A lthough the franchise business model has proven strong in tough times, franchises are not immune to the credit crunch and shrinking economy. The franchise systems that have failed or are on the verge of failing were not prepared to handle the economic challenges. They may have suffered from substantive flaws in their model, personnel, vision, financial means, or a combination of factors.
If you’re considering owning a franchise, it’s in your best interest to have a clear roadmap of how the system of your choice has fared over the last few years, and an understanding of their strategy for success in the new economy. These are the four most important questions to ask before you invest your hard-earned money in a franchise:
Q Will the consumer of today (and tomorrow) buy what you’re selling?
It’s critical to avoid getting caught up in the latest fad. While the allure of getting into a fast-growing or innovative business may be strong, consider whether it has the staying power to survive the next 10 years – or even the first one or two. Make sure your concept will hold consumer value for at least the duration of your franchise agreement. Research pending technological advances that threaten to make your product or service obsolete. If you are looking at a new concept, evaluate emerging “copycats” that can potentially undercut your price or market share.
Q Do the company leaders have what it takes to survive the challenges ahead and make great strides in prosperous times?
You’ll have to evaluate the new processes, programmes, services and products that were put in place to help the company offset the negative impact of the downturn. Furthermore, you need to examine the company’s strategies for taking advantage of the economic uptick.
Reviewing the franchisor’s disclosure documents will give you great insight into their average unit revenues, overall expenses relative to revenues and their budget – all of which will help you to determine whether they can live up to their promises and your expectations. If a system is sustaining itself primarily through revenue from franchise fees, you can surmise that it will have difficulty staying the course against competitors operating off the organic growth of their system. It’s not that investing in a franchise from a new system that may not have built up royalty or system sales is necessarily a bad decision. However, the tight credit market and delayed openings will strain a franchisor that does not have the financial cushion to retain key support programmes and staff.
Q How do existing franchisees feel about the franchisor’s response to the recession?
Ask franchisees how often they saw the corporate staff in their market. Did executives attend meetings and hold conferences where they brought value and showed their ability to make tough decisions with a long-term and strategic solution in mind? Was there an open flow of communication, idea sharing and troubleshooting when the waters got rough?
I’ve heard my share of horror stories about lack of communication and collaboration between the head office and the franchise system. When times are tough, this communication is critical. Franchisees must feel comfortable in expressing their ideas and their concerns, and when their expectations aren’t being met, they need to trust that something will be done to help. Evaluating how the franchisor responded to franchisees’ struggles and the support they provided their system over the last year and a half speaks volumes for the support you can expect to receive going forward.
Q Are there incentives being offered that will help offset your start-up costs and increase your profits?
Many franchise systems have adjusted to economic conditions by offering a variety of financial incentives to buyers. Some offer reduced franchise fees or reduced royalties for a specific timeframe, while others offer enhanced training or other discounts. These types of incentives are intended to help offset the credit crunch and allow the system to grow and push past struggling competitors. So, as a prospective franchisee, it’s important to examine what the franchisor is offering to help you become more productive and profitable in your start-up phase. However, it is even more critical to evaluate whether or not the system is in a position to sustain healthy growth despite collecting less revenues from new franchisees. Financial incentives should not come at the expense of support or innovation from the home office.