How to evaluate a franchise opportunity

If you have a franchise, or several franchises you are interested in, then it is essential that you evaluate them fully.

To check if a franchise is viable you need to ask the franchisor the following questions:

1. Does the business operate in a large and growing market?

Joining a franchise usually requires a large investment which it will take you several years to recoup. It would be unwise to commit to this unless you can be reasonably certain that the product has sufficient staying power.

2. Is the growth in the market likely to be sustainable?

Don’t be blinded by a one-day wonder. As we have said, it will take you years to recoup your investment. And once you are ready to move on, you should ideally be able to sell the business at a capital profit; this will be difficult to achieve if the market is in decline.

3. Are attainable margins sufficient to cover franchise fees?

For the required investment to make sense, you should be able to earn, over time, a reasonable return on your capital, plus pay yourself a market-related salary. Keeping in mind that you also need to stay competitive, so upping prices is not always an option. Will the business be able to generate acceptable returns after you have paid franchise fees?

4. Can the product or service demand a price premium?

It is generally assumed that concepts that are dependent on discounting do not franchise well but this is not always correct. For example, Pick ‘n Pay is in the discount market but its franchisees are doing extremely well. This is made possible because Pick ‘n Pay’s enormous buying power allows franchisees access to cost savings that keep them competitive in spite of their higher operating costs.

In most instances, however, unless consumers are willing to pay a price premium, for example for better service, it will be difficult to realise expected margins. You need to explore this point.

5. Does the franchisor have access to sufficient capital?

This aspect comes into focus if the company you are dealing with has started franchising only recently. Of course, everyone needs to start somewhere, but, seen from the franchisor’s viewpoint, the first few stages of franchising are capital-intensive.

The issue is further complicated by the fact that during the early stages, all franchisees will be new. This means that they need lots of hand-holding and support, yet sales will be relatively low. It also means that the franchisor’s income will be low.

You need to satisfy yourself that the franchisor company is sufficiently well funded to maintain an adequate support structure during this period.

6. Does the potential exist to establish a memorable brand?

All great franchises are recognised as great brands. Examples are PostNet, McDonalds, Steers, Wimpy, Pick ‘n Pay and NWJ. By investing in a franchise, you should gain access to a brand that tells your local customers what your business stands for. It is also important to ensure that the trademark is properly protected.

You may get a better deal if you help the franchisor build the brand, but you need to be aware of this and know what you let yourself in for.

7. Is there a substantial barrier to entry – not easily copied?

If you join a network that sells a “me-too” product, business is likely to be a free-for-all and price cutting will be common. Some degree of uniqueness is a distinct advantage in the marketplace. It is not necessary to have a unique product; in fact, this could be a disadvantage because the market could be under-developed. Uniqueness can come in the form of adding value by offering additional services, or even by providing imaginative packaging.

8. Will the franchisor make a satisfactory return on investment?

Is the franchise package structured in such a way that the franchisor stands a reasonable chance of achieving reasonable returns over time? Should you think that this is not your concern, you would be mistaken. Everybody is in business to make money and your franchisor is no exception. If this expectation remains unfulfilled for too long, the franchisor will close up shop. You need to consider where this would leave you.

9. Does a franchise culture seem to exist within the network?

A franchise culture is open, learning-orientated, flexible and supportive. Did this kind of culture manifest itself during your initial contact with the franchisor? Or was there a lot of secrecy, evasiveness even, in evidence? As a franchisee, you are entitled to receive guidance in a flexible and supportive environment.

10. Does the franchisor have a vision for the network?

The concept must have staying power, and the franchisor must give long-term commitment to its success. This means having a clear vision for the development of the network, and a strategy for the implementation of this vision.

11. Is it easy to learn the required skills?

The franchisor should train you in all aspects of operating the business successfully. This should not be limited to product training, but should include training in business skills as well.

Although it is in your own best interest that the training offered by the franchisor is thorough, it should not go on over a very long period. The reason for this is that during training, you will have to live from your savings, not an attractive prospect, especially if you have a family to support.

Depending on the complexity of the business, training periods of 2-6 weeks are the norm. Some franchisors who insist on training their franchisees for a much longer period employ them as assistant managers and pay them a living salary.

12. Are suitable systems and procedures in place?

One of the main reasons why you invest in a franchise and pay franchise fees is the expectation that you receive tried and tested systems and procedures. Make sure that this is in fact the case.

Which Franchise