a/k/a How to Make $5 Million in Franchising
Studies show that if you are one of the 29% who made New Year’s resolutions this year, there is an 80% chance that you have already accepted your failure. Don’t stress about what ISN’T happening. Rejoice instead about what IS.
It’s February. Each day offers a little more daylight. Your 2021 financial statements and year-end point of sale and CRM reports are ready for your review. And a new hopefulness is permeating your business. Now is the perfect time to use the information to assess your business’ financial results and commit to goals for growth and profits in 2022 and beyond. But first, take the time to set these two VERY important VERY long-term goals:
1) Identify when and how you will exit your business, and
2) Define what you want your business to be worth when you move on.
Our Expansion Planning Worksheet can launch the process of setting both of these goals.
Expansion Planning Worksheet
|1||How many years does this expansion plan cover?||5 Years|
|2||How much do you want your franchise investment to be worth then?||$5,000,000|
|3||What EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) multiplier is realistic for your industry?||3.5 times|
|4||EBITDA Target for your franchise investment (line 2 divided by line 3)||$1,428,600|
|5||What’s the average EBITDA for a franchise unit in your system?||15%|
|6||Sales required to generate target value (line 4 divided by line 5)||$9,524,000|
|7||What is a reasonable expectation for average location sales?||$2 million|
|8||How many franchise units/territories will you need? |
(line 6 divided by line 7, rounded up)
How to Customize this Worksheet to Your Business or Franchise (organized by Worksheet Row):
- This worksheet describes a 5-year plan. However, you can adjust this time span to match your personal exit timeline.
- This financial figure is the bottom line needed for you as franchise owner to meet your time specific goal.
- EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. The EBITDA multiplier is a factor that is multiplied by EBITDA that represents what the business is worth. Many franchises track the multiples used for business transfers within their system. Ask your franchise development executive to help establish a good multiple for you.
- Divide the number from Row 2 by the EBITDA multiplier in Row 3 and enter it into the right column of Row 4. This figure indicates the yearly amount your business must earn before interest, tax, depreciation, and amortization to accomplish the goal you stated in Row 2.
- In Row 5, enter the average EBITDA% (percent of sales) an individual franchise unit makes in your system. In the example above the percentage is 15%. Your franchise support team should know what’s typical for your business. Many franchises benchmark actual EBITA%, which helps you make a reasonable estimate for your franchise.
- Divide the number you calculated for Row 4 by the percentage you calculated from Row 5 to see the sales needed to accomplish your goal noted in Row 2.
- Enter the average sales produced by a franchise unit in your system. Again, this number can be obtained from your franchise support team or franchise benchmarks.
- Divide the total sales needed to meet your value goal (Row 6) by the expected sales per location. In this example, the total number of franchise units required to produce the $9,524,000 sales identified in row six is 4.762 which rounds up to 5 locations.
Summary of Worksheet Results
In our example, to grow your business’ value to $5,000,000 within 5 years, you will need 5 locations producing average sales and profits for your franchise system. Of course, if your franchise is a high performer, you should adjust your numbers for lines 5 and 7 using “better than average” figures.
The worksheet and steps identified above are excerpts from Chapter 1 of Profit Soup’s course titled “Profitable Growth Through Multi-Unit Expansion.” The course is featured at the 2022 International Franchise Association Conference in San Diego, on February 26. In just the first chapter you will learn:
- The two things that are required for any business to grow to its potential
- The importance of growth and efficiency
- The components of the value wheel and
- How to value your business
In our next post we will include excerpts from Chapter 2 relating to planning for profit in both the short and long term.
Join us at IFA 2022 to gain the plans, skills, systems, and support to start your business’ evolution through in-person training at:
Driving Profitable Growth Through Multi-Unit Expansion
Saturday, February 26, 2022
This 200 CFE Education Credit pre-conference Institute of Certified Franchise Executives (ICFE) seminar includes a practical workbook that will help you start your process.
Want more? Click here to find 25 things you can do today to lift tomorrow’s value.