; The Perpetual Franchise Question: Can Losing Money Today Pay Down The Road? | Be The Boss

The Perpetual Franchise Question: Can Losing Money Today Pay Down The Road?

Mark Siebert


Apr 20, 2018

Most franchisors in the industry can agree – closing a franchise sale is an electrifying experience. They may also agree that spending money on lead generation is a troublesome task. The reality is simple though – in order to make money, you have to spend money.

But, in an effort to save or to increase profit margins, even the most savvy franchisors tend to make unsound marketing decisions. These might include: hiring inexperienced staff to reduce overheard; cutting successful broker programs because of the associated fees; or pulling an ad campaign after one trial when it generated a high number of qualified leads but didn’t result in a sale.

This short-term thinking often results when owners don’t understand the present value of a franchise, or PVF. The PVF concept borrows from the principles of net-present value, a financial construct used to value a stream of future payments.

So, let's start with a basic premise. A franchise sale is more than a one-time revenue generator. If all is well, it’s a virtual annuity that can last for decades. Franchisors draw fees, royalties, advertising dollars, renewal fees, and other sources of revenue from each franchisee, over the term of their franchise agreement. Those fees, or the promise of those fees, represents a real value to the franchisor today, but also a foundation for longevity in your franchise program.

Long-Term View

When considering this long-term approach to franchise growth you’ll need to adopt a mantra that the money spent today is an investment in your future. If we think about a franchise sale as an annuity, the purchase price for that annuity is the cost of the marketing and sales dollars spent to make the sale. In return, the franchisor gains revenue and reduces the need for aggressive marketing expenditures in the future as the franchise matures.

Far too often franchisors lose sight of their long-term potential and cut marketing efforts short when they fail to see the fruits of their efforts immediately. That’s not a recipe for sustainability. Always keep in mind that it can pay handsomely to “lose” money on the franchise fee by reinvesting it in lead generation.

Of course, few franchisors have the financial strength to take this strategy to the extreme. You can buy market share for only so long before cash flow considerations no longer allow it.

When it comes to franchisee support, the principle remains the same. You have to be able to support the franchises you sell. If you award a franchise only to have the franchisee fail, you lose that virtual annuity and, in the process, hurt the validation that is key to long term sales.

Make It Worth It

Always keep in mind two very specific questions: Will this expenditure – whether for staffing, advertising, marketing materials, training, or any of a number of marketing-related uses – have a positive impact on franchise sales? And, will this expenditure lengthen the lifetime of a franchisee by improving longevity, increasing average unit performance, or decreasing franchisee expenses? If the answer to either of these questions is yes, then measure the long-term impact versus the short-term expenditure when making a decision.

If these expenditures have only a minimal impact on close rates, however, then the situation changes. Franchisors have a greater need to balance short- and long-term considerations in their decision making than other business owners do. The PVF paradigm, coupled with good short-term financial management, will bring a perspective that will ultimately impact your long-term profitability.

The lesson here for franchisors, no matter the maturity or size of the system, is establish a willingness to test the waters and commit to playing things out. Rome wasn’t built in a day, and neither will your multi-location franchise system.