“How Do You As A Franchisor Stack Up? ”		«BACK
	by Dennis L. Monroe
	from February 2006 Franchise Times

Last month’s column highlighted ways franchisees can be effectively compared, both to other franchisees within their franchise system or franchisees in general.  A comparison approach is very subjective but this industry lives on comparisons.  Even without this competitive approach, it is important to understand a franchise business in relation to other franchise businesses.

Continuing with the comparison approach, this month’s column tries to develop a franchisor comparison matrix.  If you review Uniform Offering Circulars in the franchise industry, you will note that within different segments (such as the restaurant segment), the terms of the franchise agreements are very similar.  Some times, without knowing the name of the franchisor, you could substitute one franchise company’s documents for another.  This is also particularly true in the auto aftermarket and hair care segments.  Consequently, many franchisors take a “follow the leader” approach, thus comparisons are very relevant.

The health of a franchisor is very much determined by its franchisees.  Therefore, much of the matrix presented last month for franchisees can be applied to the franchisor scenario.  The matrix below is a group of evaluators based on certain industry specific issues for the franchisor. This system will give a franchisor an indication of how it stacks up against other franchisors.

Franchisor Matrix

Obviously, the above matrix is very subjective; but the point is, every franchisor business can develop a system of how it rates itself as compared to the franchise industry, particularly its sector of the franchise world.  Everything is a comparison but there are certain absolutes (such as store profitability, average unit profitability, average system profitability of the franchisees and return on investment) that are factors for the system. 

There are other indicators, such as the cost of servicing the franchises (i.e., what percentage of royalties is used to maintain the ongoing franchise system).  Also, there are the overall financial considerations of the franchisor, such as leverage, profitability, and return on investment.  I have not addressed these issues in this column.  These issues have more to do with the financial structure and capitalization of the franchisor.  What this column addresses is a franchisor comparison that reflects the intrinsic value of the franchise system.  If there is intrinsic value, there will always be buyers or investors who will be willing to recapitalize the balance sheet for the franchisor.

Next month’s column will address what you can expect in the franchise finance world in 2006.