Corporate Franchises - Operational and Financial benchmarks
I have found that currently, US franchises do not follow a standard set of rules or guidelines when it comes to recording metrics. Most do not publish their financial information (at least in total), and for this reason the common operational and financial benchmarks of a franchise vary greatly. However, I have found that in general, the following metrics are being measured: Cost of goods sold, labor, gross margin, profit margin, marketing, profitability, rent, general and administrative expense, utilities, royalties, EBITDA, operating expenses, current assets, current liabilities, gross profit, sales, net profit before tax, inventory, accounts payable, average order (sale) per customer, employee turnover, net promoter score, average sales per employee, percentage of repeat customers, percentage of redos and franchisee engagement.
THE STATE OF FRANCHISE FINANCIALS
Unfortunately, finding information regarding the metrics that franchises keep is not completely straight forward. This is because 70% of them do not report any sales, costs, or other unit financial information in their financial disclosures. So it is unclear what metrics they are keeping track of. Forbes tell us that within the franchise industry there is a "need for a standard set of performance metrics" which it is currently lacking. They also highlight the major issue of franchises not sharing information on the metrics that they measure.
I first looked for information regarding metrics that franchises must measure and publish by law, however I quickly found that this area is highly unregulated and franchises are more often than not choosing to not publish financial details. I then researched sources that advise franchises on what metrics they should be measuring, here I found a lot of overlap and was able to create a list of commonly measured metrics.
FRANCHISE DISCLOSURE DOCUMENT
Market demand has recently encouraged US franchises to share more about their financial performance. The Franchise Disclosure Document (FDD) is where franchises release details (including financials) each year. The FDD tends to include the following margins: Cost of goods sold, labor, gross margin, profit margin, marketing, profitability, rent, general and administrative expense, utilities, royalties, EBITDA (earnings before interest, taxes, depreciation and amortization), and operating expenses. This information is held in Item 19 of the document. Item 19 tells the reader how well the franchise is doing, and how much money can be made. However, there are no rules as to what a franchise has to include in this section, and many choose to omit a lot of details.
This source provides an example of an Item 19 from American auto-repair franchise, Midas. The metrics that they include are: Number of shops in group, average sales per shop, cost of goods sold, technician wages, franchise royalties, advertising royalties, other variable expenses, and other fixed expenses.
The FDDs published by franchises (which include Item 19s) are not all publicly available, you can read them on the FDD Exchange, but this involves membership fees. Therefore, it is not possible to review what is kept track of and indeed published for most US franchises.
This article suggests that currently the metrics measured by US franchises vary from company to company. It tells us that "the degree to which franchise organizations track key performance indicators, and the specific metrics they choose to track, varies substantially". This means that the operational and financial benchmarks tracked weekly or monthly currently vary a great deal between different US based corporate franchises.
The evidence shows us that there is no standard set of metrics that these franchises consistently measure. The most likely set of metrics that are measured would be those featured in the Item 19s of the FDDs. However, as these are not available I have instead found several recent sources advising franchises on what metrics they should be measuring. I have produced the information as a summary list, rather than as dedicated sections to each metric because of the lack of hard data regarding this subject overall, and because mostly each metric is fairly self-explanatory.
This source from Franchising.com provides a framework to help franchise owners know which financial metrics to watch. The article advises that all franchises should be measuring 3 key ratios: Balance sheet ratios, profitability ratios, and asset management ratios. These ratios are calculated by measuring the following metrics: Current assets, current liabilities, gross profit, sales, net profit before tax, cost of goods sold, inventory, and accounts payable.
This article published by Profit Keeper recommends similar metrics should be a standard for any franchise. For a restaurant franchise they identify food costs, labor costs, weekly sales, average order per customer, and employee turnover as the basic metrics that should be measured. Profit Keeper informs us that these are the metrics that large food franchises such as Marco's Pizza and Little Caesars keep.
Finally, this source outlines the following metrics as being important key performance indicators for franchises: Net promoter score, average sales per employee, average invoice value, percentage of repeat customers, percentage of redos (work that has to be redone), EBITDA, cost of goods and payroll expenses, and franchisee engagement.
SUMMARY LIST OF METRICS
Below I have summarized common metrics that act as operational and financial benchmarks. I have created the list from metrics commonly found on an Item 19, and those that are listed in the above mentioned sources, duplicates have been removed:
— EBITDA (earnings before interest, taxes, depreciation and amortization)
— Average order (sale) per customer
— Percentage of redos (work that has to be redone)
To sum up, I have found that cost of goods sold, labor, gross margin, profit margin, marketing, profitability, rent, general and administrative expense, utilities, royalties, EBITDA, operating expenses, current assets, current liabilities, gross profit, sales, net profit before tax, inventory, accounts payable, average order (sale) per customer, employee turnover, net promoter score, average sales per employee, percentage of repeat customers, percentage of redos and franchisee engagement are commonly measured operational and financial benchmarks of American corporate franchises. However, due to the fact that there are currently limited rules and guidelines in this area, metrics measured varies greatly dependent on the franchise.