Even after you’ve narrowed down South Africa’s 700+ franchised concepts to an industry you’re interested in, there’s still a lot to wade through.
Fortunately, success leaves clues. Here are five steps to help you zip through the narrowing down process.
1. Unit counts:
How many franchises are the company’s versus franchisees’? Are they growing, constant or declining?
2. Litigation experience:
Has there been an increase in litigation between the franchisor and franchisees in recent years? When franchisees are struggling or failing, you almost always see an increase in litigation.
3. Franchisor financials:
Analyse the brand’s audited financial statements. Look for two things:
- First, is the franchisor financially stable with resources to survive 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.
- Two, check for a rapidly increasing balance in the accounts receivable entry of the balance sheet. A rapidly increasing balance could indicate franchisees are struggling to pay their bills.
4. Same-store sales trends:
Ask the franchisor if same-store sales figures for your system have gone up, down or stayed the same over the past couple of years.
Most systems try to increase the average year-on-year performance of their units. If the sales trend is flat or down in spite of these efforts, it’s a clear indicator that the business volume is susceptible to economic downturns.
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.