When choosing a franchise, it is critical that you carefully research the trends affecting the opportunities you are considering, not only at the national and local level, but within your franchisor. Though you may have your heart set on a specific concept, you have to be sure the public is equally love struck and the franchise concept you are considering is succeeding in the marketplace.
Research the trends affecting your opportunity at a national level and begin to understand how the concept you are considering investing in may be affected by these trends. In 2008, some of the major trends seen included the aging population, the crisis in health care, the residential real estate meltdown, and the turmoil in the credit and financial markets. Global warming, the increasing economic power of immigrant groups in the U.S. (especially Spanish-speaking populations), globalization, and rapid adoption of innovative technology shape the way our country does business, and in turn, can affect the success or failure of your franchise. Do your homework, it’ll pay off in the end.
Tip: Review past issues of the Wall Street Journal, The Economist, BusinessWeek, Fortune Magazine, Entrepreneur, and other national business magazines for articles related to your opportunity. Tip: Study the Bureau of Labor Statistics and Census data for information that would relate to your opportunity.
Now it’s time to hone in and research what factors are contributing to the health (or ailing) of your geographic market. In order to do this research, you need to dig up local information.
Starting out, cast your net wide. Google “[your geographic location] + economic outlook,” and study all reports relevant to the market and opportunity you are considering.
Now, uncover research that is even more specific to your particular opportunity. This is critical! For instance, I learned AFTER we bought into a nationally known sandwich franchise that the San Francisco Bay Area has the lowest acceptance rate of Quick Service Restaurants (QSRs) in the country. This affects average store volume, and the population density that will support a profitable operation. Regardless, our corporate parent pushed for the same density in the Bay Area as was in the rest of the country. This increases the probability of lower margin stores.
There are many, many private research firms that provide consumer research in your area. For instance, Sandelman and Associates provides excellent research in the foodservice arena. Another valuable resource is the Buxton company, which performs a research analysis of the business potential of your exact location.
Tip: See if you can get local market research for free from the provider, or the franchisor, or from the franchisee association, or from an acquaintance at an ad agency serving customers in this area.
Now study how your franchisor is doing. Answer the following questions at a minimum:
- How many stores does the franchisor have in its network? How many are franchisee-owned and how many are company-owned?
- How many new franchisee-owned stores have opened up in each of the last five years?
- How many new franchisor-owned stores have opened up in each of the last five years?
- How many franchisees have sold their stores, or shut down, in each of the last five years? Note: this information is very difficult to obtain, and it is critical to understanding the health of the franchisee community.
- What has been the AUV (average unit volume) for each of the last five years? Even better, knock off the results of the top 5 to 10 percent of stores. All franchises have super-star stores that do great volume. You’re probably not going to get one of these. Therefore, by knocking off the cream, you can get a more realistic expectation of your results.
- What has been the trend in the average ticket for each of the last five years?
List the five closest competitors to your potential franchise. Compare your franchisor’s growth rate to the growth rate of the competitors. Get the franchisor to articulate their growth plans both nationally and in your area.
- Given the national and local trend knowledge you now have, is the franchisor’s growth rate expectation realistic, in your opinion?
- What significant developments have affected the franchisor in the last three years, such as executive personnel changes, major financing events, litigation, major change in operations, major change in marketing? Have any major changes been announced but not yet implemented?
- Is the franchise owned by a large corporation or private equity firm that has plans to “flip” the organization, and if so, can you project how that might affect your results?
Mark Leonard is a franchise expert and former franchise owner who offers prospective franchisees an inside look at this unique business opportunity. He is the author of 7 Surefire Steps to Buying a Profit-Making Franchise. Mark is no longer affiliated with any franchise, and neither seeks nor receives any financial consideration from any franchisor. Visit Mark online at www.yourfranchisementor.com.