Top 5 Ways to Analyze a Franchise Opportunity, Part 2

Posted by on January 12, 2011 in Business Management, Business Start Up Advice [ 0 Comments ]

franchisingIn part one we covered the first three ways to analyze a franchise opportunity. Now we’ll take a look at the market opportunity and the legal sides of the transaction

4. Is there a strong market opportunity?

Beyond the likes and dislikes, there’s also the cold, hard, reality of business fundamentals. If you’re busting your gut working in a failing business, then it is likely that it won’t be much fun. Therefore, you also need to ensure that the business opportunity has the potential to be financially lucrative.

Conduct some market research. You can start by using the Google Keyword Tool to get an idea of the keyword search volume; this should provide some insight into the level of existing customer demand in the marketplace. Create a market research questionnaire and interview as many people as you can about the product or service offering. Develop a list of all the competitors and take some time to understand their business model, making sure to include substitute products in your analysis. Ask yourself what differentiates your potential franchise acquisition from its competitors. Is there a sustainable competitive advantage or is the business just another me too player?

Interview the franchisor about their franchise business opportunities. Come into the meeting prepared with a comprehensive list of questions, and be prepared to dig beyond the fluff and into the meaty truth of the business operation. You may wish to ask about the franchisor’s experience and background, with the hope of finding that they have a proven track record of running successful franchise businesses. Delve into the financials of the business, with particular emphasis upon the high and low points of franchisee performance. Acquire a full understanding of all costs associated with the business. Enquire about unsuccessful franchisees and ask for the franchisor’s opinion on the reason for their failure. Find out how many franchisees have failed. Develop a mental model of a successful franchisee; find out what it takes to make it in this business. Determine whether or not the franchisor has a selection process for franchisees; the franchisor should be seeking to create sustainable franchise operations, not following a burn and churn motto. Ask about the process for conflict resolution. Does it seem fair and equitable to both sides?

Interview other franchisees. Ask the franchisor to put you in touch with a number of other franchisees and ask them about their experiences. Again, you’re going to want to get as much information as you can about the financial performance of their business, but remember to be considerate as you ask these questions. Try to get some insight into the type of relationship that the franchisee has with the franchisor; does the franchisee feel that they’re receiving high quality support and assistance? Is adequate start-up and on-going training provided? How effective are the marketing endeavours? Is the business receiving high numbers of sales opportunities? Ask if they would still invest in their franchise if they could have their time over again.

That’s just a small sampling of the types of questions that will help guide your decision, so make sure to add to the list with some questions of your own before you embark on the interview process. Also remember that your interviewees will have their own agenda and individual perspective, so maintain some healthy scepticism throughout the process.

It will also be very beneficial to get amongst the day to operations of a franchise business as much as possible. Spend some time behind the scenes with a franchisee, and develop a ‘day in the life of’ understanding of managing the business. Then take a look at the business from the viewpoint of the customer. Imagine yourself making a purchase, and decide whether or not the business lived up to expectations. Would you recommend the product or service to your friends?

5. Understand the legal side

Make sure you understand the legalities surrounding franchise operations. Franchising is covered by formal laws that stipulate what can and can’t be done by all parties. Compile a list of the provisions that you feel may leave you unacceptably exposed, and look into ways that you may be able to mitigate your risk.

You should generate a complete picture of all your obligations under the contractual franchise agreement. Pay particular attention to the fee structure, and to the conditions under which the franchisor may terminate the franchise agreement.

What happens if the franchisor goes bankrupt? Will you be able to continue operating or will you potentially incur significant losses? How are the specifics of the contract geared to operate in this situation, especially around leasing, branding, and intellectual property?

It’s important to get legal advice at this stage of the process. Engage a professional franchising lawyer to review all documentation and advise you about the transaction.

Ultimately, once you’ve thoroughly researched and analyzed the franchise opportunity, you’re going to need to decide if it feels right. Remember that building a franchise business is a long term commitment, so envision yourself working on the business in five years time – is it a happy picture? If the answer is yes then you’re almost ready, but first you need to prepare a business plan. Apart from being a terrific tool for your business, it is also a litmus test for your level of commitment. If you conquer the task of producing a quality business plan, and it stacks up to professional scrutiny, then you’re ready to embark on your franchising voyage.

Steve Davis is a franchising enthusiast and member of the Housework Heroes franchise team. He appreciates the level of complexity involved in finding a suitable cleaning business for sale, and feels that franchising can present some great opportunities.

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