The Franchise Opportunity. Part 4 of 5: The Business Model

Part 1 of this series focused on fees associated with franchise ownership. Part 2 focused on operating and training systems and their importance to business success. Part 3 focused on the importance of a system for marketing the business and growing the brand.

There are many benefits to seeking a franchise business. Besides the fact that someone already took on the burden and risk of proving out the concept, they have also taken on the responsibility of documenting operating systems and developing the necessary training and support systems necessary for franchise owners to realize success. There is also something to be said about engaging an established brand. Much of the difficulty that comes with launching a new business lies in the mountain of work that is necessary to garner brand recognition. After all, success is contingent upon customer engagement.

When most think of successful franchise brands they probably think of McDonald’s, Dominoes, Dunkin Donuts, Chik-fil-A, 7-Eleven, Taco Bell, Subway, Orangetheory Fitness, Marriott, etc. What is certainly common among these examples is their brand recognition and their longevity. Brand recognition and longevity would indicate that each have well established systems in place and are profitable. However, we must also remember that each of these examples started with one location. Each of them probably also struggled at launch to prove out the concept and its scalability.

While many of us would love to jump into a franchise relationship with of the example brands, the likelihood of finding a prime territory is diminishing with each day that passes. One could purchase an existing location but that may be more costly than is reasonably acceptable. Not to mention acquisitions are many times filled with internal problems that may negate the viability of the investment. Those that got in on the ground floor of these brands are likely those who have done the best. They acquired the prime markets, probably experienced lower onboarding fees, and found success in growing with the brand. Yes, they assumed a risk by jumping in early but isn’t that what entrepreneurs do?

Therefore, engaging a young brand may be the next best option. While risk is a certain concern, there are some factors that we can look to that would indicate the health and long-term viability of the franchise business. As with life, there are a set of vital signs that would indicate how strong a franchise may be. These vital signs would indicate the likelihood of getting the return on the investment that one would expect from a proven franchise business.

Franchise Vital Signs

• Culture – Culture matters more than many are willing to acknowledge. You are partnering with the franchisor long-term when you decide to become a franchisee. It should be viewed much like a marriage. Therefore, you want and should expect a positive and supportive business relationship. One that is driven to help you achieve your business goals and attain the highest-level performance possible. How do you find out what the culture of the franchisor is like? Ask.

• Validation – Do not take everything you hear or read at face value. You must do your due diligence. Talk to current franchisees, talk to former franchisees, become a customer at multiple locations, and look at reviews. The franchise system typically reflects the franchisor’s culture, which is driven by its leadership.

• Past Performance – When you are engaging in a business relationship with a fairly new concept you must understand that the concept’s claims really have not be substantiated. Only the test of time can prove out its long-term viability. Therefore, you must look at each location and understand the brand’s track record. You do not want to be the test subject. You don’t have the money or the time.

• Profit Centers – Look into the franchisor’s profit centers. Is it royalties or something more. Look for areas where a franchisor may collect additional revenue, such as from suppliers in the form of rebates. In most cases suppliers are not discounting their price to cover the rebate. It is probably that you will be the one covering the rebate through higher wholesale costs. Rebate + Royalty = Lower Unit Profitability.

• Unit Profitability – Do not rely on the FDD to understand this. Dig deeper by going to the list of franchisees in the FDD and asking them how they are doing. Most will share their successes and failures. They may also share their view of the franchisor. Understand the performance of new locations, semimature locations, and mature locations. You need to know the burn rate. Ultimately, the question becomes whether you can hang in there long enough to experience breakeven and eventual profitability. If it typically takes 12 months to reach breakeven, you must determine if you can handle that type of cash injection. What if it takes 24 months? No matter how long it takes to reach breakeven you need to know that number and whether you are prepared to ride that out.

• Demand – How much in demand are the products and services of the brand? How resilient is the brand to normal business conditions, such as economic, pandemic, and market variations, such as demographic changes. A lot can happen over a ten-year term, which is where many franchise agreements are minimally set.

• Barrier to Entry - You want to be careful about investing in a business that has a minimal barrier to entry. If the business is profitable and in demand competition will quickly rise once everyone figures out the business is legitimate. When you look at the business do you see anything stopping someone from easily replicating the concept? Do you see an issue with keeping positions filled? This has been an issue with many brands, such as those in the massage, lash, hair, and nail industry. Some brands in these industries have seen some of their most successful providers leaving only to rent a room in a building to start their own business. When this occurs, they usually take their clients with them.

• Franchisees – Once you become a part of a franchise brand your success not only lies with the franchisor but also with every franchisee the franchisor has granted a license. If the franchise system is filled with team players and driven entrepreneurs, the odds of success increase. If the franchisor merely let anyone into the system, you may experience problems. Not everyone should own a business. Not everyone is willing to put in the time and effort necessary to realize success. You do not want to be a part of a brand that gains a reputation for poor service, a lack of ethics, or closures because the franchisor was franchise fee greedy and did not do their part to vet franchisees. It is also important that the brand grows. For that to happen every franchisee in the system must do their part to market and grow their individual location. All for one and one for all must be the culture.

While you can't possibly know every little detail about an investment, there are things you can find out that would indicate the viability of the business and the credibility of the franchisor. The above serve to guide you as you dig into the business opportunity. Again, don’t simply rely on the FDD or the word of the franchisor. Get down and dirty and into the nitty gritty of the business. Ask those who are like minded and already involved to share their experience. That is usually where the truth lies.

Up Next Part 5 of 5: The Franchisor

Randy Stepp is a Principal with Renaissance Leadership Group. RLG is a full-service medical practice and business development firm committed to helping owners achieve long-lasting success and sustainability.

Visit Renaissance Leadership Group at www.renaissanceleadershipgroup.com to learn more.