I am blogging a series of posts on the Secret Sauce of Franchise Investing based upon an excellent article I read some time ago on what private equity likes to see before investing in a franchise. In this post I am highlighting the sixth ingredient which is good unit economics.
What are good unit economics? One franchise investor I know keeps it really simple. He tells me he always is trying to have each franchise location average net income of at least $100,000. That’s it. To him, that is good unit economics. So if you have 10 locations that net $100,000 on average, you now have $1 million in net income and then so on. But consistency is a key. Many franchisors may have a few high performing locations but have lots of dogs scattered throughout the concept. You need to research carefully whether franchisees are consistently successful on average.
In my experience, achieving that $100,000 net income threshold is challenging for lots of franchises including sandwich shops, ice cream / dessert franchises or perhaps even certain gym opportunities. You really need to choose wisely as Indiana Jones did when searching for the Holy Grail. A great place to look for new franchises that have good unit economics is a web site called Franchise Chatter. Franchise Chatter has a great section on “Franchise Earnings” together with a list of Top Franchises with sales of at least $1 million and another list of franchises with average sales-to-investment of ratio of at least 2:1. These are the metrics used by Franchise Chatter to determine good unit economics. It is interesting to see the successful franchises under these metrics. The Franchise Chatter Top Franchises list often differs from other franchise lists you might see.
Surprisingly, one place I do not rely on much for researching good unit economics is the Franchise 500 published each year by Entrepreneur Magazine. The list tends to cover the “fastest growing” franchises but in my experience the information presented does not cover the type of unit economics necessary to make a good investment decision. And also based upon my experience, making the Franchise 500 list doesn’t mean all the franchisees in a given concept are successful. In fact, many of those franchises listed in any given year do not have good unit economics for franchisees.
So ultimately, whether you are looking to start a successful franchise, or invest in one as a franchisee, I highly recommend concentrating on good unit economics when examining the franchise opportunity. Don’t just look for the fastest growing concepts.