| There are over 2,500 different franchises
for sale right now. Trying to choose the right one might seem like an impossible task. One
that is even more intimidating considering the large financial investment at stake. If you
are a first time franchise purchaser, where should you begin? The answer is not easy;
every franchise is unique and there are hundreds of characteristics to review. That said,
certain characteristics keep popping up when we examine the best franchises.
Here are SmarterFranchise’s signs of a great
franchise concept.
1. Multi-unit Ownership
The proof is in the pudding. The best indication that a
franchisee is happy with his business is if he spends more money to purchase another unit
or an additional territory. The logic is the same as why Honda has such a strong
reputation in the car market. If your uncle Jeff has bought three Accords in a row, Honda
must be doing something right.
For the most part, multi-unit owners start with one store
which becomes so successful that the want a second and so on. In order to finance a second
store, a lender will examine the first store’s cash flow. If a franchise wasn’t
financially viable, it would be nearly impossible to open additional units.
Multi-unit ownership is also an indication of operational
efficiency in a concept. With some franchises, there is so much work that is impossible
for the franchise owner to focus on anything but day to day operations. The book,
“The E Myth” talks extensively about this trap of getting stuck “working in
your business” vs. “working on your business.” Even if you never plan to
open multiple units, this is an important characteristic, because more likely than not,
you would eventually like to retire or at least take a vacation one day.
Be wary of franchise owners who explain low multi-unit
ownership by suggesting franchisees make enough money with just one unit. If there is one
thing history has shown, people rarely decide they have “enough” money.
2. Proven Franchisor Track Record
There are three items two think about when examining the
franchisor’s track record. The first is an understanding of how much risk there is
that the franchisor might go out of business. Unfortunately, many of the 2,500 franchise
concepts available just won’t make it as sustainable businesses. If you purchase one
of these concepts, you may lose much of your investment.
Second, the franchisor’s track record should give you
an indication about the quality of the concept. Did the franchisor own several successful
stores for many years before deciding to franchise his concept or did he just decide one
day that there was good money in franchising so he better come up with a concept.
Third, franchisors with longer track records have more
established training and support programs. While you might save a few thousand dollars buy
getting into a franchise early, chances are you won’t get much for your investment.
New franchisees haven’t had the time to put together development support or training
programs or marketing campaigns. Also, if you are one of the first buyers, you are the
guinea pig which often means more risk. Maybe a new food concept works great in a mall
food court or maybe it doesn’t? Wouldn’t be nice if you weren’t the one who
had to run the experiment?
3. Strong, independent franchisee association
Unfortunately, the unspoken reality is that the
franchisor’s and franchisee’s interests aren’t always aligned. Eventually,
there will be disagreements over finances, marketing programs or development issues.
Knowing that issues are sure to arise, it is helpful to know that you will have an
organized group of franchisees who can relate to your situation. Independent associations
have many benefits. In addition to creating leverage for the purpose of negotiating with
the franchisor, an association also can improve communication among franchisees.
Independent associations also allow members to pool resources to hire competent
professionals such as lawyers or financial advisors or marketing consultants. Finally,
like with any organization, a collective, institutional memory is created. The AFA has an
excellent article on associations here.
It is also a negative sign if the franchisor goes out of
its way to discourage an association. It usually means that the franchisor does not have
the franchisees best interests in mind and is afraid of having to deal fairly with
franchisees.
In addition to independent associations, franchisees may
also develop a coop to purchase goods at a discount or control a portion of the
system’s advertising budget or develop a lobby group for a specific issue. All of
these our good signs. |
