Learning From History

What you can learn about your intended franchise investment by how it reacted in a wobbly economy.


Learning From History

The global recession has been tough on everyone. Internationally, hundreds of franchise systems struggled, ceased to grow, or even closed down entirely. But when you compare that to the numbers of non-franchise businesses that have shut their doors or are on the verge of doing so, the resilience and strength of the franchise model shines through.

In large part this is because the franchisor has a vested interest in the survival of each and every franchise owner, and will do all it can to ensure the network’s success.

So if you’re considering owning a franchise, it’s in your best interest to have a clear roadmap of how your chosen brands have fared over the last few years, have a good understanding of their strategy for success and examine the good and bad decisions the companies were forced to make under pressure.

These are the four most important questions to ask before investing your money in a franchise:

1.  Will the consumer of today (and tomorrow) buy what you’re selling?

It’s critical to avoid getting caught up in a fad. Various listings are put out each year of the hottest new concepts, and while the allure of a fast-growing or innovative business may be strong, consider whether it has staying power to survive the next ten years — or even the first one or two.

Do some research into pending technological advances that can make your product or service obsolete too (think PVR and on-demand’s impact on video and DVD rentals). And if you’re looking at a new concept, evaluate emerging ‘copycats’ that can potentially undercut your price or market share.

2.  Do the company leaders have the skills to survive challenges and make great strides in good times?

Though some businesses predicted the recession, you didn’t have to foresee the timing and severity in order to have a clear survival plan for an economic crisis. So, does your franchise have a plan in place to keep driving sales in a recession? If not, evaluate the new processes, programmes, services and products that were put in place to help the company offset the negative impact of the downturn. Furthermore, you need to examine its strategies for taking advantage of the economic uptick.

Review the franchisor’s disclosure document to help you determine whether they can live up to their promises and your expectations and, if the franchise is sustaining itself primarily through revenue from franchise fees, you can surmise that it will have difficulty staying the course against competitors.

3.  How do existing franchisees feel about the franchisor’s response to the recession?

In researching a franchise opportunity, take note of the accessibility of the senior leadership. Ask franchisees how often they saw the corporate staff in their market. Did executives attend meetings and hold conferences where they brought value and showed their ability to make tough decisions with a long-term and strategic solution in mind? Was there an open flow of communication, idea sharing and troubleshooting when the waters got rough, and was everyone paddling in the same direction?

Franchisees must feel comfortable in expressing their ideas and their concerns; and evaluating how the franchisor responds to franchisees’ struggles and the support they provided their system over the recent past speaks volumes to the support you can expect going forward.

4.  What are the wildcards? Are there incentives that will offset your start-up costs and increase your profits?

Many franchise systems have adjusted to economic conditions by offering a variety of financial incentives to buyers. Some may offer reduced franchise fees or reduced royalties for a specific timeframe, while others offer enhanced training or other discounts.

These types of incentives are intended to help push past struggling competitors. So, as a prospective franchisee, it’s important to examine what the franchisor is offering to help you become more productive and profitable in your start-up phase.

However, it is even more critical to evaluate whether or not the system is in a position to sustain healthy growth despite collecting less revenue from new franchisees. Financial incentives should not come at the expense of support or innovation from the head office.

While franchise companies continue to deal with economic challenges, there are still many advantages to owning a franchise today. Every prospective franchisee has the benefit of taking a look at a company’s performance during one of the worst global recessions in history. Knowing how a system’s franchisees were supported and how the leadership acted in the toughest of times will foreshadow your experience with the system, in good times and bad.

 

 

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