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

Let's fight through a counterpoint to see if there is as much value in a $1 Million AUV versus an $800,000 one.

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 AUVs?

I have thought a lot about the fight for more and more average unit volumes—and I certainly understand the why behind it—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’s start with the positives:

  1. You have a stronger Item 19—or at least a marketable term in creating a $1 million business opportunity.
  2. In theory, more money should create higher EBITA.
  3. There is something magical about owning a million-dollar business – thus, maybe (just maybe) that helps the perception of the franchisees and increases validation.
  4. $1 million AUVs means $50,000 (5 percent royalty) per location back to the franchisor.

How about some variables:

  1. Sure, there are businesses that are meant to be over $1 million in business. But it is not an all-encompassing message for all franchisors. The message is more so around not being what you aren’t.
  2. Viral brands that have the operational support should be able to crush limitations – meaning, if you have an incredible product that people rave about, then, that buzz will automatically drive your unit sales higher.

Now, let’s make some assumptions:

  1. 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.
  2. Those low-cost franchise brands rarely reach millions in gross revenue.
  3. There is also a lot of buzz around the idea that everyone wants to own a restaurant.
  4. The reality is, not everyone can afford a restaurant.
  5. The more the investment costs climb, the fewer prospects exist. More money means fewer buyers.

So, for argument’s sake, let’s take a $500,000 investment and say you have 100 locations. Then, let’s say 30 percent of your franchisees produce volumes more than $1 million, 30 percent are between $800,000 and $1 million 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:

  • Top 30 percent: 30 locations X $1,300,000 = $39 million
  • Next 30 percent: 30 locations X $900,000 = $27 million
  • Bottom 40 percent: 40 locations X $700,000 = $28 million
  • Total System-Wide Sales: $94 million
  • Actualized AUV: $94 million / 100 = $940,000
  • Total Royalty to Franchisor (5 percent): $4.7 million

Some notes about the above:

  1. We sure as hell know the bottom 40 will complain a lot. A LOT. Why?
    1. You sold them on the fact that the top 30 percent did $1.3 million in sales. It doesn’t matter if you disclose the fact that it is your top 30 percent; that’s the number prospects listen to.
    2. The initial investment is really built around the potential for $1.3 million in sales (or perhaps $1 million). For argument’s sake, let’s say the average ticket is $15. That’s 66,666 transactions/year, 5662/month or 182/day. It helps you figure out seats, labor, food/product, etc.
    3. When they think they will make, for argument’s sake, at least $1 million, 70 percent of your system is not reaching their so-called potential and has some sense of frustration.
    4. For every franchisee who doesn’t validate, add more $$$ in franchise marketing to find new franchisees.
    5. The reality is this brand is upside down, even though it appears it isn’t.

Example 2: A franchisor who’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.

  • Top 30 percent: 30 locations X $900,000 = $27 million
  • Next 30 percent: 30 locations X $800,000 = $24 million
  • Bottom 40 percent: 40 locations X $700,000 = $28 million
  • Total System-wide Sales: $79 million
  • Total Royalty to Franchisor (5 percent): $3.95 million

Some more points:

  1. Franchisors will pull in $750,000/less/year.
  2. Question: Is a $400,000 unit easier to grow?
  3. How about marketing? Easier to drive fewer people?
  4. Does real estate change at all?
  5. Do operations become easier?
  6. The bottom 40 percent is frustrated because they are not hitting their full potential ($800,000 AUV). That’s slightly better than 70.
  7. Which brand has more growth potential in today’s market?
  8. Is it worth giving true AUVs even if it doesn’t give the marketing hook?
  9. What’s more valuable, expectations met long-term or not (for franchisees)?

Now, if I have kept you engaged this long, you are probably saying sure, makes sense, but won’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’t a lower investment and a lower return help with validation in that expectations are more aligned?

The truth is, I don’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.