Do you know about the “Sold But Not Open” metric? Beware of this subtle numbers game when franchise companies report on the numbers of units sold. Just because a unit is sold, it doesn’t mean that it eventually opens for business. Many companies like to sell multiple units at a time (as in “3-packs”) and these don’t always get opened.

Here is an article from Franchise Times on this franchising graphic:

Many Units Sold, Far Fewer Open for Many

Here are some interesting excerpts:

Franchising has rebounded since the recession, with the nation’s franchisors opening new units at a pace of about 12,000 a year, according to the International Franchise Association’s Economic Impact report. The report says that’s faster than non-franchised businesses.

 

But if you read the press releases and online promotions of dozens of brands, you’d believe that franchises are growing even faster. (See article for specific examples)

 

If all those franchisees actually opened the units they signed up for, individual brands would be far bigger and franchising in general would be growing much faster than its current rate. Instead, thousands of franchise sales fall into another category, called Sold But Not Open (SBNO).

 

Franchisors must report unopened units each year in their franchise disclosure documents (FDD). We asked FranchiseGrade.com, a research and analytics company in London, Ontario, to provide a list of the 50 franchisors with the greatest numbers of Sold But Not Open units from its database of FDDs from more than 2,400 systems. In their 2013 FDDs, the top 50 SBNO franchisors alone reported 12,697 unopened units.

 

Many of these units will never open because the franchisees who signed the agreements—and usually paid upfront franchise fees—are struggling to operate the one or two units they have opened; are having trouble finding sites for additional units; have lost interest or, in some cases, have run out of money and filed for bankruptcy.

 

The most obvious victim when units don’t open is the franchisee, who might have opened a single unit and flourished. But the franchisor also suffers, because the same territory could have been sold to other franchisees who might be thriving there. And franchising itself suffers, because more robust growth could strengthen the industry’s position in its legal battles against minimum-wage increases, healthcare reform and worker unionization.

Be sure to read the entire article. It’s very interesting. Give me a call to discuss!

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