The vanity metric that's killing your valuation

"We've sold 500 territories in five months!"

Sounds impressive, right? 

You see these announcements all over LinkedIn and franchise publications. Brands love talking about territories sold.

But here's what most founders don't understand: sold territories can actually hurt your enterprise value if you're not careful.

The SNO Pipeline Problem

Investment bankers call these deals "SNO" - Sold but Not yet Open. 

A big SNO pipeline can be very positive for your valuation. It shows your brand is validating well, that potential franchisees are getting positive feedback when they call existing operators.

But that same SNO pipeline can quickly become a valuation killer.

If you've sold 50 territories that are supposed to open this year and only 10 actually open, that's a red flag. 

It signals that existing franchisees aren't making enough money to open their second, third, or fourth locations.

When Vanity Metrics Become Valuation Problems

Private equity firms dig deep during due diligence. They're not impressed by how many deals you've signed. They want to know:

• Are franchisees opening on schedule? If your development schedule says six months from signing to opening, but most are taking 12-18 months, that's a problem.

• Why aren't they opening? Is it funding issues? Real estate problems? Or are existing franchisees telling prospects the numbers don't work?

• What's the real pipeline health? A stale SNO pipeline where territories sit unsold for months sends a dangerous signal about your business model.

The Right Way to Think About Territory Sales

Smart franchisors focus on quality over quantity. 

They'd rather ramp slower at the beginning and get the right people on the bus than chase quick franchise fees.

For this reason, your first 10-20 franchisees are critical. 

They're going to validate your system. They're producing the results for your Item 19. Closures in this group send a really dangerous signal in years 3, 4, and 5.

A simple benchmark that some might use: the best franchisors will have less than 5% closures in year five or ten of their system.

What Actually Drives Enterprise Value

Instead of chasing territory sales numbers, focus on what private equity actually cares about:

1. Franchisee profitability and 2-3 year payback periods. Without good unit-level economics, you won't get validation and you'll have closures.

2. System-wide sales growth across different vintages. Are your first 25 franchisees doing better than your next 25?

3. Development schedule adherence. Franchisees open on time according to their agreements.

In short, stop chasing territory sales headlines, and focus on building profitable locations that actually open and perform.

Until next week, 

Erik

PS: Ready to build the systems that create real enterprise value? Check out the Franchise Secrets private Facebook group, where members share wins, losses, and hard-earned lessons  that you won’t find anywhere else.