Far too many entrepreneurs do not spend enough time analyzing a franchise offering before making the leap. While different types of franchises should be evaluated based upon the kind of business they are in before they are bought, here are some common factors to all types of franchises that need to be considered.
How many potential customers can you draw from your local market size versus the cost of the franchise fee? The point is that paying a franchise based upon a percent of sales is only workable if you have a large enough local population density. Franchise fees can be deceptive. I have worked with a client, for example, that owned a franchise from a national franchiser and was paying the same 7% of sales franchise/advertising fee in a town of 7,550 as in city like Chicago with a population of 2.7 million. The logic of the franchiser is that their franchise payment is proportional to their sales and is therefore equitable. Most franchisees pay the same percent of sales and not the same dollar amount for their franchise. Sound logical, right?
What is missing from this logic is that in most franchise businesses, you need critical market mass or a minimum amount of sales to break even and make a good profit. The point is that it is much harder to make a profit with only $300 thousand in sales from a population with 7,550 people and paying say a 7% of sales franchise fee than it is to make a profit from a population of 2.7 million people with the same 7% franchise fee. And yeah, sure there will be plenty of other of the same or similar franchises in a large metro area, and no you cannot serve the entire population of that large area. The point is that the available local market in a high density city will generate much more sales to be able to pay a franchise fee with a high percentage of sales. Paying a franchise based upon a percent of sales is only workable if you have a large enough local population density base unless you are principally an on line and or a mail order business.
It is critical to determine if the associated franchise fees are justified for your market. After considering the mass or size of your market:
If you are going to be in direct competition with a strong national brand business, whether it is a franchise or not, what is your franchise’s competitive edge, that is, what can you do better that will cause customers to do business with you rather than the competition? The truth is, most entrepreneurs do not do this analysis!
Next, ask the franchiser to furnish the names, phone numbers and locations of all of their franchisees. Ask the franchiser for the sales for each franchisee by market location. If they furnish them, match the sales to markets of a similar size to yours. Call franchisees in similar size markets and find out how successful they are.
There are several ways to do this.
We will talk about the next steps in the following article.
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When you’ve identified competitors strategies you can establish a plan such as lowering prices, special promotions or add to your product line or services.
There continues to be a number of individuals that look to purchase a franchise without the benefit of professional advice which can be a mistake.