In Franchising, Does Size Matter?

Dunkin’, Taco Bell, McDonald’s, Sonic, The UPS Store, Ace Hardware, Planet Fitness — those are the outliers when it comes to brand size. For the vast majority of franchisors, those are the dream brands.

What is the right size for a franchise brand? Are there advantages to staying small?

It depends.

Defining success

What does success look like for the franchisor? Is it that moment when the system produces enough volume that the kicked-off royalties carry the business past breakeven? Is it when the private equity firms start hounding the franchisor for potential purchase? Is it when franchisee satisfaction reaches perfection and franchisees want to swallow up more units?

It begins with vision. What is your vision over the next 12 months? Start there. Small bites will drive great growth. Franchisors who basically follow the operational process of the dream brands (slow and steady wins the race) are likely the brands that grow – and grow around the two most important features of a successful brand, unit level profitability and franchisee satisfaction.

Are there advantages of continued growth?

Imagine the following scenario: a franchise brand remains under 50 units, but has an amazing group of successful franchisees.

Imagine the brand has only 25 locations, each owned by one franchisee. Each of the first five years, the brand has awarded five more franchisees into this system and at year six, the first franchisees can add another location. Corporately, the vision has been to offer amazing support to those franchisees to help them each join a $1 million club. And, for cash flow, the franchisor owns one corporate location.

• 25 Locations X $1,000,000 = $25,000,000

• $25,000,000 X .05 (average royalty) = $1,250,000

• 5 new franchisees X $30,000 franchise fee = $150,000

• $1,000,000 location at .15 profitability = $150,000

• Total income for franchisor $1,550,000

• CEO, COO, CMO, 5 support team/admin: - $750,000 in salary

• .20 Operating Expenses: - $310,000

• Rough annual income: $490,000

• Average franchise marketing cost per deal $25,000 X 5 = -$125,000

• Rough after additional marketing investment $365,000

• Number of Units Year 5: 25

• Number of Units Year 6 (5 from existing, 5 new): 35

• Number of Units Year 7 (10 from existing, 10 new): 50

• Number of Units Year 8 (15 from existing, 15 new): 80

• Number of Units Year 9 (20 from existing, 20 new): 120

• 120 units X $1,000,000 = 120,000,000

• Total from royalty = $6,000,000

Growth and profitability

Is a 120-unit brand that is growing at this rate considered successful? Absolutely.

• Dunkin’: 11,300

• Taco Bell: 7,072

• McDonald’s: 37,855

• Sonic: 3,504

• The UPS Store: 5,000

• Ace Hardware: 5,000

• Planet Fitness: 2,039

Is an 8-year growth plan too much?

• Dunkin’: 1950

• Taco Bell: 1962

• McDonald’s: 1955

• Sonic: 1953

• The UPS Store: 1980

• Ace Hardware: 1924

• Planet Fitness: 1992

Clearly, an 8-year run to 120 units would not be a bad run.

What numbers do franchisors (those pushing growth) focus on?

• Number of leads

What numbers should franchisors (pushing growth) focus on?

• Number of applications

• Number of deals

• Number of successful franchise openings

• Number of franchisee validators

• Number of franchisees willing to continue scaling with the brand

• Profitability

So, to answer the question of does size matters, again, it depends.

Does size matter to you? Does profitability matter to you? What does happiness look like for you? What does winning look like for you?

Success is in the eye of the behold — and the beholder is the franchisor.