There are a lot of factors to weigh when choosing the appropriate franchise opportunity. Not only do you want the franchise to be a good fit for you – you also need to work with a franchisor that’s going to be around for a long time.
How can you find out if a franchise system is healthy? In the franchise book, The Educated Franchisee we believe in sharing knowledge. A little franchise education could be useful in this area.
One fundamental measure is the system’s pace of franchise growth.
Too quick: Quick franchise development may seem like a good thing at first but it is conceivable for a system to grow too fast. It is crucial to be sure the franchisor has the people and systems in place to thoroughly oversee your training and on-going support. For example, if a system of 50 franchisees brings 30 additional franchisees in a year, the rate of franchise growth may be too fast.
Too Slow: If franchise growth is slow there could also be a problem. Why isn’t the franchise attracting new people? Possibly there are concerns with the business model – problems that make it difficult for existing franchisees to succeed. When potential franchisees do ‘validation calls’ they may hear about problems and decide to look elsewhere for a business. Or perhaps the franchisor doesn’t have the right staff and has to limit franchise growth. Either way, a lack of new franchisees may be a sign of an unhealthy franchise system.
Just Right: even franchise growth over time is an indicator of effective management and a healthy system. One way to gauge steady franchise growth is to determine the pace at which the franchise grew each year both in absolute and percent terms. To find this data for the past three years you can look in the Franchise Disclosure Document under Item 20 – the List of Outlets. All the data you need regarding franchise growth will be there for you in a clear, easy to understand format.
Rule of Thumb for Most Franchises: As a rule of thumb for medium-sized franchisors, the number of franchisees brought per year should be between 10% and 35% of the total number of franchisees. For example, a company with 100 franchisees should possess the infrastructure to add up to 35 new franchisees in the coming year.
Rule of Thumb for Large and Small Franchises: This formula doesn’t work for very large or very small companies, however, so when analyzing behemoth or boutique franchise systems consider the ratio of operational support personnel compared to new franchisees. A ratio of one support person for every 10-20 new franchisees tells you that new franchisees are likely getting the preparation and support they need to succeed.
Talk to Franchisees: But don’t assume! It is decisive that you talk to existing franchisees. Find out about the training they had initially and what they receive in terms of on-going support. Do they find the staff to be knowledgeable? Responsive? Does the franchisee feel comfortable calling on them for help? Pay particular attention to the information you glean from new franchisees. Your experience will most closely reflect theirs.
Meet the Support Staff: Generally, a good franchise investigation ends with a visit to the franchisor’s headquarters to get last queries answered and meet the staff face-to-face. Spend extra time with the support staff. Make certain you are comfortable with their experience, competence, style, and ability to communicate, since you will have to work well with them and trust their advice on an on-going basis.
There are a lot of things to consider when researching a franchise business that will match your needs, but it doesn’t matter how much you like the business if the franchisor isn’t viable. Gather the franchise information you need and be certain the system you choose is growing and has a good number of satisfied franchisees. Franchise growth is a key part of your due diligence. Only a healthy franchise opportunity can support your long-term growth and success.
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