Evaluating A Franchise Part 2

23-May-2013
23-May-2013 19:12
in Franchising
by Colin Smith

With over 1500 different franchise opportunities currently available on the UK market, it can be pretty daunting for those who are looking to become franchise owners to separate the good from the bad or to recognise an opportunity that is truly great.  However, like the person who saves money on a house purchase by skipping a detailed survey, there will always be those who either do not trust professional advice or think that they are fine all by themselves.  In the franchise sales process, it is perhaps unsurprising that people are determined to go it alone as those people who are typically involved in the process, such as the franchise sales team or a franchise broker, have the interests of the franchisor at heart.  As the old saying goes, "he who pays the Piper calls the tune" and these people are definitely dancing to the tune that the franchisor plays.  So, if potential franchise owners cannot depend entirely on the people surrounding them to act and advise in their best interests, what should they do?

Of course, I would say that they should call Continuous Business Planning and work with us in picking the franchsie that is right for them.  However, I recognise that not everyone who reads this article is going to do that.  So, especialIy for those people who insist on doing things themselves and who would never consider a service such as our independent franchise evaluation service, I've written this three part article to give them an idea of some of the essential issues that they must consider as part of the purchase process.  If you missed part one, here's a recap of the ten questions to ask yourself to better evaluate a franchise opportunity. 

1. Is the franchise already operating or is it new?  

2. Who is the competition and what barriers to entry exist in the industry for businesses seeking to compete in the future?

3. Who is responsible for marketing the franchise?

4. How will products to be manufactured and/or supplied by an external supplier be priced? 

5. Will you be required to be personally involved in the operation of the business?

6. Do you require any technical skills or expertise to successfully operate the franchise?

7. Is the product protected by patent or liability insurance and does this protection apply to you?

8. Does the lease agreement allow assignment to any permitted assignee of the franchise?

9. Does the term of the lease coincide with the term of the franchise?

10. Does the term of the lease provide sufficient time for the recovery of the capital outlay?

This article covers the next ten questions for a total of 20 questions that will help you evaluate the franchise opportunities that interest you.  After that, we will examine in the third and final part of this series what questions you ought to ask in evaluating the franchisor themselves.  Here we go with questions 11 to 20.

11. Does the product have a distinct advantage over the competition?

We have covered this point much more comprehensively than we can hope to do here in other articles we have posted on the site.  What we need to make clear here is that any business that does not enjoy a sustainable competitive advantage over the competition does not have a certain future.  I often hear from franchisors that they are the only operator in their market.  If this is actually true (and it rarely is by the time you have counted effective substitute products as competitors), then it's important to realise that "first mover advantage" is not inherently sustainable.  "Fast followers" of first mover companies who are have deeper pockets than the incumbents can quickly catch up if there is no enduring competitive advantage.  The competitive advantage of a franchise business is likely to be sustainable, at least in the short term, if the franchise you are examining benefits from real intellectual property (i.e. a patent), a dynamic product line rather than a single product, a significant comparative cost advantage, a proven team with existing relationships with key people in the market or a strong focus or differentiation. If the industry in which you operate has high barriers to entry, this will also help.

12. What is the market trend and potential growth?

Every franchisor seems to be offering an"exciting opportunity" in a "multi billion" pound industry.  If I could just get a potential franchise owner to do one thing it would be to conduct thorough independent market research.    If it is a market that is in decline or is a business exploiting a fad that is likely to be short lived, the chances of your franchise being a sustained success are significantly lower than if it is growing even modestly.  Unless there is an extremely compelling answer to the question that we have just asked that ensures that the business is at the top of the food chain in that industry, I would advise caution.      

13. How competitive is the price of the products?

Since pricing is such an important part of the marketing mix and it is something that franchise owners have less control over than would someone starting up a small business themselves, this is an extremely important part of the pre-purchase research.  If there are products or services of comparable quality available at a lesser price on the market, this will prove challenging for your franchise business.  In addition, you need to weigh up if you believe that the price at which you will ultimately have to sell the products or services offered by the franchise is right for your territory.  If, for example, you are offering a premium product that will appeal to a niche demographic, could you make the franchise model work in a relatively economically deprived area?  Matching the product and service with the right territory is a big part of what will drive success in your franchise business.  There is simply no substitute for the right product/market fit. 

14. Does the franchisor have their lines of supply properly tied up?

If a franchisor, and thus you as a franchisee, is dependent upon a particular supplier, you need to understand the state of that relationship.  Are the lines of supply tied up with some kind of exclusivity contract in terms of your products?  If not, what is the current state of the relationship between franchisor and supplier?  If things went sour, could the supplier bypass you and the franchisor and set up their own competitive business?  In this digital age, many manufacturers are supplying customers directly via the internet.  Could your key suppliers do this with the products upon which you rely?  

15. Is there adequate back up in terms of guarantees and service facilities?

Many franchise agreements prevent franchisees from obtaining supplies from another source other than the franchisor.  This may seem fair at first glance, but what about if there are supply chain difficulties?  The problems of the franchisor would then become the problem of every franchisee and you would be prohibited from trying to do anything about it in terms of alternative supply.  The question then becomes is there a service level agreement between the franchisor and their suppliers?  What guarantees about uninterrupted supply exist? I'm a big believer in hoping for thebest but planning for the worst so I would definitley recommend that these types of "what if" scenarios are a part of your franchise evaluation process. 

16. What is the reputation of the product and service?

There are two options which might seem attractive to a potential franchise owner and you will be naturally inclined towards one or the other.  These options are to leverage an established product or service with existing brand recognition and established reputation and image to reduce business venture risk (but usually at a higher price) or to get in on the ground floor of a newly established or emerging brand with a reduced price that reflects the increased risk.  Either way, it is important to evaluate the repuation of the product or service offered by the franchise to establish if any price premium is reasonable.

17. If it is a successful franchise newly imported from another country, will it hold a similar appeal in the UK?

New concepts imported from abroad are introduced to the UK market all the time.  However, they need to be treated with caution.  Just because it was successful in foreign markets does not mean it will automatically be adopted as enthusiastically in domestic markets.  It's important to check to see what market testing has been done on the concept in the UK.  Do not accept that just because it has worked elsewhere it will automatically work here.  Look at UK retail giant Tesco's recent attempts to crack the US market.  Success in one country does not automatically equate to success anywhere. 

18. Have you reveiwed a copy of the franchise operations manual?

When we talk about franchising as a proven business model, you need to know how well that system has been captured in the operations manuals that will be given to you.  Ultimately, you are paying for a system, yet i'm amazed at how many times these systems are poorly documented or even not documented at all.  A comprehensive, well written operations manual is a "must have" with any franchise and the absence or poor execution of such support materials should immediately raise a red flag about the organisation to which you are about to belong.  

19. Is there an induction program?

Some franchisors offer comprehensive training not only on the franchise products and services, but also on other important topics such as customer service, quality assurance, business planning, marketing and how to manage staff.  Find out about the induction program before you sign any paperwork.  Again, if there is no induction program or it seems to be woefully inadequate, that should raise a red flag about the organisation to which you are about to belong. 

20. What direction is the franchise company moving in?

Markets move fast and the players within those markets must respond.  What are the future plans for the franchise? For example, is it adopting new technology as it becomes available/affordable? Is this important? How will new technology affect costs for franchisees?  Once you get on board a particular franchise, it is particularly difficult to get off, so please make sure that the franchise is heading in a direction with which you are comfortable.

So there we have it.  Twenty questions that will help you to evaluate the franchise opportunities that you are considering.  The final part of the process is to look into the franchisor themselves.  We will look at ten questions that you should ask when evaluating the franchisor in the next article.  The purchase of a franchise is a serious business.  The sums of money that are potentially at stake, as well as the commitment of time and effort, make it probably the most significant commitment you'll ever make in your career.  At Continuous Business Planning, we do not believe that this process should be trivialised or taken lightly.  We hope that you will use these resources that we have provided to make the right decision, even if that decision is not to buy any franchise at all.  However, if this all seems like too much or some parts of the evaluation seem to be a little beyond your comfort zone, please contact us about our franchise evaluation service today.  Leveraging the strengths of others who have greater experience of a particular job than you is the very reason why you are attracted to franchising in the first place so apply that same principle to the purchase process pick up the phone to us today.  You'll be glad you did.  

 

 

 

 

 

 

  

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