Franchise ownership in the brand new economy
The unofficial results of days gone by 14 months show that approximately 200 to 400 franchise systems are struggling. Many have ceased franchise growth and even closed down entirely. However when you compare that to the amounts of non-franchise businesses which have shut their doors or are on the verge to do so, the resilience and strength of the franchise model shines through. A well-oiled franchise system gets the capability to fight the forces pulling down small independent businesses. In large part for the reason that the franchisor includes a vested interest in the survival of the franchise owner and can do all it could to guarantee the network’s success.
Why discuss the number of hundred brands that are struggling? That’s Darwinism at its best. Although the franchise business design has proven strong in tough economic times, franchises aren’t immune to the market meltdown and shrinking economy. The franchise systems which have failed or are on the verge of failing weren’t ready to handle the economic challenges. They could have suffered from substantive flaws within their model, personnel, vision, financial means, or a combined mix of factors. While we’d all prefer to forge ahead rather than look back at a tremulous 2009, it’s critical to judge the nice and bad business decisions that companies were forced to create under pressure. If you are considering running a franchise, it’s in your very best interest to get a clear roadmap of the way the system of your decision has fared during the last few years, and a knowledge of their technique for success in the brand new economy.
They are the four most significant questions to ask before you invest your hard-earned profit a franchise:
1. Will the buyer of today (and tomorrow) buy what you’re selling? This may look like a clear question, but it’s critical in order to avoid getting swept up in the most recent fad. There are numerous listings put out every year of the latest new franchise concepts, but as the allure of getting right into a fast-growing or innovative business could be strong, consider whether it gets the stamina to survive another 10 years–or even the first a couple of. Ensure that your concept will hold consumer value for at least the duration of your franchise agreement. Research pending technological advances that threaten to create your service or product obsolete. If you are searching at a fresh concept, evaluate emerging "copycats" that may potentially undercut your price or market share.
2. Do the business leaders have what must be done to survive the challenges ahead and make great strides in prosperous times? There have been many business leaders who predicted the recession. However the simple truth is that you didn’t need to foresee the timing and severity of the downturn to be able to have a clear plan of how exactly to survive an overall economy. So, did the franchise system you’re considering have an idea set up to keep driving sales in a recession? If not, you need to measure the new processes, programs, products that were set up to be able to help the business offset the negative impact of the downturn. Furthermore, you have to examine the company’s approaches for benefiting from the economic uptick.
Reviewing the franchisor’s FDD this season will provide you with great insight to their average unit revenues, overall expenses in accordance with revenues and their budget–all that will enable you to determine if they can surpass their promises as well as your expectations. If something is sustaining itself primarily through revenue from franchise fees, you can surmise that it has difficulty staying the course against competitors operating off the organic growth of their system. It isn’t that purchasing a franchise from a fresh system that might not have developed royalty or system sales is necessarily a bad decision. However, the tight credit market and delayed openings will strain a franchisor that will not have the financial cushion to retain key support programs and staff.
3. Just how do existing franchisees experience the franchisor’s response to the recession? In researching a franchise opportunity, observe the accessibility of the senior leadership. Ask franchisees how often they saw the organization staff within their market. Did executives attend meetings and hold conferences where they brought value and showed their capability to make tough decisions with an extended term and strategic solution at heart? Was there an open flow of communication, idea sharing and troubleshooting when the waters got rough, and was everyone paddling in the same direction?
After 17 years in the franchise industry–on both franchisee and the franchisor sides of the table–I’ve heard my share of horror stories about insufficient communication and collaboration between your office at home and the franchise system. When times are tough, this communication is crucial.
Franchisees must feel safe in expressing their ideas and their concerns, so when their expectations aren’t being met by the house office, they have to trust that something will be achieved to greatly help. I’ve had to create many tough decisions to raised both of our franchise systems. Often, the impetus behind new policies or programs were concerns expressed by franchisees. This is simply not by chance. Evaluating the way the franchisor taken care of immediately franchisees’ struggles and the support they provided their system during the last 14 months speaks volumes to the support you will probably receive in the years ahead.
4. What exactly are the wildcards? Is there incentives being offered that will assist offset your startup costs and boost your profits? Many franchise systems have adjusted to fiscal conditions by offering many different financial incentives to buyers. Some offer reduced franchise fees or reduced royalties for a particular timeframe, while some offer enhanced training or other discounts. For instance, TSS Photography offered a "Stimulus Package" in ’09 2009 that deferred some of the franchise fees. This season, TSS and Young Masters are each giving a 50 percent rebate on product purchases. We’re looking to surrender between $10,000 and $50,000 to each franchisee that joins our bodies this year 2010.
These kinds of incentives are designed to help offset the market meltdown and allow the machine to grow in this economy and push past struggling competitors. So, as a prospective franchisee, it is important to examine what the franchisor offers to help you are more productive and profitable in your startup phase. However, it really is even more critical to judge set up system is able to sustain healthy growth despite collecting less revenues from new franchisees. Financial incentives shouldn’t come at the trouble of support or innovation from the house office.
While franchise companies continue steadily to cope with the challenges posed by the brand new economy, you may still find many advantages to running a franchise today. Apart from the many financial incentives that weren’t available just 3 years ago, every prospective franchisee gets the benefit of looking at a company’s performance during among the worst recessions inside our nation’s history. Focusing on how a system’s franchisees were supported and the way the leadership acted in the toughest of that time period will foreshadow your experience with the machine, in memories and bad.