How To Spot Franchise Opportunities That Are Worth The Investment
Franchising remains a viable business model for many entrepreneurs, and yet it’s also one of the models with a high failure rate. But that failure rate is more due to the choices you make rather than the actual franchise business model itself. The nature of this means that there will be both good and bad opportunities out there – what tends to happen is people pursue the bad ones and then lose all of their investment.
So how do you spot a franchise opportunity that’s actually worth investing in?
Check The History
Are you taking a risk by investing in a new franchise that’s only just been set up? Absolutely. You have no historical data that proves this could be a genuinely beneficial business idea; you’re basing things on pure luck or the strength of a proposal. One common error is to invest in a franchise because it may be run by someone (or a company) that’s had successful franchises before. While this may seem like a good track record, their success could’ve come in a completely different industry, so it’s not automatically relevant.
Instead, you should look for franchise opportunities that have existed and succeeded over many years. Jani-King notes on its website that it has been backing commercial cleaning franchises for over 30 years. The McDonald’s franchising system has been around for over 70 years. These are both great examples of a proven franchising opportunity that’s stuck around and stood the test of time.
If you have lots of historical data to back up the success – or even the failure – or a franchise system, then this gives you the confidence to know if you should consider investing or not.
Consider The Market Demand
There are two things to look for here:
- Does the business model have sustainable demand?
- Is there enough demand for the business in the franchise location?
In the first case, you’re looking more at business ideas or models that provide long-term success for the franchisee. You want ideas that are proven to work over time and will keep bringing in customers – or can be sustainable with a large group of returning customers. Take a gym franchise, for example; it’s clearly a model that works: people will buy memberships, and you can sustain this over time. A bad example is a business that caters to a specific trend. For instance, if PopMart started doing franchising, that might not be a good idea because who knows how long that bubble will last before it bursts.
With the second question, you have to consider if the franchise idea works in the proposed franchise location. This is where things get complicated, as a business model that ticks the first question might not tick the second. Going back to the gym example, you may see a franchise opportunity for a gym in your local area, but is there enough demand to make this viable? If there are already four or five gyms with established customer bases, then it could be hard to set yours up successfully.
The right opportunities tick both boxes and can provide a sustainable business model that’s proven to work over time and has enough demand from the target market.
Run The Financial Equation
Franchisors will advertise opportunities with the big headline that tells you the earning potential of the business. People get drawn in by this, assuming that it means that if they invest in this franchise, they will definitely earn x amount every year.
In reality, the earning potential is just that: potential. It is not set in stone, nor does it consider some of the other key franchising costs:
- Initial franchise fees
- Set-up costs
- Ongoing royalty payments to the franchisor
- Potential marketing costs
- Regular operating costs
When you run the financial equation and figure out just how much it will cost to run your business, you can determine if it is a viable idea or not. You’ll also discover that the advertised earnings may not be as important as you first thought. One franchise could advertise annual earnings of $300,000, but then the overall investment and running costs mean you’re barely breaking even each year. Another could only advertise earnings of $200,000 a year, but the operating costs are so much lower, meaning the profit margins are bigger.
The main thing you want to focus on is whether or not the franchise costs too much to run when you factor in things like royalty payments to the franchisor, and so on. What looks like a great idea could quickly be a non-starter.
Research The Franchisor
As well as looking at the history of the franchise itself, you should look at the franchisor. Who owns the whole business model, and what are they like? This could be a singular person or a company, but here are some key things to research:
- Does the franchisor have good reviews from franchisees?
- Is there a massive turnover when looking at franchisees?
- Can you find a lot of complaints directed towards the franchisor?
You’ll have to do some digging here, but it’s worth it to identify the rotten apples. A franchise opportunity can look so fantastic on the surface, but then you realise that the franchisor runs the overall business terribly. If loads of franchisees leave all the time – and there are common complaints about extra fees or a lack of help from the franchisor – then it may be best to sit this one out.
Conversely, you could discover that the franchisor has an excellent reputation. Franchisees work for them for decades because the model works, they get loads of help, and there’s nothing to complain about. If you can find opportunities like this, then that’s a massive green flag.
Will franchising be a good business option for everyone? No. Some people may still prefer to run their own business, but others will definitely enjoy the benefits that come with franchising. What’s most important is that you separate the good opportunities from the bad to avoid wasting time and money.
The post How To Spot Franchise Opportunities That Are Worth The Investment appeared first on BNO News.
Ella Rae Greene, Editor In Chief
