Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Top Franchisees Use Employee Ownership Plans to Retain Staff
Transcript
- Lucas: Let's talk about something that keeps franchisees up at night — not revenue, not rent, but staff turnover. The kind where you train someone for two weeks, they're decent for three months, and then they're gone, and you're starting over. Luna: And the cost of that churn is brutal. The National Restaurant Association puts it at roughly fifteen hundred dollars per hourly employee when you factor in recruiting, training, and lost productivity. Lucas: Right. So a franchise running twenty hourly workers turning over one hundred percent a year is bleeding thirty thousand dollars just in replacement costs. That's before you account for the hit to customer experience when a new person is still learning the register. Luna: So the question becomes: what actually gets people to stay? A fifty-cent raise? Better scheduling? At some point those are just table stakes. Lucas: And that's why a small but growing number of franchisees are trying something more structural: Employee Stock Ownership Plans. ESOPs. It's not just for big public companies — private franchise groups can set them up too. Luna: ESOPs in a franchise context — that's unusual. How does that work when you don't have publicly traded stock to give? Lucas: The franchisee creates a trust that holds shares in their operating company. Employees earn units based on tenure and performance, and those units vest over time — typically three to five years. When an employee leaves or retires, they cash out at the appraised value of the company. Luna: So it's like a retirement account tied to the success of your specific franchise group. Lucas: Exactly. And one of the best examples I've seen comes from a McDonald's franchisee in the Mid-Atlantic, Mike Smith. He runs twelve units. In 2023, he set up an ESOP that covers all employees who work at least a thousand hours a year. That includes crew, shift managers, even the assistant managers. Luna: And what happened? Lucas: Within two years, turnover dropped from one hundred ten percent to forty-five percent. And same-store sales growth in his group ran three percentage points above the regional average for McDonald's. Not because he raised prices — because stores with more experienced crews run faster, make fewer order errors, and get better drive-through times. Luna: That's a compelling number. But setting up an ESOP isn't cheap or simple. There are legal fees, plan documents, annual valuations — I've heard the setup cost alone can run fifty thousand dollars or more. Lucas: It can. But the math works if your turnover is high enough. Mike Smith told me he was spending roughly two hundred thousand dollars a year on recruitment and training across his twelve stores. post esop, that dropped to about eighty thousand. So within the first year, he covered the setup costs. Luna: And the employees — do they actually feel ownership? I mean, a twenty-year-old working the fry station might not care about share valuations. Lucas: That's the thing — Smith found that once employees understood the plan, they started paying attention to waste, to speed, to customer satisfaction. Because they know that if the stores perform better, the shares grow. He does a quarterly meeting where he shows the store-level profit numbers and explains how that affects the trust's value. Luna: So it becomes a feedback loop. Better performance, higher share value, more retention, even better performance. Lucas: Exactly. And the ESOP also works as an exit strategy for the franchisee. If Mike Smith ever wants to sell his twelve stores, the ESOP trust can buy them. He gets a fair price, and the employees keep their jobs and ownership. It's a built-in succession plan. Luna: That's a lot of advantages. But it only works if the franchisee has enough scale. A single-unit operator probably can't justify the overhead. Lucas: Right. The sweet spot seems to be five or more units, or a multi-brand franchisee with a couple hundred employees. But even then, it's not for every concept. High-volume fast food works well because the labor pool is large and turnover is traditionally brutal. But a lower-volume service franchise with a handful of employees might not get enough benefit to offset the administrative cost. Luna: And the franchisor — what's their reaction? Some franchise agreements restrict how you can transfer ownership or structure equity. Lucas: That's a real issue. Most franchise agreements require the franchisor to approve any change in ownership of the franchisee entity. So you need to get the legal team on board early. But a growing number of franchisors are actually encouraging ESOPs because they see the retention data. McDonald's, for example, has a whole resource page for franchisees interested in setting one up. Luna: It makes sense. The franchisor benefits from stable, experienced management at the unit level. Higher sales, fewer compliance issues. Lucas: There's also a tax advantage for the franchisee. In the U.S., contributions to an ESOP trust are tax-deductible, and if the ESOP owns more than thirty percent of the company, the seller can defer capital gains taxes under Section 1042 of the tax code. That's a huge incentive. Luna: Okay, that's the piece I hadn't considered. So the franchisee gets a tax break, an exit strategy, and a retention tool all in one. Lucas: And the employees get a nest egg. A crew member who stays five years at Mike Smith's stores — the average payout so far is around twelve thousand dollars. That's real money that changes how people think about their job at a fast-food restaurant. Luna: One of the things I appreciate about this show is that we dig into tactics that actually move the needle for franchisees — and this is a great example. If today was useful to you, the way we keep these conversations ad-free is through listener support. People who find value in what we do can help keep it going at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the episodes coming. Lucas: Yeah, we hear from listeners who say they've used ideas from this show to save thousands or improve operations. That's what keeps us going. And if you want to be part of that, the link is simple: buy me a coffee dot com slash fexingo. Now, back to ESOPs — one thing I want to address is the risk. What if the business loses value and employees' shares drop? Luna: That's the flip side. ESOPs concentrate risk. If the franchise group hits a rough patch, employees see their retirement savings shrink at the same time they might be worrying about layoffs. Lucas: True. But compared to a 401 where the employee might not have any company stock, here they have a direct line of sight between their effort and the outcome. And the diversification argument — employees shouldn't have all their eggs in one basket — is valid. Some franchisees who set up ESOPs also offer a simple IRA alongside it, so employees can choose where to put their savings. Luna: So it's not a silver bullet. But for the right operator with the right scale, it's a powerful lever. Lucas: And the trend is growing. The Employee Ownership Foundation says the number of ESOPs in franchise businesses has increased about fifteen percent year-over-year since 2021. It's still a small slice, but the early adopters like Mike Smith are proving the model. Luna: If someone listening wants to explore it, what's the first step? Lucas: Talk to a lawyer who specializes in ESOPs — not a general franchise attorney. The ESOP Association has a directory. You'll need a feasibility study that looks at your employee count, turnover rate, profitability, and franchise agreement. That study typically costs five to ten thousand dollars and will tell you whether the numbers work. Luna: And if they do, you're not just buying a retention strategy — you're building a culture where employees have a real stake in the outcome. Lucas: Exactly. And that's the kind of moat that's hard for a competitor to replicate with a fifty-cent wage bump.