Franchisee Earnings

The accounts reflect the pilots’ financial results.

Once retired, they must demonstrate that the exploitation of the concept is profitable enough on the one hand for the franchisee to finance its investment and remunerate it, but also for the franchisor to invoice and collect the revenues necessary to finance the services it will provide to the franchisee and to ensure a profit. 

There is no financial feasibility of a sustainable franchise development if this level of profitability is not reached. 

The accounts of the pilots do not in principle reflect what the operating accounts of future franchisees will be: they in fact bear expenses that the franchisee will not have to expose. They must therefore be retired.

• Reduce atypical charges
   

The pilots’ accounts most often contain expenses that a franchisee will not have to incur: trademark filings, costs of creating a graphic universe of furniture, software development costs, etc. They should be reprocessed: they are subtracted so as to place themselves in the situation where the future franchisee would be. This operation makes it possible to better read the real profitability resulting from the exploitation of the concept.

• Leverage the retired accounts of the various pilots to build the franchisee’s operating account
   

If there are several pilots, the accounts of each of them, once cleared of atypical charges, will be compared. The aim is to determine the extent to which the exploitation of the concept gives comparable results and to be able to explain the differences observed. This step makes it possible to model the operating account well: under these average conditions of activity, the intermediate management balances must be homogeneous from one point of sale to another. 

The method of agglomerating pilots’ accounts in order to determine an average account must be used with a critical eye: the average must be significant. 

The accounts of a pilot who has failed should not be discarded if this failure is not explained and if there are only one or two other pilots whose results are otherwise not homogeneous and thus have significant standard deviations.

If, on the other hand, the causes of the failure have been identified and the accounts of the other pilots allow rules to be drawn, the decision to exclude the accounts of the pilot in question could be taken. 

It is very important to have a typical operating account of the franchisee. Why? Because to recruit franchisees, you must first be able to give them figures. They need to know how much they need to invest, how much return on investment can be expected. So these figures come from the history of the network’s achievements.

It is therefore from the franchisee’s standard operating account that this type of information can be provided.

But then, it is necessary to allow franchisees to finance themselves, by building their own provisional account from what is found in the network and therefore this is necessary to allow the borrowing that will be essential for the franchisee to concretize the opening of a point of sale under the brand.

It is also necessary to be able to ensure the sustainability of the concept and therefore it is important at this stage to ensure that the typical operation of a franchisee will generate sufficient revenues, with which we will associate sufficiently contained expenses to ensure a profitability that ensures the sustainability of the concept. 

We start from the typical operating account drawn from the pilots’ experience and defined as indicated in the previous step, and we retreat it.

Then, we will reprocess all the expenses that can be described as research or development expenses in a more general way, so as not to focus on this term, all those that are the sole responsibility of the franchisor: trademark filings, concept development, software development expenses that the franchisee will not have to incur sinceit will directly benefit from the result that allowed the exposure of these expenses.

Then, if the franchisor or a company in its group supplies products to franchisees, the transfer prices of the goods are determined and the gross commercial margin is adjusted accordingly.

Indeed, the conditions of supply of franchisees may differ from those enjoyed by the franchisor’s pilots, whether for objective reasons (volume of purchases for example) or subjective (margin arbitration). Discrimination between buyers is possible under French law, subject to certain reservations. Therefore, if it were decided that the purchase prices from which the Franchisee will benefit should be different from those applied to the Franchisor’s pilots, it would be necessary to adjust the level of the gross commercial margin in the Franchisee’s standard income statement accordingly. 

And then, we take into account the changes in parameters induced by the operation by an independent: for example, if the franchisee replaces the point of sale manager, the payroll will be impacted.

It is also necessary to reprocess all intra-group expenses. Often, the pilot is operated by a subsidiary, a holding company of the franchisor and therefore we can imagine that there are fees charged by the holding company, for example administrative management, or brand provision, or executive remuneration. So it has to be restated so that we arrive at a typical operating account that can serve as a model.

Then, and this is a good transition for the future, it will be necessary to introduce into its operating account all the deductions that will result from the franchise agreement: entry fees, royalties, any services provided by the franchisor and check whether the organization of supplies will allow the same level of margin to be maintained. From there, we will have re-parameterized everything, but with historical data to have a typical operating account of what the franchisee should achieve under normal operating conditions.

 The objective of this step is to determine the structure of the business income statement, to value the aggregates of this income statement, and to understand the duration of reaching the standard cruising pace of a franchisee’s activity (at least the break-even point or the break-even point calculation). 

The franchisor’s business model is by nature closely linked to that of franchisees. Putting these last two into perspective will allow them to be finalised.

The franchisor’s business plan is mainly structured around two profit centers: the establishment of new franchisees and the animation of the network .

Franchisor Business Plan

1. Finalization
   

The head-end must model the forecast openings on the time scale. These will generate products for the franchisor of different natures depending on the progress of the franchisee’s project.

As a first step, the headend invoices an input package mainly covering the entry fee, the equipment or the installation package as well as training. These products are attached to the development department.

In a second step, the network head will benefit from two main revenue channels: royalties and the profit of central purchasing or referencing.

Royalties revolve around two main categories: support and brand. The assistance fees allow the franchisor to run the network. Brand royalties are the consideration for the franchisor for the grant of the trademark right and more generally the distinctive signs of the brand.

Margins and / or commissions made through central purchasing or referencing constitute the second revenue channel. If the supply of franchisees is operated within the framework of a central purchasing body managed by the franchisor, the latter will make a margin on the resold products. If the supply of franchisees is carried out within the framework of a referencing centre, the franchisor will benefit from the sums paid by the suppliers due to the referencing carried out or the services rendered.

The

profitability of each of these two departments will depend on the franchisor’s ability to maintain a positive ratio between the revenues generated by each of them and the costs incurred. The controlled allocation of human resources to both departments is fundamental.

The operating department generates a turnover that is generally progressive, rather linear and continuous over time. Adapting the associated costs as they arise is generally not a problem. It should be noted that only a reduction in the number of points of sale can generate a drop in the turnover of this department.

On the other hand, the development department may be subject to higher volatility. The turnover generated may be discontinuous over time. This mainly depends on the maturity of the network in that mature networks benefit from contract renewals positioned over time allowing them a stability of the revenues of this department. However, it remains essential to anticipate any slowdown in the number of openings because it will be necessary to reduce the team of implementation managers if necessary in order to maintain a positive rate of return.

The versatility of positions between the two departments can be a key to management.

The forecasting strategy presented above must allow the head of the network to define the amount of entry fees, monthly fees, products of a central purchasing or referencing to position in order to ensure the balance of its financing plan.

2. Completing the Franchisee’s Business Plan 
    

The pricing positioning of entry fees and monthly fees must be injected into the franchisees’ financing plan.

It should be noted that the head of the network must work on the costs borne by franchisees through negotiated referrals. The synergy of the network must allow economies of scale for the benefit of future franchisees.

Once the result and the self-financing capacity of the first years have been amended from the expected monthly entrance fees and royalties, they should be used to verify the maintenance of the financial feasibility of the project according to the investments and the financing structure.