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Call me a crazy person, but stick with me on this topic: is the juice worth the squeeze when growing a franchise business to $1 million&nbsp;AUVs?

I have thought a lot about the fight for more and more average unit volumes&mdash;and I certainly understand the why behind it&mdash;but, let me fight through a counterpoint to see if there is as much value in a $1 million AUV versus an $800,000 one.

Let&rsquo;s start with the positives:

<ol>
	<li>You have a stronger Item 19&mdash;or at least a marketable term in creating a $1 million business opportunity.</li>
	<li>In theory, more money should create higher EBITA.</li>
	<li>There is something magical about owning a million-dollar business &ndash; thus, maybe (just maybe) that helps the perception of the franchisees and increases validation.</li>
	<li>$1 million&nbsp;AUVs means $50,000 (5&nbsp;percent royalty) per location back to the franchisor.</li>
</ol>

How about some variables:

<ol>
	<li>Sure, there are businesses that are meant to be over $1 million&nbsp;in business. But it is not an all-encompassing message for all franchisors. The message is more so around not being what you aren&rsquo;t.</li>
	<li>Viral brands that have the operational support should be able to crush limitations &ndash; meaning, if you have an incredible product that people rave about, then, that buzz will automatically drive your unit sales higher.</li>
</ol>

Now, let&rsquo;s make some assumptions:

<ol>
	<li>There is a lot of buzz around low-cost franchise brands. Some of the fastest growing brands have nailed the price point that reaches the masses.</li>
	<li>Those low-cost franchise brands rarely reach millions in gross revenue.</li>
	<li>There is also a lot of buzz around the idea that everyone wants to own a restaurant.</li>
	<li>The reality is, not everyone can afford a restaurant.</li>
	<li>The more the investment costs climb, the fewer prospects exist. More money means fewer buyers.</li>
</ol>

So, for argument&rsquo;s sake, let&rsquo;s take a $500,000 investment and say you have 100 locations. Then, let&rsquo;s say 30 percent of your franchisees produce volumes more than $1 million, 30 percent are between $800,000 and $1 million&nbsp;and 40 percent are below $800,000. Within that grouping, the top 30 percent then averages $1.3 million, the next 30 percent averages $900,000 and the bottom averages $700,000. For this example:

<ul>
	<li>Top 30 percent: 30 locations X $1,300,000 = $39 million</li>
	<li>Next 30 percent: 30 locations X $900,000 = $27 million</li>
	<li>Bottom 40 percent: 40 locations X $700,000 = $28 million</li>
	<li>Total System-Wide Sales: $94 million</li>
	<li>Actualized AUV: $94 million / 100 = $940,000</li>
	<li>Total Royalty to Franchisor (5&nbsp;percent): $4.7 million</li>
</ul>

Some notes about the above:

<ol>
	<li>We sure as hell know the bottom 40 will complain a lot. A LOT. Why?
	<ol style="list-style-type:lower-alpha">
		<li>You sold them on the fact that the top 30 percent did $1.3 million&nbsp;in sales. It doesn&rsquo;t matter if you disclose the fact that it is your top 30 percent; that&rsquo;s the number prospects listen to.</li>
		<li>The initial investment is really built around the potential for $1.3 million&nbsp;in sales (or perhaps $1 million). For argument&rsquo;s sake, let&rsquo;s say the average ticket is $15. That&rsquo;s 66,666 transactions/year, 5662/month or 182/day. It helps you figure out seats, labor, food/product, etc.</li>
		<li>When they think they will make, for argument&rsquo;s sake, at least $1 million, 70 percent of your system is not reaching their so-called potential and has some sense of frustration.</li>
		<li>For every franchisee who doesn&rsquo;t validate, add more $$$ in franchise marketing to find new franchisees.</li>
		<li>The reality is this brand is upside down, even though it appears it isn&rsquo;t.</li>
	</ol>
	</li>
</ol>

Example 2: A franchisor who&rsquo;s actual AUV is $800,000 and the investment is 20 percent less than example one ($500,000 X .20 = $100,000 less) at $400,000.

<ul>
	<li>Top 30 percent: 30 locations X $900,000 = $27 million</li>
	<li>Next 30 percent: 30 locations X $800,000 = $24 million</li>
	<li>Bottom 40 percent: 40 locations X $700,000 = $28 million</li>
	<li>Total System-wide Sales: $79 million</li>
	<li>Total Royalty to Franchisor (5&nbsp;percent): $3.95 million</li>
</ul>

Some more points:

<ol>
	<li>Franchisors will pull in $750,000/less/year.</li>
	<li>Question: Is a $400,000 unit easier to grow?</li>
	<li>How about marketing? Easier to drive fewer people?</li>
	<li>Does real estate change at all?</li>
	<li>Do operations become easier?</li>
	<li>The bottom 40 percent is frustrated because they are not hitting their full potential ($800,000 AUV). That&rsquo;s slightly better than 70.</li>
	<li>Which brand has more growth potential in today&rsquo;s market?</li>
	<li>Is it worth giving true AUVs even if it doesn&rsquo;t give the marketing hook?</li>
	<li>What&rsquo;s more valuable, expectations met long-term or not (for franchisees)?</li>
</ol>

Now, if I have kept you engaged this long, you are probably saying sure, makes sense, but won&rsquo;t happen in reality. But, do brands take steps toward rearranging their sell? Do they re-engineer their models to fit more humans who could potentially buy? Doesn&rsquo;t a lower investment and a lower return help with validation in that expectations are more aligned?

The truth is, I don&rsquo;t know the complete answer. But, I have certainly spent a lot of time thinking about it. I would love for you to share your thoughts with me on this topic.

Nick Powills: Should You Fight to be a $1 Million Franchise Brand? 

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