Opening a business is always a risk. However, buying an existing franchise can be particularly risky. Why exactly does the owner want to sell?
As the old saying goes: Success leaves clues. So does failure. You need to know how to spot the signs that point to problem opportunities so you can steer clear of them, and find better opportunities without wasting too much time.
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1. Unit counts
This is the simplest test of all. Find out if the franchise company’s number of operating units is growing, staying constant or declining.
If the number of existing units is declining (regardless of any explanation you might receive), this is a huge red flag suggesting increased risk to joining the franchise.
2. Litigation experience
You need to determine if there has been an increase in litigation between the franchisor and franchisees during the last couple of years.
When franchisees are struggling or failing, you almost always see an increase in litigation because many people blame others whenever something doesn’t work out.
If you see a pattern of significant or increasing litigation (again, regardless of any explanation offered), this is a franchise you probably want to avoid.
3. Franchisor financials
There are two things you want to learn from a franchisor’s financial situation, and you can get the answers very quickly.
First, you want to know if the franchisor is financially stable and has the resources to survive for the long run.
Look for a financial statement indicating that the operation is profitable, that cash flow is positive and that capital reserves are strong.
Second, you want to make sure the franchise company does not have a rapidly increasing balance in the accounts receivable entry of the balance sheet.
For most franchise companies, their largest accounts receivable are payments from their franchisees, so a rapidly increasing balance would indicate that franchisees are struggling to pay their bills, and that’s never a good sign.
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4. Same-store sales trends
What you want to ask is, ‘Have the same-store sales figures for your system gone up, down or stayed the same over the past couple of years?’
As you can imagine, most systems make every effort to increase the average performance of their units year over year, because this provides a direct benefit to both the franchisee and the franchisor.
If the sales trend for a company’s units is flat or down in spite of these efforts, it is a clear indicator that the business volume is susceptible to economic downturns.
That might not be an automatic disqualifier, but it is a clear warning sign that you should carefully investigate prior to moving forward.
5. Existing franchisee calls
You can get a very fast read on the attitude of the existing franchisees by randomly selecting a few for some quick preliminary calls.
Later in the process of investigation, you’ll want to spend quite a bit of time actually visiting franchisees, but at this early stage in your research you just want to make a few short calls to take the general temperature of the franchisee base.
You’ll only need to ask two to three basic questions — How do you feel about the business? How have the past couple of years been? Knowing what you know now, would you do it again? — to get an impression of how things are going.
Usually you’ll see a clear pattern in the input after only a few of these calls. If your gut feeling is queasy or troubled, this is not the right franchise opportunity to pursue.
6 Questions Before You Discount
Try this checklist so that discounting doesn’t give you nightmares.
For some retailers, discounting is a way of life. Most, though, begrudge the thought of discounting – and I completely identify with that.
It was not until last year that we ran our first company-wide discounting, our “Spring Clean” campaign. It took Trevor Locker, our Chief Operating Officer, to convince me that there are times when discounting makes great business sense – just as there are times when it could spell business disaster.
Here is the checklist of questions which we hammered out as a guideline to successful discounting that will let you sleep peacefully at night:
1. Is this a stock clearance?
Some businesses stock ranges that have a very short shelf life, such as clothing that quickly goes out of fashion. If this is your market, you need to learn to accept that some of the goods you have bought in will be less appealing than others to your customers. The sooner you shift them out of the store through sale discounts, the sooner you can replace them with goods that repay you with a full profit.
2. Is this a cashflow crunch?
If you are reluctant about devising quick discounts on selected ranges to generate enough cash to pay the rent, you are right. This is a red flag that your business could be in trouble. Pay attention and spend time focusing on how you will recover once you are past this immediate crisis – otherwise you are in a downward spiral.
3. What are you celebrating?
Maybe you have a business or seasonal anniversary that you want to celebrate. Selected discounting in this situation can help you reward repeat customers and consolidate their loyalty as well as attracting new customers into your business.
4. Is your promotion a win-win?
Long-term repeat discount promotions can have a negative impact on even your most loyal customers. Effectively you are training them to wait for your discounts – unless you set up a win-win strategy such as partial discounting. A great example of how this can work is Steers’ Wacky Wednesday. Customers win when they come into the branches for a discounted hamburger. Steers wins because customers still pay the normal price for cool drinks, chips and so on, sales that the company probably would not otherwise make on a quiet midweek trading day.
5. Are you joining the herd?
Black Friday is a classic example of this. Some retailers have felt stampeded into offering discounts because they worry that everybody else is. The jury is still out on whether this new trading phenomenon increases sales overall or just moves them out of December and into November. To benefit most, you need to have stock that you want to clear or loss leaders that you have bought in at prices that do not cripple you financially.
6. Do you own your own sale?
Our company-wide “Spring Clean” concept sale was a great example of finding a reason to discount that worked for our branches, our customers and our brand and meant that our discount was not drowned out in the marketplace.
We encouraged customers to bring us unwanted goods from their homes and benefit from freeing up the cash value.
At the same time, we also attracted customers into the stores to pick up bargains from stock that we wanted to clear. Running this promotion at a time of year when many other retailers are quiet promotionally meant that we owned the spring-clean discount concept and it highlighted our brand across the market.
What To Know About Franchising Your Business
For many businesses, franchising is an excellent route to growth, opening up new opportunities and markets. Laurette Pienaar, National Franchise Manager at Nedbank, unpacks why it’s worth considering this route.
- Player: Laurette Pienaar
- Position: National Franchise Manager
- Company: Nedbank Limited
- Visit: nedbank.co.za
What type of business is ideally suited to the franchise model?
Franchising has been proven successful across all industries, including the automotive, food, entertainment and retail industries. However, several key qualities ultimately determine a concept’s ability to successfully become a franchise.
Firstly, the business model must be scalable and able to be repeated in several locations. Secondly, there must be demand for the products sold and, thirdly, the franchise model must be proven as profitable.
Why is franchising a good growth option?
Franchising is often used as a cost-effective growth strategy for businesses. A key benefit of this strategy is that no capital layout is required for a new franchised store as opposed to corporate-owned stores.
Franchised stores are also proven to be more successful than corporate-owned stores. This is mainly due to the fact that the franchise owners have a vested interest in the store, whereas corporate stores are supervised by a manager. Franchising is therefore also a great way to build your brand.
What should business owners focus on?
Franchisors should set up good infrastructure to support their franchisees, including good upfront and ongoing training to both the franchisees and their staff, the correct legal advice and assistance, and a strong operational team to assist franchisees daily.
Many successful franchisors provide support by expanding through vertical integration, which provides franchisees with logistics, supply chain security and product consistency.
Several franchisors advocate a structure with both franchisee and corporate-owned stores. This enables a franchisor to keep in touch with the daily challenges franchisees experience and new products and solutions can be tested at a corporate store before being rolled out to the franchise network.
How can franchising consultants assist business owners?
Franchise consultants provide daily operational support to franchisees. They are responsible for daily store visits to assist with quality checks, process flows, supplier relationships and, often, financial assessments. They are a helpful soundboard on any improvements to be made in the business model and can convey suggestions to the franchisor.
What challenges should business owners be aware of?
Businesses looking to franchise need to ensure that their business is teachable to others. Overcomplicated products and systems may deter franchisees from investing in your brand.
Franchisors have to do ongoing introspection regarding their company culture. For example, does the culture promote innovation and inspire franchisees and consumers, which ultimately is a culture worth investing in?
New franchisors’ selection criteria for franchisees are often not sufficiently thorough and comprehensive. For a new franchisor, it is important to choose good quality franchisees and to have strict selection criteria to ensure that your brand remains reputable and stable during fast-expanding cycles.
What lessons can be learnt from SA’s successful franchises?
Businesses looking to expand through franchising should consider setting up several corporate-owned stores first. This assures potential investors that your business is based on a proven model with a track record and supportive infrastructure.
There is not always a one-size-fits-all model. Many franchisors have created custom models to accommodate and adjust to the need of a specific property or consumer market. A great example of this would be the food industry where many franchisors offer shopping centre concepts, drive thrus and kiosk or express concepts. Consider this when developing your model.
Develop Digital Marketing Competency In 3 Simple Steps
Conquering the digital revolution needn’t be daunting. Polish up your tech skills and watch your digital marketing prowess increase throughout your franchise.
As a franchisor, digital marketing may be proving to be a challenge due to the unique structuring of the business.
“The very nature of franchises is ‘structured’, however, when it comes to marketing, that structure often lacks,” says Marcela De Vivo, Founder and CEO of Gryffin Media.
Franchisors and franchisees often struggle to reach common ground when looking to achieve different marketing goals. While the franchisor needs to control the brand in its entirety, the franchisee wants to market their business using particular strategies suited to their location.
Research has found that smartphones are the biggest influencers of 82% of users when they make their in-store purchase decisions while. It’s for this reason that the importance of digital marketing for franchises has increased.
Here’s how to harness its power of influence, amplify foot traffic and solidify brand loyalty:
1. Recruit digital natives and early adopters
As much as you’re the leader of your franchise network, there are franchisees in your chain you could learn from. The global increase in millennial franchise owners means it is highly likely that you’ll be able to identify early digital adopters within your franchise network.
“The best people to learn from are those who have been in your shoes before,” says Matt Forman of the Franchise Centre at Griffith University.
“Encourage and support their efforts and use them as case studies to demonstrate to the rest of your franchisees the value of digital marketing, and how to do it right.”
2. Invest in training your team
“Each digital competency level requires more education and resources in order to integrate digital marketing with your physical stores,” says Forman. For this reason, regularly investing in continuous training for your team so as to ensure they keep abreast of any new and emerging trends.
Proactivity and adapting to the constantly evolving digital landscape led KFC to open a LinkedIn account for its founder and mascot Colonel Sanders. KFC’s out of the box tactic is a fresh approach to what has long been considered a B2B platform, under-utilised as a B2C platform.
3. Apply custom targeting techniques
The discovery of new and small businesses is being fuelled by Google searches, social media and online reviews, making these platforms a goldmine of invaluable tools.
Leveraging certain custom targeting techniques like easily searchable keywords and exposure on other reputable and high-traffic websites, gives your franchise’s digital marketing efforts a boost. This results in an effective campaign, favourable reviews and meaningful and lasting interactions with consumers “whether it’s a reply to a Facebook comment or a retweet,” says Entrepreneur’s Emily Conklin.
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