Franchising is a business that relies on profit. Even though it seems so basic and self-evident, not all franchisors adhere to this overriding concept. A franchisor’s value proposition is their business model’s future expansion, scalability, and sustainability. Franchisees’ profits per unit are the final yardstick by which these factors are measured. Numerous early-stage franchisors dissatisfied with their franchise unit economics struck us. In the early years of their business, even the most successful franchisors were losing money while they set up their processes and infrastructure. Perhaps franchising isn’t the ideal growth strategy if your initial goal was to double or triple your earnings. In contrast, franchising is the ideal way to expand your firm to a value 50 or 100 times greater than it is now.
Franchisors must resist being short-term greedy to achieve exponential development. To succeed in the long run, a franchisor must continually reinvest, understand and cultivate a culture conducive to the success of their franchisees, and grasp their business strategy inside and out. When a new franchisor is starting, they shouldn’t be concerned with increasing their EBIDTA by nickel and diming their franchisees. If they don’t do this, they won’t be able to generate future EBIDTA and increase their enterprise value in the long run.
According to Law Insider, “Franchise EBITDA means, for any period, concerning a franchise acquired by Company or any of its Subsidiaries during such period, the sum, without duplication, of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, and (v) total amortization expense, in the case of clauses (ii)-(v), to the extent deducted in the calculation of Consolidated Net Income, determined for such franchise in conformity with GAAP. For purposes of determining Franchise EBITDA, references in the definitions of “Consolidated Net Income” and “Consolidated Interest Expense” to Company and its Subsidiaries shall be deemed to refer to such franchise.”
As soon as you decide to sell your brand to private equity, the first issue your buyers will ask is if your franchisees are profitable. The strength of your statistics and the unit economics of your franchisees are always at the heart of our tango with our clients. Invest now in your franchisees’ margins, efficiency and overall profitability, even if you plan on exiting the business in a few years. Consume those expenses now so that you can savor the benefits afterward. Understanding this comprehensive summary solves your math with franchise unit economics.
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