Unit Level Economics is a Difference Maker for Emerging Franchisors

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2 Unit Level Economics is a Difference Maker for Emerging Franchisors Joe Lewis Vice President and General Counsel Smoothie King Franchises, Inc. Brian Schnell Partner, CFE Faegre Baker Daniels LLP

3 Your system's EBITDA, profitability and sustainable franchisor/franchisee relationships depend on transparent and accurate unit level economics.

4 UNIT ECOMOMICS: WHY IS IT IMPORTANT? Your Success Depends Upon It Your Zees Success Depends Upon It Best Way to Increase Franchise Sales Attracts High Quality & Multi-Unit Candidates Reduces the Amount of Unit Closures Reduces Risk Of Litigation Supports High Growth Attracts Private Equity/IPO

5 What Separates Franchisors on Unit Level Economics? Develop relationships that encourage compliance so that you can help educate your franchisees with the benchmark tools that they should be utilizing in their business Establish franchisee forums that share best practices (examples, new unit build-out costs; operating margins) The franchisor should operate the business model too; Skin in the game approach Be results driven. Compensate franchisor employees for improving franchisee profitability

6 What Separates Franchisors on Unit Level Economics? Starts at the top the CEO [owner] sets tone. Then hire the right people at all levels who embrace franchisee success, most importantly at the emotional level Develop benchmarks with the input of franchisees and industry experts Publish those benchmarks on a regular basis, including how they are measured Bake progress against those benchmarks into company goals and compensation plans

7 CREATING A CULTURE Profitability of Your Franchisees Matters! Make it Part of Your Strategic Planning Set Long-Term & Near-Term Goals Assign Responsibility & Accountability Break Down Objectives To Accomplish Goals Develop an Action Plan Set Measurables & Report at Meetings Communicate To Team & Franchisees

8 TOTAL INVESTMENT TRACKING Track All Pre-Opening/Open Costs ( All-In ) Set Up By FDD Categories (Item 7) Provide Detailed Form At Orientation Make It A Mandatory Report (It s Important!) Designate Responsible Party To Collect Update During Unit Opening Process Note All Variances & Why Final Report Turned In After Opening Evaluate Your True Costs & Variances Track Different Models & ADA

9 EBITDA (P&L) TRACKING Establish Financial Disciplines Up Front Set Up Standard Chart Of Accounts Make It A Mandatory Report (It s Important!) Make It Easy Focus On The P&L Set Up Financial Statement Discipline, Also EBITDAR (Rent) Allows Unit-To-Unit Comp Require Monthly P&L s

10 EBITDA (P&L) TRACKING Develop Weekly KPI Reports Begins With Opening Of Unit 1 ST Week! Provide Value With Information Food, Labor, Expense Comparisons Operations Consultant Reporting Benchmarks Quarterly Business Reviews Performance Groups

11 Driving profitability through benchmarking and performance groups is a critical aspect to the success of all franchise systems.

12 Benchmarking and Performance Groups Financial education is the first, critical piece in the benchmarking and performance group process If franchisees do not understand the financial information they receive and the management intelligence it provides, they are unqualified to participate in a benchmark study or a performance group

13 Benchmarking and Performance Groups Benchmarking metrics and industry statistics create a yardstick of comparison that identifies the top performers Participation in a performance group begins to refocus franchisees working together in the group. Developing within the group a culture of accountability to implement change can be a brutal process

14 EBITDA (P&L) TYPICAL UNIT Projected Projected Annual Monthly Sales $1,000,000 $83, % Cost of Goods Sold Food Costs $300,000 $25, % Direct Labor Costs $300,000 $25, % Total Cost of Goods Sold $600,000 $50, % Gross Profit $400,000 $33, % Operating Expenses $150,000 $12, % EBITDAR $250,000 $20, % Rent $100,000 $8, % COMPANY UNIT EBITDA $150,000 $12, % Royalties $50,000 $4, % FRANCHISE UNIT EBITDA $100,000 $8, %

15 INVESTMENT/EBITDA RELATIONSHIP Cash-On-Cash Return #1 #2 #3 #4 #5 Total Investment $500,000 $500,000 $475,000 $450,000 $450,000 EBITDA $100,000 $125,000 $145,000 $158,000 $180,000 Annual Cash-On-Cash ROI 20.0% 25.0% 30.5% 35.1% 40.0%

16 WEEKLY KPI REPORT KEY PERFORMANCE INDICATORS Goal/Bgt Total/Avg. NET SALES $0 Prior Year Net Sales $0 Difference $0 % Change $0 Same-Store-Sales Goal % % Ave Lead Measure: (Daily LSM) 0 FOOD COST % % % Ave Goal Difference (From Goal) % Ave Lead Measure: (Daily Waste Rpt) LABOR COSTS % % % Ave Goal Difference (From Goal) % % Ave Lead Measure: (Daily Tracking) TOTAL FC & LC % % % Ave Goal Difference (From Goal) % % Ave KEY CONTROLS Inventory (Reconciled) Weekly Audit Completed Supplies v. Budget Repairs v. Budget Customer Feedback Rpts Pop-In Visits Mktg Schedule Executed

17 QUARTERLY BUSINESS REVIEW 2016 Projected Sales Net Sales #DIV/0! Daily Sales Average #DIV/0! $0 $0 $0 Comp Sales Growth Store Prior Month 0.00% YTD Territory Avg. System Avg. Transactions Avg. Check Count (#) Avg. Check Amount ($) Store Territory Avg. System Avg. Prior Month YTD Prior Month YTD Prior Month YTD Business Drivers Enhancer/Extra % Upsize % Retail % Catering % Store Territory Avg. System Avg. Prior Month YTD Prior Month YTD Prior Month YTD SWAP Track Survey Counts Overall Satisfaction Speed of Service Store Territory Avg. System Avg. Prior Month YTD Prior Month YTD Prior Month YTD Maximizing Profit Labor % Discount % (of Sales) Void % (of Sales) Store Territory Avg. System Avg. Prior Month YTD Prior Month YTD Prior Month YTD

18 How do you lead system change as sustainable unit level economics hinge on a franchisor and franchisees effectively adopting system change in light of external forces to the business model and ever changing customer demands and expectations?

19 How to Successfully Lead System Change Be able to justify the change and explain the benefits to franchisees in terms they understand These benefits should include savings in time and money, improvements in profits and customer service and a stronger competitive position in their local market Be sensitive to how a change could undermine the organization s culture or the franchisees sense of identity

20 How to Successfully Lead System Change Test or pilot the change initiatives to ensure they work before releasing them into the network Over communicate and be clear and concise in your communications as franchisees don t have time to read longwinded documents that fail to address their concerns Don t mistake silence for agreement - thinking that because franchisees do not question the change that they agree with it

21 How to Successfully Lead System Change Consult with the people who have to implement the change and ask them what they need in order to make it work Do the franchisees feel like they have a voice Don t treat legitimate franchisee concerns and questions as negativity A franchisee who asks a question is giving you an opportunity to explain the benefits of the change if you can t answer the question then you have something that you need to work on Document and publish progress of the change along the way over communicate

22 How do you effectively engage your franchisees so they are committed to driving performance and are passionate about the brand (the franchisees views of what is effective, fair and reasonable)?

23 Franchisee Engagement Find out what drives them - why did they buy? Then direct every energy into delivering their profitability so that they can truly see the brand as a vehicle for providing results Franchisees are usually competitive by nature - specifically the highest performing ones. The A team players. Drive performance by transparency in the numbers. Produce those monthly KPI results nationally and regionally