not seem like a big number, but hiring 134 people in a year is an analogy which gives us more perspective.

Additionally, the relationship you are building includes a financial component, just like the people you hire. This financial relationship can be quantified.

Investigating further, the report on the economic impact of franchised businesses reports over 674 billion in economic output (sales) across 732,842 locations, an average of $920,000 per location. In the quick service restaurant segment, the average revenue per location is higher at $1,190,000. For discussion purposes, round off to a million dollars average revenue per location.

Franchisors typically charge royalties based on sales. The royalty rates vary per industry (see one and two) and average 6.7%. However, restaurant royalty rates are lower (average of 4.47%). Let’s assume a common 5% royalty rate to keep it simple.

As such, our example franchisee will pay an average of $50,000 to the franchisor annually, which is vastly different than selling a car to an individual for a $30,000 one time fee.

In general, the relationship between the franchisee and the franchisor can be compared to a $25,000 to $100,000 per year sale or hire.

Curious realization: franchising is surprisingly similar to SaaS

When trying to find a proper comparable to the franchise recruitment process, we’re looking for this type of situation:

  • The buyer embarks on a long term journey with the seller
  • The relationship is based on a recurring revenue stream, rather than a one-time fee
  • The relationship is roughly quantifiable as between $25,000 and $100,000 annually

Given my own background, an obvious comparable comes to mind: Software-as-a-Service (SaaS) companies selling their software to businesses (B2B). The core principle behind SaaS is that the software provider will begin a long term relationship with its customers, offering its software in exchange for a recurring revenue stream. Initial setup fees exists but they normally are not material in the bigger picture. There are thousands of SaaS companies for which the annual contract value (ACV) is of similar size to that of the royalty stream. For example, this study of 303 SaaS companies showed 46% of companies with an ACV over $25,000. Software-as-a-service is also just a subset of the broader software market, many of whom sell software with a long-term maintenance agreement of comparable magnitude.

What’s interesting about this comparable is that a similar sales process is employed in tens of thousands of software companies every day, by hundreds of thousands of sales professionals. This comparable is an order of magnitude bigger than the franchise development market and can teach us some interesting insights.

Curiously, there are many other similarities which can be drawn between franchising and Software-as-a-Service:

  • director of franchise development compensation aligns with inside sales manager compensation: similar average deal sizes imply similar compensation structures
  • franchise business coaches are similar to customer success representatives: both are aligned with ensuring success and reducing churn
  • multi-unit operators as a growth strategy resembles upselling software: it’s much more capital efficient than acquiring new customers

There are also striking differences, mainly around team size. Software companies proportionally employ more salespeople than franchises. Is this due to reaching market saturation more quickly or an untapped opportunity for growth?

Myth: Franchise development is unique

Franchising obviously has its unique characteristics but overall, it is not a unique discipline. Franchise development is a relatively small space which can learn best practices from employee recruitment, SaaS sales and countless other domains.

There is nothing truly unique about franchise development; it’s just a process like any other. Software companies might not have an FTC requirement to send out a Franchise Disclosure Document or to have an Item 23 signed and returned, but they will surely send over supporting documentation and require electronic signatures, just as salespeople in the finance space must comply with numerous regulations.

In conclusion, the challenges faced by franchise development teams have been faced by countless other sales teams in various larger verticals. Franchise development teams do not only benefit from the lessons learned in these other verticals but also the software tools they utilize on a daily basis. More on this in a future article!

 



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