What is the formula for franchise growth

Written on the 14 August 2013 by David Campbell and Fiona Taylor

In order to penetrate a market, rapid franchise unit growth is important.

However few franchises appreciate the impact of not driving growth early, as demonstrated in the infographic below.

The 'Unit Spool' infographic is from the Franchise Performance Metrics research report (p118).

Franchise Unit spool graph showing franchise growth trajectory

The spool rate measures how quickly franchise systems grow and is calculated by dividing the total number of franchise units by the number of years franchising.

This graph demonstrates the advantage of creating a high spool rate with the obvious impacts on brand footprint and revenues from new sales and royalties.

The average spool rate in the Franchise Performance Metrics research sample was 5 (that is, system growth of 5 units per year of operation) with the top 20 per cent of performers reporting an average spool rate of close to 12.

At the other end of the performance range, the bottom 20 per cent averaged a trajectory of just less than 1 franchise unit per year growth.

This slow growth can also be seen in the Franchising Australia research findings.

Despite 60 per cent of Australian franchises operating more than 10 years the majority of franchises (46%) are considered small with less than 20 franchise units and the median number of franchise units across the sector is only 23.

Only 30 per cent of Australian franchises have more than 50 franchise units.

In New Zealand, the Franchising New Zealand research reveals a similar profile, with 68 percent of franchises having operated for more than 10 years (including 44% which have been franchising more than 20 years), yet the majority of franchises in New Zealand are considered small with 49% only having up to 20 franchise units.

Factors contributing to franchise spool rate

The spool rate is the result of a number of factors which include:

• The franchisee business model
• Return on investment (capital recovery time)
• Recruitment and conversion rate
• Initial training and working capital
• On-going support
• Cash flow drivers

To gain competitive advantage, top performing franchise systems achieve spool rates well above the sector average thereby reaching their critical mass (where royalty revenue is able to cover all operating costs) much faster with the related cash flow benefits.

However, franchises with slower franchise unit growth can improve performance with a targeted strategy, which in part involves adapting franchisee support in line with sector best practice.

Delivering support with a focus on cash flow drivers, franchisee engagement and accountability and simple techniques to better leverage the resources invested into support and business development is the key techniques that emerging (in fact any) franchises can easily apply.

These techniques are covered in the Franchise Field Financial Management Training so you can achieve greater economies of scale, while boosting franchisee engagement, franchisee profitability and franchisor revenue. Plus, you receive a complimentary copy of the Franchise Performance Metrics Report (valued at $1800) so you can benchmark performance against best practice for more than 60 business metrics.