Kaakati Unit Economics for Franchise Models
Core Variables
| Variable | Impact on Model |
|---|---|
{revenue_model} |
Determines revenue build method and key metrics |
{business_model} |
Determines cost structure categories |
{franchise_model} |
Determines fee structures (single-unit vs. area dev vs. master) |
{territory_scope} |
Determines currency, tax, and cross-border considerations |
Required Inputs
- Revenue Model: Subscription, transaction, retail, service, or hybrid.
- Pricing Structure: Per-unit pricing or tier structure.
- Territory Definition: How territories are sized and what they contain.
- Royalty Structure: % of revenue, flat fee, hybrid, or tiered.
- Current Metrics (if available): Existing unit economics from company-owned operations.
Execution Steps
1. Revenue Build by {revenue_model}
Subscription (SaaS, memberships, recurring services)
| Metric | Definition | Build Method |
|---|---|---|
| MRR | Monthly Recurring Revenue | Active customers × ARPU |
| ARR | Annual Recurring Revenue | MRR × 12 |
| Gross Revenue Retention | Revenue retained excluding expansion | 1 - revenue churn rate |
| Net Revenue Retention | Including expansion/upsell | Gross retention + expansion rate |
| ARPU | Average Revenue Per User/Account | Total revenue ÷ active customers |
| Expansion Revenue | Upsell + cross-sell | % of base revenue |
Transaction (restaurants, retail, e-commerce)
| Metric | Definition | Build Method |
|---|---|---|
| Average Transaction Value | Revenue per transaction | Menu price × items per ticket |
| Transaction Volume | Transactions per period | Traffic × conversion rate |
| Revenue | Period revenue | ATV × volume |
| Same-Store Growth | YoY revenue growth | Comp analysis |
| Daypart Mix | Revenue by time period | % split across dayparts |
| Seasonal Adjustment | Revenue cyclicality | Index by month/quarter |
Service (consulting, healthcare, education, fitness)
| Metric | Definition | Build Method |
|---|---|---|
| Billable Hours | Revenue-generating hours | Staff × hours × utilization |
| Utilization Rate | Billable / available hours | Target: 65-85% |
| Average Rate | Revenue per billable hour | Rate card or blended rate |
| Revenue | Period revenue | Billable hours × average rate |
| Client Retention | Recurring client % | Repeat / total clients |
| Capacity | Maximum revenue at full utilization | Staff × hours × rate × utilization cap |
Retail (physical goods, inventory-based)
| Metric | Definition | Build Method |
|---|---|---|
| Revenue Per Sq Ft | Sales efficiency | Revenue ÷ selling sq footage |
| Inventory Turnover | Selling efficiency | COGS ÷ average inventory |
| Gross Margin | Product margin | (Revenue - COGS) ÷ Revenue |
| Footfall | Customer traffic | Door counts or equivalents |
| Conversion Rate | Traffic to purchase | Transactions ÷ footfall |
| Basket Size | Average purchase | Revenue ÷ transactions |
2. Franchisee Unit Economics (Territory-Level P&L)
Build a 5-year P&L per franchise unit/territory. Cost categories adjust by {business_model}:
Universal Cost Categories
| Category | Applies To | Typical % of Revenue |
|---|---|---|
| Royalty to franchisor | All | 4-15% (varies by sector) |
| Ad fund contribution | All | 1-3% |
| Technology/platform fee | All (may be in royalty) | 1-5% |
| Local marketing | All | 2-5% |
| Insurance | All | 1-3% |
Business-Model-Specific Costs
| Category | SaaS | Retail | Service | Hybrid |
|---|---|---|---|---|
| COGS / materials | Minimal | 25-40% | 5-15% | Varies |
| Labor | Sales + support staff | 25-35% | 40-60% | Varies |
| Occupancy / rent | Minimal (home office) | 8-15% | 5-12% | Varies |
| Equipment / buildout | Minimal | Significant | Moderate | Varies |
| Inventory | None | Yes | Minimal | Varies |
| Licenses / permits | Minimal | Food/health/liquor | Professional licenses | Varies |
Franchisee Economics Summary Template
| Metric | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Revenue | |||||
| COGS / Direct Costs | |||||
| Gross Profit | |||||
| Royalty | |||||
| Operating Expenses | |||||
| EBITDA | |||||
| Owner's Compensation | |||||
| Net Cash Flow | |||||
| Cumulative Cash Flow |
Key Franchisee Metrics
| Metric | Formula | Target (Healthy) |
|---|---|---|
| Total Initial Investment | Franchise fee + buildout + working capital | Recover in 2-3 years |
| Months to Breakeven | When cumulative cash flow turns positive | < 18 months |
| Cash-on-Cash Return (Y3) | Annual cash flow ÷ total investment | > 20% |
| Payback Period | Investment ÷ annual cash flow (at steady state) | < 3 years |
| Steady-State EBITDA Margin | EBITDA ÷ Revenue (mature unit) | > 15% (varies by sector) |
3. Franchisor Unit Economics (System-Level P&L)
Build the franchisor's economics based on network growth:
Revenue Streams
| Stream | Description | Recognition |
|---|---|---|
| Initial franchise fees | One-time per new unit | On unit opening (GAAP) |
| Ongoing royalties | % of revenue or flat fee | As earned monthly |
| Technology/platform fees | If separate from royalty | Monthly |
| Ad fund management | Management fee on fund | Monthly |
| Supply chain margin | Markup on required products/materials | On delivery |
| Training fees | For additional/ongoing training | On delivery |
| Transfer/renewal fees | On franchise resale or renewal | On event |
| Company-owned unit revenue | If franchisor operates units | As earned |
Franchisor Cost Structure
| Category | Description | Scaling Behavior |
|---|---|---|
| Platform / product development | R&D, product maintenance | Semi-fixed |
| Franchise sales | Recruitment marketing, sales team | Scales with growth targets |
| Franchisee onboarding | Training, opening support | Per new unit |
| Field support | Ongoing franchisee support team | 1 per 40-60 units |
| Corporate G&A | Management, finance, HR, legal | Step-function |
| Legal & compliance | FDD updates, registrations | Semi-fixed + per state |
| Brand marketing | System-wide marketing beyond ad fund | % of system revenue |
Key Franchisor Metrics
| Metric | Formula | Target |
|---|---|---|
| System-Wide Revenue | Sum of all franchisee + company-owned revenue | Growth trajectory |
| Royalty Revenue | Royalties collected | Predictable stream |
| Franchisor EBITDA Margin | EBITDA ÷ franchisor revenue | > 30% at scale |
| Franchisee Survival Rate | Units operating ÷ units ever opened | > 90% (5-year) |
| Support Ratio | Franchise units ÷ field support staff | 40-60:1 |
| Unit-Level Breakeven | # of franchise units for franchisor profitability | Know this number |
4. Win-Win Validation
The franchise model only works if both sides win:
| Metric | Franchisee | Franchisor | Healthy Range |
|---|---|---|---|
| Y3 EBITDA Margin | X% | X% | Franchisee > 15%, Franchisor > 25% |
| Cash-on-Cash Return | X% | N/A | > 20% |
| Payback Period | X months | X units to breakeven | Franchisee < 3yr, Franchisor < 50 units |
| Revenue Retained After Royalty | X% | Royalty: X% | Franchisee retains > 85% |
If the win-win test fails, adjust: royalty rate, territory size, initial investment, or support model until both sides are viable. If no configuration works, franchise may not be the right model.
5. Sensitivity Analysis
Model sensitivity on 4+ key variables (selected by {revenue_model}):
Universal Sensitivity Variables
- Royalty rate: ±2% impact on franchisee vs. franchisor economics.
- Unit growth rate: impact on franchisor revenue and support costs.
Subscription-Specific
- Churn rate: ±2% impact on LTV and franchisee breakeven.
- ARPU: pricing sensitivity on both sides.
Transaction-Specific
- Average transaction value: ±10% impact on unit P&L.
- Traffic volume: ±15% impact on revenue and staffing.
Service-Specific
- Utilization rate: ±5% impact on revenue at fixed cost.
- Average rate: pricing sensitivity.
Present as 2×2 matrices showing franchisee cash-on-cash return and franchisor EBITDA.
Quality Checks
- Both franchisee AND franchisor P&Ls built (never just one side).
- Revenue build uses
{revenue_model}-appropriate metrics. - Win-win test explicitly verified with both sides showing viable economics.
- Sensitivity analysis on at least 4 key variables.
- Ramp-period economics distinguished from mature/steady-state economics.
- All assumptions sourced with confidence levels.
- Cost categories match the
{business_model}(not generic).