Is it possible to exceed your profit goals for your new franchise? Yes, as long as you focus on reaching your new franchise AUV quickly. How do you do this? By mapping out each step of the strategy with tactics and supporting budgets to achieve the planned new franchise AUV (average unit volume).
What happens if the first-year plan does not achieve the necessary new franchise AUV? You can lower your goals, extend the time frame for meeting the target, or focus on accelerating the growth of the new franchise AUV.
Let’s take a look at the last option – speeding the growth of your AUV.
As a franchisor, one strategy is to is to look at how your franchise is structured. You have several options: franchise conversion, development franchising, or the area representative strategy.
Many franchisors award franchises one at a time. They open one location in a given area rather than multiple locations at the same time. While the franchisee may later open additional locations, the franchisor controls the growth.
Conversion franchising is one option to quicken your new franchise AUV. This method awards a franchise to business owners who already have an established clientele or business, rather than to a novice. These franchise prospects generally require less training, which contributes to lower training costs.
Franchisors who use the conversion method typically find their marketing costs reduced substantially. A new franchise AUV is met more quickly and royalties begin to flow sooner.
The conversion approach does have some challenges. The prospective franchisees are already successful and may be more difficult to convert to your brand. You may also need to implement non-compete agreements that can be enforced easily.
Another technique to stimulate new franchise AUV growth is development franchising. It is comparable to an option agreement . The option agreement allows you to grant a prospective franchisee an exclusive option to establish a specific number of franchises within a pre-defined geographic area. This includes a pre-established opening schedule.
From the franchisor’s viewpoint, development franchising is appealing. It enables you to develop larger markets more expediently. It is also a technique that attracts already successful business owners, with lots of capital and experience in business operations.
This does present some risks. As a franchisor, you are committing a larger market share to an operator who may be unsuccessful. In addition, your franchisees must have strong strategic planning and budgeting skills in order to properly schedule openings without putting the entire operation at risk. Faster is not always better with development franchising.
Area Representative Strategy
Finally, some franchisors have implemented an area representative strategy. This approach grants a territory to a franchisee, who can then sell individual franchises within that region. This creates a sub-franchisee, and you can offer a set of services, such as training or marketing, in exchange for a fee-splitting arrangement.
This technique offers a quick method of growth. However, when executed poorly, sub-franchising can negatively impact overall quality of the product or services. It may result in lower gross margins, which are just as crucial as high AUV numbers. Adding an extra layer between individual franchisees and the franchisor may also result in less control.
As a franchisor, you want your franchisees to reach their new franchise AUV. Structuring your franchise with one of the above methods can make all the difference in attaining your goals. Be sure to consider the pros and cons of each to find the method that will be most beneficial for your situation.
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