An often overlooked metric for many franchisors is the number of outstanding territories they have yet to award. For most new franchisors, selling out of territories seems like such a distant problem that they don’t give it any thought. When they think of scarcity, they think about franchisee lead scarcity. However, I would challenge franchisors to flip the equation if their goal is to maximize the long-term value of the brand. By Tom Spadea
An often overlooked metric for many franchisors is the number of outstanding territories they have yet to award. For most new franchisors, selling out of territories seems like such a distant problem that they don’t give it any thought. When they think of scarcity, they think about franchisee lead scarcity. However, I would challenge franchisors to flip the equation if their goal is to maximize the long-term value of the brand. If you have a solid, profitable, happy system, you will have plenty of franchise leads. But none of us can create more pockets of population.
As a franchise attorney, I have seen many of my clients exit over the last few years, and one thing that I know buyers of systems are very interested in is the amount of growth still remaining for them to achieve. It’s a number that can easily be tracked but something many franchisors don’t have readily available. Unsold territories are one of your most valuable assets. In some way, it’s the ceiling of your overall system’s value. And if your long-term goal is to maximize your exit, it’s never too early to make that one of the key metrics you track, manage and guard.
If you commonly lump a double- or triple-sized territory into every deal, you are trading away serious long-term value. I am a realist, so I understand the need to be generous to early adopters of your brand. But I also believe in being intentional with everything you do as a business owner. If you do give away these large territories to close a deal, at least be aware of the trade-off. Each territory that is not maximized can potentially bring down the value of all future unsold territories. Spreading your franchisees too thin will potentially give a false impression that they need big territories to thrive, which can dramatically reduce your viable territory inventory, or VTI.
When making decisions on growth, where can you have the tightest territories with the highest unit volumes? Is putting up with the anti-business regulations of California and Washington state worth it in your early years, or is that better left unsold as a solid crop of VTIs for the next owner? Be intentional about where you grow, the cost benefit of each territory sold and its long-term impact on your enterprise value. The franchisors who track and understand how the math works will win over the long haul.
Tom Spadea
Tom Spadea is a franchise attorney and founding partner of Spadea Lignana, one of the nation’s premier franchise law firms, representing over 300 brands worldwide, from emerging concepts to elite brands that are household names. Spadea is a Certified Franchise Executive, speaker, author and key adviser to many high-level executives and entrepreneurs in franchising. spadealaw.com, tspadea@spadealaw.com