Getting in Early

What to look for when shopping for a franchise that isn’t a famous name – yet.

Getting in Early

Perhaps one of the biggest knocks franchising has taken in the years of recession has been that prospective franchisees just aren’t lining up to fork out the millions required to buy big brand names. Even the slightly less famous brands have required at least half the total investment to be unencumbered capital. It’s a tall order for most.

Still, there are franchises out there that are doing very well – experiencing healthy growth and profit in spite of the market challenges that exist.

So what’s their secret? It boils down to two things: They either have a powerful brand with virtually 100% top-of-mind awareness with consumers, like KFC or McDonald’s, or they have a compelling value proposition that is driving their growth. Both options give potential buyers confidence and security.

When A-list is out of reach

When a brand doesn’t have a famous name to rely on, but desires rapid growth, they need to have numbers on their side – in a big way. In fact, the money side of the business can become even more important than the product or service the business offers. So here are three key factors that lesser known, but rapidly growing franchises have in common that you need to look out for:

1. Low investment

It’s no secret that financing has become a difficult task. Buyers in today’s market therefore need to find lower investment levels. Some franchises available in South Africa, depending on the sector, start as low as R150 000, and many rapid growth franchises have total investments of less than R750 000 all in.

Caution: To avoid scams in low investment opportunities, make sure they are part of a respected, larger holding company or FASA accredited. Be wary of investing in a brand simply because it‘s cheap.

Make sure you conduct your due diligence thoroughly, which means contacting as many existing franchisees as possible and not relying solely on the franchisor’s word.

2. Rapid break-even

Traditionally, a business was viewed as a success if it reached profitability by the second or third year in operation. In today’s market, buyers are looking for a much quicker path to profits.

They simply don’t want to be in  the position of having to feed additional cash into a new business to cover operating deficits for any significant length of time. Many of the fastest growing franchises boast a break-even point within the first year of operation and, in some cases the first few months.

Caution: Where possible, be wary of franchisors who promise break-even within three to four months. Always anticipate a longer break-even period and have the necessary working capital to tide you over, but most importantly, ask existing franchisees how long it took them to break even and compare it to what your franchisor is promising.

3. High margins

Also important in today’s market is being able to deliver high profit margins. That way, a business can quickly increase its total profit to a meaningful level once it starts making money. Where in the past a business may have put 5% to 10% of every sales transaction toward the bottom line after reaching break-even, today’s buyer is looking for business with sales margins at least three to five times that level.

Caution: Pay careful attention to the price points of your prospective franchise’s offering. For brands targeting lower LSMs, profit will be based on a low margin, high volume tactic.

If a company scores well on these money issues, they still need to convince potential buyers that they have strong and dependable consumer demand to support their business with plenty of paying customers. Service-based franchises often seem to be the best fit in terms of satisfying both the money requirements and the need for reliable demand.

So how do you find these hot franchises?

Start digging, and then dig some more. Look for evidence of rapid growth and then burrow down to find the story behind that growth. When you find a company that’s growing rapidly and has all of the characteristics listed here, you’ve got a good target for moving forward and conducting a complete and thorough investigation.

Among other things, get to know the staff of the franchise company, carefully read their disclosure documents, talk to a number of existing franchisees, and make sure their culture and values match yours – after all, no matter how cheap it is, if it doesn’t gel with your values, it’s going to be hard to invest your time and energy into making it a success.

Buyers beware!

There are so many franchise options out there in a range of industries, but there are important factors to be fully aware of before parting with your money – no matter how ’cheap‘ the deal appears to be. Here’s what to look out for:

  • Half the franchisees aren’t making the kind of money you want to make or that the franchisor has promised.
  • Franchisors are blaming franchisees for lack of system compliance and/or success. If they can’t recruit properly, how will they operate a franchise properly?
  • The model is constantly changing. If the franchisor is continually tinkering with the concept, you need to ask why – it may not work.
  • Can you get hold of the franchisor? Scarce ones are warning signs. Find out what other franchisees think of their franchisor-franchisee relationship.
  • Keeping it in the family. Sometimes franchises can be too cosy. While family isn’t a no-go in head office, a good company needs highly skilled and seasoned management. If they‘re family make sure they’re qualified.
Jeff Elgin
About the Author
Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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