Franchisors need to monitor franchisee performance for two reasons. One pertains to understanding the growth and continuity their own business. And the second, is for the ability to know where and how to help franchisees.
Some franchise companies and their advisors plan and collect a wide range of KPIs from franchisees, covering a number of business functions and processes – and comprising both financial and non-financial measures. Many measures will be specific to the particular business model – and need to be. By contrast, some KPIs are fundamental and transcend different types of business. The latter should be considered standard fare for almost every franchise system.
Yet surprisingly, many franchisors do not collect even basic information from franchisees. In our opinion this can be viewed as a significant weakness.
The following five basic measures are examples of KPIs we believe transcend different business formats and are crucial for both franchisees and franchisors alike. We also provide a brief explanation for why each is important.
1. A measure of liquidity, or the extent to which the franchisee can meet immediate and short-term obligations. A franchisee can be profitable but still go out of business. We’ve even seen it with a franchisee EBIT of more than $200,000. A franchisor with franchisees under increasing liquidity pressure is a franchisor in need of a serious plan. Knowing where franchisees are at, and the trend behind it, is vital.
2. Franchisee profit. This is an incredibly simple, but crucial KPI for the franchisor to monitor. Whether it is going up or going down provides a franchisee and franchisor with valuable insight. Profit is an important starting point for evaluating performance because it is the output of many contributing factors. And while profit doesn’t equal cash, it can sure help on the path to creating it. Also, franchisors need to know franchisee profit in order to be able to engage with franchisees on a meaningful and relevant basis (e.g. it is easier to discuss new initiatives and remedial strategies with franchisees when they can be linked to increasing profit).
3. Franchisee sales. Total franchisee sales, in itself, encompasses a whole series of KPI’s (e.g. # of transactions, average sale, # of customers etc) worthy of monitoring. We’ll save those for another article. But here, monitoring sales is powerful because sales are at the front end of the business. Sales increasing is often a positive sign. But we all know sales and profit do not always correlate perfectly, and it is insightful to monitor the correlation between the direction of sales and movements in many other key performance indicators.
4. Labour costs. Franchisee wages and salaries are often a key driver of franchisee profitability. There are often considerable differences between franchisees within a single franchise system, even for franchisees at similar turnover levels. In our experience much of this range can be explained by what the franchisee is doing, and often there is considerable opportunity for improvement with the right kind of franchisor support and subsequent franchisee execution.
5. Franchisee cost of goods sold (or other direct expenses, depending on the type of business). This could be number four depending on the business. Like labour, franchisees commonly vary considerably in the level of COGS achieved – sometimes, but not always for good reason. And like sales, and labour costs, there are many sub-components or KPIs that can provide insight into the difference. But bottom-line, knowing the headline COGS figure can provide considerable insight into the efficiency/effectiveness of the local operation – including possible opportunities for growing overall business performance and profitability.
While this is a set of five we are compelled to provide a sixth measure, and that is customer satisfaction. Customer satisfaction is of critical importance because it is central to either building or burning a business. Experience tells us that even within the tightest of franchise systems, customer satisfaction can vary markedly by franchisee or even an employee within a franchise business. In turn, what can be measured can be managed and this is important because customer satisfaction is connected with outcomes that really matter. Examples are repeat business, recommendations, reduced sensitivity to price, increased customer purchase frequency, and so on.
In summary, these are all really basic franchisee-level key performance indicators that should be monitored regularly by the franchisees and franchisor.
If you’re a franchisor and you don’t know these KPIs by franchisee, then you are missing an important part of the franchisee picture and will be hamstrung in your ability to truly engage with improving franchisee [and as a by-product, your own] performance.
It may also be a signal that your franchise system would benefit from a Franchise Review.