Every prospective franchisee wants to hop onto the next big thing. But how do you evaluate the 'best' franchise opportunity? This article shows you what to look for to make the right decision for you.
As a prospective franchisee, you're faced with a daunting task. What type of business should you get into, and how do you assess the risks, benefits, opportunities and potential for any particular opportunity promoted by a franchisor? With franchise opportunities virtually everywhere, it pays to set some criteria for your evaluation early in the process.
To a large extent, the choice of a product or service that is "on trend" and playing into a growing market will typically derive greater longer term value - in both profit and goodwill - than those segments that are maturing, in decline, or will attract substantial competition because of relatively low barriers of entry.
Before you rush to pick up the phone and call the many franchise opportunities though, perhaps it is appropriate to think a little bit about where a product or service offering might fit within the marketplace and, importantly, where it might be in the next three to five years when you might wish to exit the venture.
The reality is that some excellent owner-operators are working in extremely tough and competitive environments and not reaping the rewards, while other franchise owners who are contributing perhaps less time and effort, but by a shrewd choice - or just plain dumb luck - have chosen a segment which is outperforming the rest of the market.
To organise the process of selecting the franchise that's right for you it is worthwhile addressing the following key issues early in the selection process.
Sector
This is potentially the most important decision you will make. In reading the newspapers and talking to your friends, relatives and business colleagues, what are the trends that you see emerging that have the potential to grow significantly over the next ten years? All sectors start by emerging, progressing toward maturity, and then into decline and there are substantial financial opportunities at every stage of this cycle.
Sectors that have enjoyed longer term trends are healthcare, aged care, child development and children's products and services, food, hair and beauty, leisure, fitness and well-being.
Which franchise is right for me?
Having decided on the sector and the product or service, the question is how to discriminate between the available opportunities. The following points may prove useful in finding the opportunity with the best scope for growth and profits:
- Brand
Brand is probably the single most important part of any franchise network and is critical for you to consider. Not every great brand will start off being well known.
At the other end of the spectrum are businesses that have been in the market for many years and are offering franchises or licences of a dominant brand that is a magnet for consumers.
Smaller emerging brands offer substantial upside potential, but a judgement needs to be made. Do they have their branding and brand strategy well executed and will they maintain it in the future? A conversation with the franchisor about their brand strategy and the evolution of the brand is a worthwhile discussion to have.
- Marketing
Not to be confused with the brand, marketing is made up of those activities designed to bring people to your doorstep. Many retail businesses confine their marketing to the immediate vicinity of the shopfront. Their marketing is a mix of merchandising and point-of-sale materials. In these circumstances you may find that the marketing budget is quite modest and may represent a very small percentage of retail sales. This almost invariably will require high traffic locations in shopping centres and in some ways, the network is dependent on these centres to provide traffic.
Alternatively, business-to-business brands generally have a focused marketing approach more dependent upon targeted promotion to specific potential customers, rather than a broader advertising campaign. Every good franchise should have a specific marketing strategy that is focused on their highest value consumer segment, and understand how marketing and advertising dollars are translated into revenue.
Good franchise systems understand the importance of marketing and its role in supporting the brand as well as supporting sales. If the marketing collateral doesn't motivate you to respond, then this franchise should be crossed off your list.
- People
Great franchises are built with passionate, motivated principals, staff and franchise owners. Therefore, if you are inspired by the people who own and manage the franchise, there is a good chance that they are a quality team with the ability to succeed. The franchise owner-operators are the face of the franchise and a visit to franchisees will tell you much about the future potential of the brand.
If you meet franchise owners who look more like Homer Simpson or who present like they've been pulled backwards through a hedge, then this should tell you something about the future direction of the franchise. There is little doubt that the calibre of the people in both the management and franchise network will dictate the future potential. If you want to soar with the eagles, there's no point joining a flock of turkeys.
- Product supply
The first question to ask is whether the franchisor is in fact a supplier of any goods or services to the franchisee. This is required to be disclosed in the franchise disclosure document, but a discussion of supply side arrangements will be enormously valuable in understanding the dynamics of the relationship between the franchisor and you.
For example, some franchise systems have a major focus on negotiating purchasing arrangements from a raft of suppliers for the benefit of its franchised owner-operators. The effort an organisation applies in the supply side relationships will give you an insight into how the franchisor supports the franchisee.
These supply arrangements will help to evaluate your degree of comfort with the franchisor and the way a specific business model is designed to operate. Naturally, supply arrangements that are focused on enhancing the margins and therefore profits of the franchisee are an attractive platform on which to build good franchisee relations.
- Franchisee satisfaction
It's important to have a good look at the relationship that existing franchise owners have with their franchisor. The vast majority of franchisees are quite candid about their views of their business and the franchisor, and understand that their responses will have a major bearing on your decision making process.
Do not rely on one or two good reports, however, especially if you were specifically directed to these franchisees. In fact, you should ask the franchisor "Who is your most unhappy franchisee, and why?". It will be worthwhile to spend a little time talking to this particular individual and making an assessment of whether it is the franchisee or the system that is left wanting.
- Value proposition
The ultimate test of a franchise, and the single biggest discriminator, will be the answers to the following two questions:
- "How much money do I have to put on the table?"
- "How much money will I make?"
The answers to these two questions are absolutely crucial to your future. The return on your invested capital and time will provide you with an understanding of what's in it for you and will go a long way towards determining if this particular franchise is the right one for you.
Income is a primary driver of franchisee satisfaction and the biggest single driver of your ability to maximise the value of your investment in a franchise.
- Growth
The potential to increase the revenue and the profits of your franchise, turning it into a bigger and bigger business year by year, is an important consideration and you need to understand how scaleable the business may be.
For example, a franchise which relies solely on you to do all the labour is limited by the number of hours that you can actually spend working.
If however, a franchise has the opportunity to grow by leveraging the number of units that you might operate, or the number of employees that you can apply to manage growth of customers and sales, then your ability as a manager will be the real measure of future growth, rather than a structural feature of the franchise.
In considering growth potential it is important to understand that all growth, especially growth in profitability, will attract competition. Selecting a franchise system that has no competition is only relevant if you plan to exit before competition starts to intensify to a point where sales or profits are eroded. This product or service cycle should be a part of your consideration.
- Exit potential
Ultimately the value of every business is crystallised when you sell it. This is often not taken into consideration in the decision making process but can make the difference of hundreds of thousands of dollars over say a five to seven year period.
You should ask the question; "Who will buy my franchise and why?" before you decide to choose a particular franchise opportunity.
Sometimes, the very reasons that attracted you to your franchise are the same reasons for a prospective buyer, provided of course, that the competitive landscape and the conditions of the marketplace have not changed substantially.
On the other hand, a franchise that over the years attracts substantial competition may move from being a valuable business to one that faces a heavy competitive environment. This may prove unattractive to a potential purchaser and therefore depress the price.
Other factors that influence your returns may be the term remaining on any lease, or the requirement by the landlord or the franchisor to refit the location to bring it up to the current standard. A business that looks run-down suffers the same effect on price as a dilapidated house that needs repainting, refurbishing and new landscaping.
Your choice of business should be a reflection of your personal style and should interest and excite you in terms of its day-to-day operation. Most importantly though, your decision should be guided by a sensible analysis of the opportunities. This will help achieve the maximum value prize - and ultimately, isn't that what business is all about?