Buying a Franchise

KPIS for Franchisees

Before you invest in a franchise, you do plenty of research, looking at the financial health and performance of the corporation and of individual franchises. How will you measure the health and performance of your own franchise business?

Some franchises provide more help with this question than others. HuHot, for example, recently decided that franchisees weren’t getting enough context for the data available to them. They’re providing a new set of analytics for their franchisees which allows franchisees not only to track their own performance more easily, but also to compare it with other franchisees.

That’s an unusual level of information. Most franchises have KPIs (key performance indicators), however, and many require certain levels of performance. A franchisor may require franchisees to reach certain levels of sales, to buy certain amounts of goods or materials, to employ certain numbers of employees, to spend a certain amount on local marketing, and more. There may be other requirements that are less analytics-oriented, such as requirements for cleaning vans or uniforms.

Some franchisors may have these KPIs laid out in their contracts. Failure to meet the requirements can mean that the franchisor has the power to end the franchise relationship or to sell the franchise to someone else.
This is not the kind of thing you want to discover when you get a letter from the franchisor announcing that you’re about to lose your franchise. Make sure you’re very clear on any KPIs for which the franchisor holds you responsible.

Make sure, too, that you agree with the criteria by which your success will be judged. Your operation’s revenue is almost certain to be part of the definition of success, but there are other factors as well. You might want to consider profits, inventory turnover, or the ratio of labor costs to sales.

You might also want to include customer satisfaction, employee satisfaction, or personal contentment, but your franchisor is less likely to take these elements of success into account.
Once you determine the KPIs the franchisor uses to judge your success, find out what actions are taken with these KPIs. Some franchisors might take a drop in sales as the cue to provide more support; others might give franchisees 30 to 60 days to reach goals or lose their franchise. It’s essential to know which position your franchisor takes ahead of time.

You should also check on how reporting takes place in the franchises you’re considering. Are you expected to create spreadsheets and report to the main office, or does the franchise provide software that reports to the franchisees and the main office? If you are responsible for reporting, find out what kind of reporting is expected and make sure you have the skills required. If you don’t know a pivot table from a balance sheet, automatic reporting can be enormously helpful. On the other hand, if you have trouble understanding the automatic reports or you don’t feel they give a complete picture, you may be better off keeping your reports by hand.

Whatever approach works best for you, make sure you understand the expectations before you invest.

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