Maximizing Unit Economics

Thomas A. Romano, CFE

Moderator

• President/CEO of Biz Builders LLC

• A Franchise Consultant Company
• Over 35 years in franchising
• Former COO of KFC’s largest Master Franchise
• Former President and CEO of Greenleaf’s Grille/
Everything Yogurt
• Former CEO of Saladworks
 Presenters
• Rocco Fiorentino, CFE, Chairman & CEO Eagle Tax
Services Group

• Harold Kestenbaum, Franchise Attorney with Ruskin,

Moscou, Faltischek

• Todd Leff, President & CEO American DriveLine,

Aamco, and Cottman Transmission

• Salman Siddiqui, VP Global Business Development,

Baskin Robbins/Dunkin Brands
Maximizing Unit Economics - A Competitive Edge

• Why Is Understanding Unit Economics Important ?

• How Do You Develop Unit Economics Benchmarks ?

• Understanding and Using Unit Economics to

Advance Your System.

• Issues in Sharing the Unit Economics Data.

Setting the scene
Competition and the economic climate is demanding that the franchisors
become better informed, more sophisticated and more focused on the
economics of the franchisee.

Franchisor Franchisee
How do I attract more How knowledgeable is the
franchisees? Franchisor and how do I know
that they are?
Why do some stores perform How do I know if my store will
better than others? be in the optimum location?
How do I improve the average How will the performance of
performers? my store compare to the
average franchisee?
Who is my target customer? Who is the target customer?
How do I know when their How good is the franchisor at
needs change? keeping up with customer
needs?

Who are the direct How will competition affect my

competitors? store?
 Franchisors focus on revenue, Franchisees focus on profit. Franchisors &
Franchisees need to better align interests.

Key profit drivers

Franchisor focus
Improvement Levers

Increase Sales Volume

Improve Price
Increase to Value Ratio
Revenue
Leverage Productive

Franchisee focus
Assets

Reduce Cost of Goods

Sold

Maximize Marketing Costs

Decrease
costs
Reduce General &
Admin. Costs

Rationalize Plant,
Property and Equipment

Reduce Inventory
Reduce Levels
Capital
Improve Receivables
And Payables

Source: Alix Partners

ColdStone Creamery (Astor Place)
Haagen Dazs
Cosimos Pizza
How do you know when a franchisor is truly focused on Maximizing Unit
Economics?

• Franchisors can quantify what drives the variation in both revenue and profit
across their retail network

• Average unit profitability is growing

• Every franchise produces a P&L

• Franchisees might need incentives

• Franchise Advisory Boards are focused on improving profitability across the

network by leveraging franchisee community shared data and knowledge.

• Franchisors embrace item 19 – full disclosure

• When you are recognized as the franchisor of choice!

 Maximizing Unit Economics -
A Competitive Edge

• Why Is Understanding Unit Economics Important ?

• Issues in Sharing the Unit Economics Data

 Rocco Fiorentino, CFE
Presenter
• Chairman/CEO Eagle Tax Services Group
• Joined United initially as a Director and Board Member in May
2002
• Assumed the positions of Chairman and CEO in February 2005.
• Franchisor of Financial Services and Tax Preparation Services,
with nearly 200 offices operating nationwide.
• Serves on the Board of Directors for Swiss Farm Stores
• Serves International Franchise Association, Franchisor Forum
and member of the Board of Directors for the IFA.
• Mr.Fiorentino holds a Master of Science in Management (MSM)
Degree
 Harold Kestenbaum
Presenter

• Franchise Attorney with Ruskin, Moscou, Faltischek

• Over 30 years with Franchise Law Experience
• Unique blend of experience in franchise law
• Serves as a Director of several National and International
Franchisors
• Published many articles related to franchising
• Author of “So you want to Franchise your Business”
 Maximizing Unit Economics

• Why is understanding Unit Economics Important

 Determining the Health
of your System
Strong Unit Economics typically can be evident through
observing:
• Franchisee basic satisfaction/validation
• Multiple unit operator interest
• Referrals from existing franchisees
 Presenting to Lenders
• Lenders are coming off of "loose" credit standards

• Lenders are faced with an uptick in defaults on SBA loans

• Lenders are no longer able to sell off portfolio as often, which means
that their non-interest income from selling loans at a premium is no
longer available.

• The result: lenders are lending "Less" money, which means they are
much more conservative in who they are lending to.

• Lenders are influenced by "Data"

 Presenting to Lenders
• Data that is above and beyond what is readily available within the Industry is well
received.

• Managing, Controlling, and Providing Data on your "Unit Economics" will be a key
factor in all future lending decisions.

• On November 13, 2008, SBA announces new ways to improve Small Business
Access To Capital. SBA Administrator Sandy Baruah announced important loan
program changes to help the agency's lending partners increase access to capital for
small businesses.
 Types of Financing
• Conventional Bank Financing
• currently not available for the most part, unless there are extraneous
circumstances.
• SBA Financing
• Still available, although there are far fewer lenders in the marketplace, due to
the market conditions outlined in the previous slide.
• Lease Financing
• Still available with tighter credit guidelines and higher interest rates.
• Self Directed IRA
• Should be used whenever possible, possibly in concert with an SBA loan or
lease financing.
 Franchisor Issues – SBA Loans
• SBA Registry
• A must for franchisors who want to use SBA as a resource. Contact FRANdata –
www.frandata.com
• FDD Issues
• Item 19 – Franchisors who have Item 19 disclosures are viewed favorably by
lenders. In the absence of any disclosure, confidential reporting direct to lenders
is a viable option.
• Length of time franchising
• Number of Units open
• Training program – needs to be highlighted in FDD
• Class training and field training
• Exits and Transfers
• Any anomaly should be explained
• Avoid stores going “dark”
 Franchisor Issues – SBA Loans
• Coleman Report – Used by lenders to see defaults and charge-off’s
by franchise concept.
• Report is incomplete, and may not reflect franchisor’s actual
performance.
• Underlying data can be requested under the Freedom of
Information Act.
• A Bank Credit Report can be obtained from FRANdata (for a fee)
• Managing troubled locations
• Talk to lenders as soon as you know there are issues. They can
work in concert with you and your franchisee
• Try to have location transferred before going “dark”
• Allocate resources in your company to manage lenders or hire a
packager to manage the relationships on your behalf
 Franchisee Issues
• Consistency Issues
• Resume – Must have managerial experience
• 1040, Credit Report, and resume need to be consistent
• FICO score needs to be over 650, however personal income
needs must be reflective of earnings from franchise
• Cash Injection
• Was average of 20%, moving upward toward 30%+
• Home Equity cannot be used without other income to service that
debt
• Gifts are still acceptable
• Franchisor can participate by offering standby financing of some
soft costs
• Lenders looking for additional liquidity after the fact
 Industry Issues
• Food Sector
• Major tightening on start ups – moratorium by some
lenders
• Size Matters!
• Most lenders have minimum loan sizes of >$200k
 What is your legal Obligation
before Franchising
• Peaberry case does not require a display of a successful
business model before franchising
• Personal experience has observed 58 out of 60 failures with
a brand.
• Recommend at least 6 months of operating history &
positive cash flow.
 Issues in using in FDD
• Item 19 refers to Financial Performance Representation
• Whole sale sweeping changes in 2008
• However FRP not required, continues to be optional.
Statistically, 30% of franchisors have a FRP in their FDD
• Benefits to FRP disclosure are:
1. Eases the sales process
2. Better hedge against FPR claims
• Transparency strengthens the relationship.
 Maximizing Unit Economics - A
Competitive Edge

• How Do You Develop Unit Economics Benchmarks ?

• Understanding and Using Unit Economics to Advance Your

System.
 Todd Leff
Presenter
• President & CEO American DriveLine since 1998- Parent to
AAMCO and Cottman Transmissions
• Prior to that served as its General Counsel.
• In 10 years he has guided the company’s extraordinary
growth from 225 centers to 1,100 locations today
• Achieved system wide sales of $600 million in ‘08 and
employs over 6,000 team members nationwide.
• Previous lead trial attorney with the United States
Department of Justice, Antitrust Division.
• A cum laude graduate of Temple School of Law, and served
as Editor of the Temple Law Review.
 Salman Siddiqui
Presenter
VP Global Business Development, Baskin Robbins/Dunkin
• 19 years of industry and national QSR development
experience with Exxon, Pepsi, Yum and Dunkin Brands.
• Held several positions with Exxon
• Later joined Pepsi and moved into the QSR sector with
YUM where he held several positions at Taco bell, KFC,
Pizza Hut, Long John Silver and A&W
• Joined Dunkin brands in 2005
• Salman has an MBA in Strategy and Marketing from Depaul
and a MS degree from University of Illinois
How to Develop Unit Economics Benchmarks

• Develop a Unified Model

• Get Everyone to Speak the Same Language
• Internal Agreement on Model
• FAC Agreement on Model
• Owner’s Compensation?
• Non-Cash Compensation?
• Debt Service?
• Depreciation, Amortization, Non-Cash
Sample
Median AWG
Average AWG

Above Average Total

SAMPLE COUNT 44%
PERIOD Annual$s % Annual$s %
REVENUE $ 733,352 100.0% $ 538,221 100.0%
PARTS $ 161,330 22.0% $ 117,889 21.9%
LABOR $ 138,977 19.0% $ 114,515 21.3%
CSM (ALWAYS CALCU $ 45,133 6.2% $ 31,907 5.9%
COST OF SALES $ 345,440 47.1% $ 264,311 49.1%

EMPLOYEE TAXES $ 19,594 2.7% $ 15,814 2.9%

REAL ESTATE TAXES $ 5,086 0.7% $ 3,728 0.7%
TOTAL TAXES $ 24,679 3.4% $ 19,541 3.6%

LEASE $ 53,017 7.2% $ 47,434 8.8%

REPAIR-MAINTENANCE$ 1,296 0.2% $ 1,210 0.2%
SIGN LEASE $ 101 0.0% $ 147 0.0%
TOTAL LEASE EXPENS $ 54,415 7.4% $ 48,790 9.1%

TELEPHONE $ 4,098 0.6% $ 3,742 0.7%

UTILITIES $ 7,477 1.0% $ 6,409 1.2%
TOTAL UTILITIES $ 11,575 1.6% $ 10,151 1.9%

HEALTH INSURANCE $ 6,625 0.9% $ 4,755 0.9%

INSURANCE OTHER $ 1,668 0.2% $ 1,078 0.2%
LIABILITY INSURANCE $ 6,119 0.8% $ 4,358 0.8%
WORKERS COMP $ 8,391 1.1% $ 5,896 1.1%
TOTAL INSURANCE $ 22,803 3.1% $ 16,086 3.0%

MEDIA ADVERTISING $ 23,924 3.3% $ 20,167 3.7%

NATIONAL CREATIVE $ 1,800 0.2% $ 1,800 0.3%
YELLOW PAGES $ 17,475 2.4% $ 16,301 3.0%
TOTAL ADVERTISING $ 43,199 5.9% $ 38,268 7.1%

ALARM $ 3,023 0.4% $ 2,875 0.5%

BANK FEES $ 278 0.0% $ 326 0.1%
CAR RENTAL / MONEY $ 848 0.1% $ 491 0.1%
CONTRIBUTIONS $ 50 0.0% $ 66 0.0%
DELIVERIES $ ‐ 0.0% $ ‐ 0.0%
DUES & SUBSCRIPTIO $ 3,646 0.5% $ 2,752 0.5%
FRANCHISE FEES $ 44,165 6.0% $ 32,813 6.1%
FUEL $ ‐ 0.0% $ ‐ 0.0%
INTREST EXPENSE $ 3,225 0.4% $ 2,199 0.4%
LATE CHARGES $ ‐ 0.0% $ ‐ 0.0%
LAUNDRY $ 2,017 0.3% $ 1,876 0.3%
LEASE (LIFTS) $ 1,679 0.2% $ 842 0.2%
LICENSE AND PERMITS$ 1,688 0.2% $ 1,709 0.3%
MISCELLANEOUS* $ 1,620 0.2% $ 1,245 0.2%
OFFICE SUPPLIES $ 561 0.1% $ 522 0.1%
PENALTY $ ‐ 0.0% $ ‐ 0.0%
POSTAGE $ 2,494 0.3% $ 1,699 0.3%
PROFESSIONAL DEVLP$ ‐ 0.0% $ ‐ 0.0%
PROFFESIOAL FEES $ 5,832 0.8% $ 6,057 1.1%
REFERAL $ 1,942 0.3% $ 1,498 0.3%
REPARS - COMPUTER, $ 297 0.0% $ 204 0.0%
SUPPLIES/ATF $ 4,437 0.6% $ 2,692 0.5%
SUPPLIES OTHER $ 1,532 0.2% $ 989 0.2%
TOWING $ 4,577 0.6% $ 3,264 0.6%
TRAINING $ 1,328 0.2% $ 957 0.2%
UNIV. LIFE INSURANCE $ ‐ 0.0% $ ‐ 0.0%
WARRANTY INSURANC $ ‐ 0.0% $ ‐ 0.0%
WASTE REMOVAL $ 801 0.1% $ 604 0.1%
TOTAL OTHER EXPENS$ 86,038 11.7% $ 65,679 12.2%

GRAND TOTAL EXPEN $ 588,150 80.2% $ 462,826 86.0%

NET PROFIT - Pre Own $ 145,203 19.8% $ 75,395 14.0%

 How to Develop
Unit Economics Benchmarks
• Gathering Data
• Electronically Through
POS
• Sales, Customers,
Ticket Size, Products
• Field Staff
• Require at least 2x breakevens per year
• Voluntary Submissions, Incentives?
Comparing and Stratifying Data
Using and Understanding Unit Economics:
Elements of a Concept Launch
1
VISION

7
DESIGN
CONCEPT 2
FRANCHISE
DISCLOSURE
MARKETING

CONCEPT
ECONOMICS

6 ROAD
MAP
CONCEPT
TESTING 3

SUPPLY PORTFOLIO
CHAIN OPTIONS
5 4 … a disciplined
approach
 Maximizing Unit Economics

MAXIMIZE
INVESTMENT SALES

ECONOMICS

Sales: Investment Ratio Greater than 1

Maximize Value- at every stage…

DESIGN /CONCEPT MARKETING CONCEPT TESTING

Build Sales & Profitability

• Vision & Design • Segment Analysis • Where & Why,

length & duration?
• Equipment •Competitor
Differentiation • Test Agreements
• Layout, Size
• Products • Tracking Sales &
• Test, Value Customer count
Engineer, Optimize • Pricing
• Item 19
• Finalize V1 & start • Promotion
re-engineering! • Building a story
• Place~ Road Map
Portfolio
Approach Cafe 31’

Express
Traditional Store
Maximize Value- at each stage…
FRANCHISE
SUPPLY CHAIN GROWTH ROAD MAP
DISCLOSURE

• Product • US & International • Item 1

Preparation & • Item 5
• Prioritize Markets
Procurement
• Trade Area • Item 7 & 8
• Delivery
Mechanics • Building Network • Item 11

• Bulk Purchasing • Utilize Concept • Item 19

Portfolio • Item 22
• Eliminate Waste
• Area developer
‘Zero-100’
• Site Selection
 Competitive Edge
• Attractiveness : Brand awareness, longevity, heritage: relevance
• Franchisee base & new
• Concept Simplicity - lifestyle
• Single vs. multi-unit - networks
• Capital availability banks willingness to loan
• Concept Rating in a tiered system
• SBA lending program
• Incentives
Using an Understanding of Unit Economics:
Launching a New Product Line
Using and Understanding of Unit Economics:
Launching a New Product Line

Overcoming Dealer Concerns:

• Is it Profitable?
• Can we Make the Same Money?
• Can we service the new Product Line?
• Will consumers buy the Product/Service?
• What is Capital Investment/ROI?
 30
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• Profitability – outside/internal study

• Consumer Adoption - zoomerang
• Ease of Implementation - internal
Do The Metrics Drive Behavior?
Using and Understanding of Unit Economics:
Cutting Costs

1. Identify the Cost Drivers

2. Compare Internal Performance
3. Compare vs. Industry Benchmarks
4. Build the New Model
5. Test and Track
6. Communicate the Result
Impacting Labor as a Key Driver

• Every Labor hour generated resulted in $70

Gross Profit
• Dealers more concerned with unexpended
inventory than unused labor
Comparing Costs to Industry and
Internal Benchmarks

• Range internally was significant but not

dramatic
• Best performers to Average was a 7%
difference in labor
• One of last auto service businesses to pay
salary
• Industry Study showed:
• 75% actual productivity, 90% benchmark
 Comparing Costs to Industry and
Internal Benchmarks
# of Employees # of Weeks Billed Hours Paid Hours Productivity
Center A 4 5 451 760 59.3%
Center B 3 8 857 960 89.2%
Center C 4 5 340 800 42.5%
5 Add'l Cente 17 33 2,439 4,200 58.0%
Average 3.3 6.4 511 840 60.8%

• Industry was 75% productive – AAMCO was 60%

• Labor must be thought of as perishable inventory
• Flat Rate Program – Pay a technician a fixed hourly rate
(x) hours actually billed to customer
• Upside to technician is greater earning potential
Build the Model

Launching Flat Rate Pay

•Needed a system to track labor inventory
– technician’s time (hours worked & hours billed)
•Implemented a comprehensive training plan for all staff
•Developed policy on comebacks and non-routine tasks
•Implemented a plan for charging testing and diagnostic
services, including free inspections
•Developed policies to compensate technicians for other
uses of time (i.e., equipment maintenance, CSM fill-in,
training, etc.)
Test and Track
Center Billed Hours Worked Hours Productivity
Lee’s Summit, MO 298 280 106.5%
Bear, DE 160 160 100%
Turnersville, NJ 376 320 117.5%
Totals 834 760 109.8%
Industry Actual 75%
Industry Benchmark 90%
AAMCO Chain 60%

• Complete Car Care Growth (CCC) – Chain 19.0%

• Chain Average CCC - weekly $1,850
• Flat Rate Test Centers CCC Growth 79.4%
• Flat Rate Centers Average CCC $3,871
• % above Chain Average 109.2%
 Communicate Results
Productivity Increased Annual
Improvement Earnings
3% $14,000 • Convention Training
6% $28,000 • Webinars
9% $42,000 • Field Rollout
12% $56,000
30% $140,000
50% $233,000
Strategic Planning and Budgeting