Franchising

Definition (short). You let others (franchisees) operate under your brand and system. You earn initial fees plus ongoing royalties (usually % of gross sales) and often ad fund contributions and rent. You supply brand, playbooks, supply chain leverage; franchisees supply capital and operations.

Recent example. U.S. fast-food franchises typically pay 4–9% royalty on gross sales plus 2–4% advertising fees. 4–9% royalty on gross sales plus 2–4% advertising fees. McDonald’s charges ~4% royalty plus rent (~8–12%), per its 2024 Franchise Disclosure Document. McDonald’s charges ~4% royalty plus rent (~8–12%). Historical example. Singer Sewing Machine (1850s) is cited as an early franchisor; modern franchising exploded post-WWII with chains like McDonald’s (1955), Holiday Inn, and Dunkin’.

KPI Definitions

Net Franchise Royalty/Profit Growth % (NFRG). YoY growth of (royalties + rents + fees − franchisor support costs). Pseudo: ((FranchiseProfit)_t - (FranchiseProfit)_{t-1}) / (FranchiseProfit)_{t-1} * 100. Why it matters: Shows if expanding units and improving unit economics actually translate into franchisor profit. Benchmark: Mature systems still target mid- to high-single-digit profit growth from royalties/rents annually. Mid- to high-single-digit profit growth from royalties/rents annually

Royalty & Fee Revenue $ (FREV). Total ongoing royalties + initial fees + ad fund admin fees (if recognized). Pseudo: Σ(royalties + initial_fees + other_recurring_fees). Why it matters: Core monetization stream; growth comes via more units and higher AUV. Benchmark: Royalties typically 4–9% of sales; ad fees extra 2–4%.

Franchise Margin % (FMAR). Gross margin on franchise operations (royalties & fees − franchise support costs). Pseudo: (FRev − Support_Costs) / FRev * 100. Why it matters: High-margin royalties can be eroded by heavy field support/legal costs. Benchmark: Asset-light franchisors often run 50–70%+ margins on royalty revenue.

Active Franchise Units (UNIT). Number of open franchised outlets. Pseudo: COUNT(franchise_locations_open). Why it matters: Scale equals revenue base; unit growth is the engine for future royalties. Benchmark: McDonald’s >36k units worldwide, Subway >36k, many top brands grow net units 2–4%/yr.

Royalty % of Franchisee Sales (RPF). Contracted royalty rate on gross sales. Pseudo: RoyaltyPaid / Franchisee_Sales * 100. Why it matters: Your “take rate”. Too high hurts franchisee economics; too low caps monetization. Benchmark: 4–9% typical; McDonald’s ~4% plus rent; Chick-fil-A’s model is different (higher share of profit).

New Units Opened (OPEN). Count of openings in period (net of closures). Pseudo: Openings − Closures. Why it matters: Pipeline health and brand demand. Benchmark: Strong systems add >3% net units/year; weak ones shrink.

Franchisee Retention % (RETEN). Percentage of franchisees renewing at term or not selling back. Pseudo: Renewed_Franchisees / Franchisees_Up_for_Renewal * 100. Why it matters: Low churn signals healthy economics and satisfaction. Benchmark: Best systems keep >90% renewal; high churn flags trouble.

Ad Fund % of Sales (ADVF). Mandatory marketing fund contribution. Pseudo: AdFee / Sales * 100. Why it matters: Funds national marketing; too high squeezes operators. Benchmark: Often 2–4%.

Real Estate/Rent % of Sales (RENT). Rent/franchise real estate markup as % of sales (for landlord-franchisors). Pseudo: RentPaid_to_Franchisor / Sales * 100. Why it matters: Major profit lever for brands that own/lease sites (e.g., McDonald’s). Benchmark: McDonald’s rent plus royalty commonly totals ~12–16% of sales.

System Quality Score (QUAL) (aux). Composite of audits, brand compliance, NPS. Pseudo: w1*AuditScores + w2*NPS + w3*ComplaintRate. Why it matters: Brand consistency drives AUV and retention. Benchmark: Franchisors target >90% pass on audits; drops trigger remediation.

Average Unit Volume $ (AUV). Average annual sales per franchise unit. Pseudo: Total_Franchisee_Sales / Units. Why it matters: Drives royalty dollars and franchisee ROI; a key selling point to prospects. Benchmark: McDonald’s U.S. AUV ~$4 M; Chick-fil-A ~$9.3 M; Subway ~$0.49 M.

Payback Period (Franchisee) (PAYB). Years for a typical franchisee to recoup initial investment from profits. Pseudo: Initial_Investment / Annual_Profit. Why it matters: If franchisees don’t earn back fast enough, growth stalls and churn rises. Benchmark: Many QSRs aim for <5–7 years; lower is a strong selling point.