The ideal franchise opportunity
The ideal franchise opportunity
1. Do they look good?
It is critical that you are the best looking store in your category or, if you are a mobile franchise, the vehicles should be well presented and serve as mobile billboards for the business. There is no substitute for first impressions.
2. Have they been able to secure prominent premises?
The best retail sites are seen by more people and, as a result, trade at higher turnover levels. Franchise groups having a strong brand, well presented stores and a professional approach are generally able to secure the best sites. Better sites create profile in the market place, tend to generate excellent numbers and are therefore a more attractive proposition - provided that rents are manageable.
3. Are existing franchisees profitable?
One of the big discriminators is naturally a comparison of return on invested capital. There is little point in a franchise group looking good but being only marginally profitable. Be sure that the business is maximizing the profit that falls to the bottom line in both its company-owned and franchised locations.
4. Are they seen?
Does the business you are considering have a profile in the media? Every franchise group should have a unique selling proposition and a public face to sell it. Does the franchise group diligently promote every aspect of the business - customer experiences, expertise in the segment, a particular characteristic of its staff or plans for future national or international expansion?
5. Are existing franchisees happy?
The advocacy of franchise owners is one of the most powerful indicators that this is a franchisor of choice. What makes a franchisee smile? Good returns and a positive working relationship. You want a franchisor focused on ensuring franchisees are maximizing the performance and profitability of their outlets.
6. Advertising, advertising and advertising
Many of the best franchisors are seen in the marketplace by their advertising and promotional activities. Advertising drives retail and service business sales and this flows to the bottom line to produce a more profitable business. The franchisor of choice has an ongoing and well-developed marketing campaign with constant reminders to the market the organisation is alive and well.
Advertising may be in the form of product sampling, catalogue distribution, local area marketing, event sponsorship, radio or television advertising, or a combination of these.
7. Do they have a strong relationship with the banks?
Franchisors with aspirations for significant growth will generally have a strong and robust relationship with the banks which, in turn, are willing to offer attractive funding packages for franchisees.
8. Do they have company owned operations?
Company operated locations provide a valuable core of cash flow and profitability for the franchisor, which provides stability for the group. Company operations provide a 'controlled' environment for your induction and training which will contribute to your success.
9. Do they listen and learn?
Many of the ideas and innovations in a franchise network come from the franchisees at the customer end of the business. Has the franchisor used this wealth of knowledge and information to improve processes and create more value for the customer?
10. Do they have a clear vision and an aggressive growth plan?
Leading franchisors are continually articulating the direction and goals of their organisation and the progress of the business in one-on-one discussions. They encourage every stakeholder in their network to consider the opportunity and aspire to be part of the future prosperity of the business.
If you've done your homework, ticked each of these items off your list and decided which franchise group you want to join, you're now faced with another choice; a new location with exciting potential or an existing location with proven performance. It's important to recognise that there is inherent risk in both of these scenarios - the risk of any new business venture. Whilst it is generally accepted that higher risk equals higher returns, we know this is not always the case, so careful analysis becomes the key to good decision making.
Firstly, you should take a long, hard look in the mirror and analyse yourself. What is you risk profile? We all have our own unique risk aversion characteristic which drives our behavior. Someone with low risk aversion tendencies will be more likely to venture into a new location and be prepared to face the consequent start up risk. Someone with high risk aversion tendencies will be more likely to opt for the safer bet of an established location and the certainty of a proven track record. Understanding your personal risk profile is important in the decision making process. Whilst you may want to push a little beyond your personal comfort zone, how much risk is too much? The uncertainty and associated stress levels associated with a high level of risk may impact negatively on your performance as an owner operator. Too little risk on the other hand, may result in no adrenalin rush and a quick descent into boredom. Understanding where you sit on this scale and what motivates you will be an important factor in making your choice.
The new location - starting from scratch
Let's assume for a moment that you're the type of person that can tolerate a reasonable level of risk and as such, you're prepared to venture into a new location. What should you look for, what are the questions to ask and how do you arrive at a commercially sound decision?
Some of the benefits of taking on a new location include:
• No goodwill is payable to a previous franchisee
• It is a brand new operation and the local reputation of the business can be established as desired
• The landlord may be prepared to make a contribution toward fit out.
Obviously, the balancing factor is that you will not have the certainty of a proved trading history for that particular location.
Do your homework
Much research should be undertaken when considering a new venture. Interestingly, many potential franchisees do not use the options at their disposal. The following are examples of some of the methodologies used to make a factual judgment in relation to the likely success of any given location.
• A people traffic count
• Examining neighboring business performance
• Researching previous tenant performance irrespective of the business type
• Shopping centre reports
• ABS data for the territory
• Bank advice on the industry risk profile and the consequent accreditation rating for the franchise system
• Industry research, IBIS World, Retail Association, other available sources
• Competitor study in surrounding locations
Access to a reasonable amount of data will ensure you are making a more informed decision. This must however be balanced with the fact that risk will never totally disappear. Experience has shown that potential franchisees have missed great opportunities over time due to prolonged dithering and the failure to make a decision in a reasonable time. This is just as frustrating for the franchisor as it is for the franchisee. If you find yourself in this position, try to focus on the key issues impacting the decision. Try not to be too consumed with the multitude of other issues that can divert attention from the important considerations.
The established location - a running start or someone else's problems?
In essence, the good and bad of the established location are the reverse of the new or -greenfield-location. You will take some comfort in the proven trading history so in effect, it is generally perceived as a lower risk option. If the premises are looking a little tired, a refurbishment can restore the appearance, and there is an existing reputation - which could be good or bad. Similarly, existing employees could be a positive or a negative and this is discussed in a little more detail below. A key issue to consider is the potential for further growth of the business; is there more growth to be had or has it reached its peak? So, where do you start?
Numbers, numbers, and numbers
There is no substitute in business for having detailed and accurate numbers for the performance of a business. The quality of the numbers is crucial and, frankly, some examples we've seen defy belief - they lack of detail and in some cases, any semblance of accuracy.
It is important to cross reference any numbers provided with the previous financial reports, BA5 statements, reporting to the franchisor, the franchisee's accountant, and any benchmarking that exists in the network. Businesses that carry a cash component are the most difficult to calculate. If the numbers appear in anyway inconsistent this must be focused on in detail. This is not an area where close is good enough.
In addition to reviewing the financial performance it is important to ensure a detailed budget has been prepared outlining the sources and uses of funds and the cash flow from the business. This should include finance costs and a buffer for any reduction of revenue. The single greatest cause of stress in franchisee businesses is being undercapitalized at the start.
Franchisee peer perspective
Given the existing franchisee has operated in the network. it is worth speaking with other franchisees to gain a peer perspective. The objective is to understand the performance and any views that may assist in making the decision. Typically, if a franchisee has been a good performer and a decent operator they will be respected by their fellow franchisees. It must be remembered however, that there will be franchisees in a network that may not be inclined to provide a balanced view.
Circumstance change
The adage that time never stands still is as true in business as it is elsewhere in life. The present situation will not be the same forever and consequently it is important to consider whether there are any circumstance changes that are likely to impact the performance of the business in the future. Past performance is not necessarily an indication of future performance. There maybe a competitor that has signed a lease just across the road, a new DFO about to open, a major anchor tenant leaving, or a change to surrounding parking or road infrastructure. All (or none) of these may be relevant to the performance of the franchise and the decision to purchase.
Should growth be expected in the current franchise?
Growth is an expectation in nearly every business. This is no different in a current franchise but there are factors to consider. All businesses and brands go through the cycle of start up, growth, and maturity. Whether decline or reinvigoration is the next step is down to the network and the operator. Any purchase should achieve an acceptable return on the invested capital that will typically require a degree of growth.
The other part of this question is growth in what - revenue, profit, cost base? The reality is all will grow over time but growth in profit is the most important measure. Revenue can fall but improvements in gross margin, productivity or cost management may deliver an improved profit result.
When assessing a franchise system the growth opportunities must be considered in the context of industry and group direction. A new franchise system may have questions of sustainability or may be defining a completely new specialty. A mature system may be on the verge of a slow down or at threat from a younger, more dynamic competitor. Stepping back from the business to analyse the industry and key players will assist in making an assessment of the likely growth trajectory.
Employees - should they stay or should they go?
There are three key issues to resolve as to whether you should keep existing employees after an acquisition is complete.
• Do they have the skills to match your expectations of the role?
• Is there any strong impact on performance if they leave?
• Is there a cultural and personal fit with the new owners?
Individually none of these provides an answer; it is the combination of factors that matters. For instance, you could have a strong operator to whom customers are particularly aligned and whose departure may negatively affect store performance. However, the same employee could have no interest in the new ownership structure and consequently not only fail to deliver the previous results but impact the future results because of the cultural or personal disconnect with the new owners.
A decision needs to be made very early as focusing on developing your new business is challenging enough without having to worry about whether or not your people are aligned with your direction. There is no substitute for a direct conversation with the existing team and seeking some input from the franchisor or outgoing franchisee.
Another interesting consideration is whether you should keep former franchisor staff if you are purchasing a company operation that is to be converted to a franchise. There are some key advantages in that they know the business, how head office operates and have relationships with other head office team members which could be to your benefit. There are also some potential disadvantages that need to be considered such a greater concern for the head office perspective rather than yours, a lack of motivation to work under your constant supervision or the perception that a career path progression has been removed as they are no longer part of company operations. Again a candid conversation is a great first step to understanding these issues and the appropriate actions.
In summary, your personal risk profile is the principal determinant of whether you should invest in a new and exciting location or a proven and profitable one. In either case they key is to be conscious of the risks and benefits inherent in both scenarios and ensure that your decision is supported be the relevant data.
The ideal franchise opportunity - To learn more about this author, visit Rod Young's Website.
Like this article? Share it with your friends
Selecting your franchise opportunity
1. Do they look good?
It is critical that you are the best looking store in your category or, if you are a mobile franchise, the vehicles should be well presented and serve as mobile billboards for the business. There is no substitute for first impressions.
2. Have they been able to secure prominent premises?
The best retail sites are seen by more people and, as a result, trade at higher turnover levels. Franchise groups having a strong brand, well presented stores and a professional approach are generally able to secure the best sites. Better sites create profile in the market place, tend to generate excellent numbers and are therefore a more attractive proposition - provided that rents are manageable.
3. Are existing franchisees profitable?
One of the big discriminators is naturally a comparison of return on invested capital. There is little point in a franchise group looking good but being only marginally profitable. Be sure that the business is maximizing the profit that falls to the bottom line in both its company-owned and franchised locations.
4. Are they seen?
Does the business you are considering have a profile in the media? Every franchise group should have a unique selling proposition and a public face to sell it. Does the franchise group diligently promote every aspect of the business - customer experiences, expertise in the segment, a particular characteristic of its staff or plans for future national or international expansion?
5. Are existing franchisees happy?
The advocacy of franchise owners is one of the most powerful indicators that this is a franchisor of choice. What makes a franchisee smile? Good returns and a positive working relationship. You want a franchisor focused on ensuring franchisees are maximizing the performance and profitability of their outlets.
6. Advertising, advertising and advertising
Many of the best franchisors are seen in the marketplace by their advertising and promotional activities. Advertising drives retail and service business sales and this flows to the bottom line to produce a more profitable business. The franchisor of choice has an ongoing and well-developed marketing campaign with constant reminders to the market the organisation is alive and well.
Advertising may be in the form of product sampling, catalogue distribution, local area marketing, event sponsorship, radio or television advertising, or a combination of these.
7. Do they have a strong relationship with the banks?
Franchisors with aspirations for significant growth will generally have a strong and robust relationship with the banks which, in turn, are willing to offer attractive funding packages for franchisees.
8. Do they have company owned operations?
Company operated locations provide a valuable core of cash flow and profitability for the franchisor, which provides stability for the group. Company operations provide a 'controlled' environment for your induction and training which will contribute to your success.
9. Do they listen and learn?
Many of the ideas and innovations in a franchise network come from the franchisees at the customer end of the business. Has the franchisor used this wealth of knowledge and information to improve processes and create more value for the customer?
10. Do they have a clear vision and an aggressive growth plan?
Leading franchisors are continually articulating the direction and goals of their organisation and the progress of the business in one-on-one discussions. They encourage every stakeholder in their network to consider the opportunity and aspire to be part of the future prosperity of the business.
If you've done your homework, ticked each of these items off your list and decided which franchise group you want to join, you're now faced with another choice; a new location with exciting potential or an existing location with proven performance. It's important to recognise that there is inherent risk in both of these scenarios - the risk of any new business venture. Whilst it is generally accepted that higher risk equals higher returns, we know this is not always the case, so careful analysis becomes the key to good decision making.
Firstly, you should take a long, hard look in the mirror and analyse yourself. What is you risk profile? We all have our own unique risk aversion characteristic which drives our behavior. Someone with low risk aversion tendencies will be more likely to venture into a new location and be prepared to face the consequent start up risk. Someone with high risk aversion tendencies will be more likely to opt for the safer bet of an established location and the certainty of a proven track record. Understanding your personal risk profile is important in the decision making process. Whilst you may want to push a little beyond your personal comfort zone, how much risk is too much? The uncertainty and associated stress levels associated with a high level of risk may impact negatively on your performance as an owner operator. Too little risk on the other hand, may result in no adrenalin rush and a quick descent into boredom. Understanding where you sit on this scale and what motivates you will be an important factor in making your choice.
The new location - starting from scratch
Let's assume for a moment that you're the type of person that can tolerate a reasonable level of risk and as such, you're prepared to venture into a new location. What should you look for, what are the questions to ask and how do you arrive at a commercially sound decision?
Some of the benefits of taking on a new location include:
• No goodwill is payable to a previous franchisee
• It is a brand new operation and the local reputation of the business can be established as desired
• The landlord may be prepared to make a contribution toward fit out.
Obviously, the balancing factor is that you will not have the certainty of a proved trading history for that particular location.
Do your homework
Much research should be undertaken when considering a new venture. Interestingly, many potential franchisees do not use the options at their disposal. The following are examples of some of the methodologies used to make a factual judgment in relation to the likely success of any given location.
• A people traffic count
• Examining neighboring business performance
• Researching previous tenant performance irrespective of the business type
• Shopping centre reports
• ABS data for the territory
• Bank advice on the industry risk profile and the consequent accreditation rating for the franchise system
• Industry research, IBIS World, Retail Association, other available sources
• Competitor study in surrounding locations
Access to a reasonable amount of data will ensure you are making a more informed decision. This must however be balanced with the fact that risk will never totally disappear. Experience has shown that potential franchisees have missed great opportunities over time due to prolonged dithering and the failure to make a decision in a reasonable time. This is just as frustrating for the franchisor as it is for the franchisee. If you find yourself in this position, try to focus on the key issues impacting the decision. Try not to be too consumed with the multitude of other issues that can divert attention from the important considerations.
The established location - a running start or someone else's problems?
In essence, the good and bad of the established location are the reverse of the new or -greenfield-location. You will take some comfort in the proven trading history so in effect, it is generally perceived as a lower risk option. If the premises are looking a little tired, a refurbishment can restore the appearance, and there is an existing reputation - which could be good or bad. Similarly, existing employees could be a positive or a negative and this is discussed in a little more detail below. A key issue to consider is the potential for further growth of the business; is there more growth to be had or has it reached its peak? So, where do you start?
Numbers, numbers, and numbers
There is no substitute in business for having detailed and accurate numbers for the performance of a business. The quality of the numbers is crucial and, frankly, some examples we've seen defy belief - they lack of detail and in some cases, any semblance of accuracy.
It is important to cross reference any numbers provided with the previous financial reports, BA5 statements, reporting to the franchisor, the franchisee's accountant, and any benchmarking that exists in the network. Businesses that carry a cash component are the most difficult to calculate. If the numbers appear in anyway inconsistent this must be focused on in detail. This is not an area where close is good enough.
In addition to reviewing the financial performance it is important to ensure a detailed budget has been prepared outlining the sources and uses of funds and the cash flow from the business. This should include finance costs and a buffer for any reduction of revenue. The single greatest cause of stress in franchisee businesses is being undercapitalized at the start.
Franchisee peer perspective
Given the existing franchisee has operated in the network. it is worth speaking with other franchisees to gain a peer perspective. The objective is to understand the performance and any views that may assist in making the decision. Typically, if a franchisee has been a good performer and a decent operator they will be respected by their fellow franchisees. It must be remembered however, that there will be franchisees in a network that may not be inclined to provide a balanced view.
Circumstance change
The adage that time never stands still is as true in business as it is elsewhere in life. The present situation will not be the same forever and consequently it is important to consider whether there are any circumstance changes that are likely to impact the performance of the business in the future. Past performance is not necessarily an indication of future performance. There maybe a competitor that has signed a lease just across the road, a new DFO about to open, a major anchor tenant leaving, or a change to surrounding parking or road infrastructure. All (or none) of these may be relevant to the performance of the franchise and the decision to purchase.
Should growth be expected in the current franchise?
Growth is an expectation in nearly every business. This is no different in a current franchise but there are factors to consider. All businesses and brands go through the cycle of start up, growth, and maturity. Whether decline or reinvigoration is the next step is down to the network and the operator. Any purchase should achieve an acceptable return on the invested capital that will typically require a degree of growth.
The other part of this question is growth in what - revenue, profit, cost base? The reality is all will grow over time but growth in profit is the most important measure. Revenue can fall but improvements in gross margin, productivity or cost management may deliver an improved profit result.
When assessing a franchise system the growth opportunities must be considered in the context of industry and group direction. A new franchise system may have questions of sustainability or may be defining a completely new specialty. A mature system may be on the verge of a slow down or at threat from a younger, more dynamic competitor. Stepping back from the business to analyse the industry and key players will assist in making an assessment of the likely growth trajectory.
Employees - should they stay or should they go?
There are three key issues to resolve as to whether you should keep existing employees after an acquisition is complete.
• Do they have the skills to match your expectations of the role?
• Is there any strong impact on performance if they leave?
• Is there a cultural and personal fit with the new owners?
Individually none of these provides an answer; it is the combination of factors that matters. For instance, you could have a strong operator to whom customers are particularly aligned and whose departure may negatively affect store performance. However, the same employee could have no interest in the new ownership structure and consequently not only fail to deliver the previous results but impact the future results because of the cultural or personal disconnect with the new owners.
A decision needs to be made very early as focusing on developing your new business is challenging enough without having to worry about whether or not your people are aligned with your direction. There is no substitute for a direct conversation with the existing team and seeking some input from the franchisor or outgoing franchisee.
Another interesting consideration is whether you should keep former franchisor staff if you are purchasing a company operation that is to be converted to a franchise. There are some key advantages in that they know the business, how head office operates and have relationships with other head office team members which could be to your benefit. There are also some potential disadvantages that need to be considered such a greater concern for the head office perspective rather than yours, a lack of motivation to work under your constant supervision or the perception that a career path progression has been removed as they are no longer part of company operations. Again a candid conversation is a great first step to understanding these issues and the appropriate actions.
In summary, your personal risk profile is the principal determinant of whether you should invest in a new and exciting location or a proven and profitable one. In either case they key is to be conscious of the risks and benefits inherent in both scenarios and ensure that your decision is supported be the relevant data.
The ideal franchise opportunity - To learn more about this author, visit Rod Young's Website.
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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Jay Kubassek(Jay's Full Bio: EvanCarmichael.com/jaykubassek) In five years, Canadian-born entrepreneur Jay Kubassek went from selling mufflers at a Midas franchise to revolutionizing Internet marketing with the 2004 launch of CarbonCopyPRO, a online marketing education company, now worth over $20 million with customers in over 160 countries.
As an independent film producer, his upstart film fund Aliquot Films is currently producing a films with Spike Lee and Abel Fererra (starring Ethan Hawke and Dennis Hopper.)
Jay's entrepreneurial spirit is irrepressible. He’s the owner of five companies, a professional speaker and trainer, international real estate developer/investor, extreme sport enthusiast and emerging philanthropist. Jay resides in NYC with his wife Jamie, son Milo and dog Cooper. Visit Jay's official website: www.JayKubassek.com - Visit Jay Kubassek's Website |
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