Alicia Miller
“Best semi-absentee franchises,” “best franchises for passive income” and “part-time franchises” are common search terms. Franchise Insights survey data showed 45 percent of respondents cited “supplemental income” among their reasons for wanting to start a business. Not surprisingly, these franchise models are heavily advertised at expos, online and in print.
Sales pitch vs. franchise agreement
Do the phrases “semi-absentee,” “passive income” or “part-time” appear in the actual franchise agreements of concepts being marketed in this way? Usually not.
In a completely unscientific test, I Googled “best semi-absentee franchises” and quickly found a broker webpage devoted to this topic. It listed “Top 10” picks (method of ranking not disclosed) as well as “The Complete List.” The second list was longer, but still short enough for me to assume the brands are paid friends.
Brand No. 1’s website asserts its model is “turnkey” and gives the opportunity to “earn an incredible living.” I did an auto word search of the 200-plus page franchise disclosure document. No mention of “semi-absentee.” I went down the list of the other brands, and also did not find “semi-absentee” in their FDDs.
Digging in a bit more on the first franchise, it was clear someone had to make it a full-time gig. The agreement stated one operating partner must have minority equity and make it their full-time role. But you wouldn’t find that out until later in the sales process. I know where to look in the FDD; the average first-timer likely does not.
There is much talk these days about “responsible franchising.” This example brand is only semi-absentee if you also have a full-time operating partner. It’s still a valid model. So why bury that important point in the fine print? Why not be transparent up front?
Pushing part-timers
What happens when you design a franchise to be part-time and you end up with (surprise!) a bunch of hobbyist franchisees? If management wants franchisees to work harder, usually minimum royalties are added. “Watch while we unlock enterprise value!” To encourage adoption, the franchisor may “give” something in exchange for signing the new agreement. Those who don’t immediately convert end up leaving early anyway because they see renewal coming. Either way, underperformers improve or leave.
I recently looked at a company where that scenario unfolded. A minimum royalty was implemented about a year after a private equity firm bought the company. Unfortunately, it was enjoying an unsustainable pandemic surge in business. Despite the brand adding more than 250 units since the deal, total royalties were down 41 percent in 2023 from the peak in 2021.
The new minimum royalty was set too high for half of the system, even looking at the surge year. New unit openings dropped 67 percent in 2022 (the first year in which minimums were added), while transfers jumped 87 percent year over year. Realizing they’d been too aggressive, the franchisor reduced the minimum royalty in 2023, and reduced it again going forward.
But here’s the interesting part. Implementing minimum royalties did not create higher sales performance, looking at the averages. Average unit revenue in 2023 is only 2 percent higher than in 2019. But the franchisor collected, on average, 39 percent more royalties per unit (for those units open longer than one year) under the new minimum scheme in 2023 compared to 2019. How?
The company terminated dozens of franchisees, when in prior years there was only one termination. Transfers started outpacing openings. Transfers in 2022 were 49 percent higher than new units opened, and in 2023 transfers were 43 percent higher than new units opened. Unit performance of the top third was down 5 percent. But the bottom third saw an 89 percent average unit revenue improvement. Hobbyists were replaced with part-timers willing to engage at the new performance level.
If you’re launching a new franchise designed to be a part-time model, consider implementing reasonable minimum royalties from the outset. This avoids having to reset expectations later.
Another common approach to push part-time franchisees to put in more effort is to sell either small territories, or non-exclusive territories. From the franchisor’s perspective, territories are better optimized, and customers are better served by franchisees with the most hustle. But it also virtually guarantees many small operators will stay small and higher system churn. Not surprisingly, these brands are often recruiting new franchisees because they may close nearly as many units as they open.
“You can make the business whatever you want,” is a line in a different part-time franchise concept I reviewed. The brand doesn’t push anyone to grow. There are no minimum royalties. But in practical terms the model creates scarcity and competition amongst franchisees, not flexibility via small, non-exclusive territories.
The better a franchisee does and the more visible their branded trucks are in the community, the likelier a prospective franchisee in the same market will be attracted into the system. The first franchisee recruited their own competitor.
When units close, the franchisor’s explanation is a twist on, “It’s not you, it’s me.” To paraphrase the sales rep: “Don’t worry that we closed 50 units in the last two years; we sold 80! It’s not a unit profitability issue. Part-timers sometimes simply change their mind. But look at all the new believers we’ve recruited!”
I would prefer to see better recruiting up front of owners who want to work part time while building something substantial. And backed by larger exclusive territories, minimum royalties and solid training and support to reduce churn and improve franchisee outcomes.
Synonyms of “part-time,” per Merriam Webster, include: weekend, unskilled, unprepared, untrained, inexperienced, unqualified, amateurish, unprofessional, and naïve. Designing and marketing a franchise as part-time sets expectations, regardless of the franchise agreement. Recruit carefully. It is also something PE should keep in mind when evaluating overly aggressive pro formas of part-time models.
Alicia Miller is the founder and managing director of Emergent Growth Advisors. Her Development Savvy column covers smart ways to market and grow a franchise. She is also the author of “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” Reach her at [email protected].