Choosing the right franchise: Ten key factors to consider
How does one shop for a franchise? What factors should one consider before buying a particular franchise? Should one always go for the most popular brand? Should one go for the trendiest brand? These questions are pertinent because the success of a franchise business largely depends on finding the right franchise. The questions are also important because the fast food industry is not the only industry where franchising opportunity exists. In Canada, for example, according to Doing Business in Canada guide, there are approximately 1,100 franchise brands and 78,000 franchise units in operation throughout the county and they cross more than 40 different sectors of the economy, including retail, hospitality, automotive and health care. In the United States, there are approximately 3,500 franchise brands. In the United Kingdom, a NatWest/British Franchise Association survey conducted in 2009, found that there were 838 franchisors actively operating in the country with an estimated 34,600 franchisees. There are at least ten factors that a prospective franchisee must consider and evaluate before buying a franchise. The list is by no means exhaustive and is in no particular order.
1. Evaluate Your Skills: You know your goals, your habits, your limitations, your educational and technological background and the skill-sets that you bring to the table. What is your experience as a business owner or manager? Will you need special training to run a particular franchise? What skill sets do you already have and which franchise can best maximize those skill sets? It would make little sense to invest in an automotive franchise if you know next to nothing about cars, are not excited about the auto industry, and cannot afford the time or money investment needed to acquire the necessary training.
2. Evaluate the Industry: Is the industry growing or declining? What are the future projections for the industry? Is the industry likely to become obsolete soon due, for example, to technological changes? Imagine the range of products and services that were once considered indispensable but have become obsolete or are about to become obsolete because of changes in technology. As products such as films (and film cameras), compact discs, records, VCRs, and landlines go, so do services associated with them. Conversely, one can think of products and services that are not presently in high demand but which may become very popular in the future as a result of technological and demographic changes. For example, with a growing middle class and a growing number of parents willing to spend money on the education, entertainment and overall development of their children, kids’ franchises (e.g. educational franchises, child care franchises, fitness franchises) could become winners in Nigeria in the near future.
3. Evaluate the Economy: When the economy is robust and more and more middle class are created, this typically translates into more options for prospective franchisee because more people have the money to spend on services that may have once been considered luxuries. For example, in a thriving economy, services such as pet care and services, coffee shops, ice-cream shops, and fitness/nutrition services can be good options for a prospective franchisee. Conversely, when the economy is weak or unpredictable, prospective franchisees may be better of choosing recession-proof brands. Recession-proof brands offer services that people always need regardless of the state of the economy such as child-care, elder-care, and health-care.
4. Evaluate the Demand: Is there a demand for the product and service that a given franchise is offering? A franchise must and should make sense in the domestic market where a prospective franchisee hopes to operate. A prospective franchisee should pay attention to products and services that people cannot afford to live without (e.g. child care and healthcare) as well as luxuries that have become more affordable to a growing middle class (e.g. fitness). Regarding the sectors or industries with greatest opportunities for franchising, this will vary from country to country.What is working in the United States may not necessarily work in Nigeria.According to Entrepreneur.com, in the US, theTop 10 Franchises for 2013are: Hampton Hotels (#1), Subway (#2), Jiffy Lube Int’l Inc. (#3), 7-Eleven Inc. (#4), Supercuts (#5), Anytime Fitness (#6), Sevpro (#7), Denny’s Inc. (#8), McDonald’s (#9) and Pizza Hut Inc. (#10). Although hugely successful in the US, some of the popular US franchises may not be popular in Nigeria. Automotive franchises (e.g. Jiffy Lube) may not work in a country like Nigeria where road-side mechanics are readily available. However, automotive franchise may work in a city like Abuja with a growing and affluent middleclass willing to splurge on expensive cars.
5. Evaluate Local Culture, Tastes, and Habits. Consider South-South Franchising Opportunities: In thinking about franchising in Africa, it is important to remember that the culture and taste of consumers in developed countries may be different from those of consumers in Africa. The best performing franchising sectors in Brazil in 2007, in terms of revenue growth, were not necessarily the best performing sectors in the US but were personal accessories and footwear (24.4%), other retail business and services (24.2%), and information technology (IT) services (20.4%). The question to ask is what will work given local tastes and habits. In this regard, prospective franchisees would be well advised to consider promising opportunities in other developing countries. Given similarities in weather, culture, or economy, it is possible that what works in one developing country may also work in another developing country. This could explain the success of some South African franchises in Nigeria.
6. Evaluate the Competition. Danger of Being the First or Last in Line: Competition is good for business and for consumers. However, excessive competition may completely wipe out the profit expected from a franchising deal. Is the demand for the product and service undercut by competition from other businesses that offer similar products and services?Given the rise in on-line business, competition can be local, regional, national and even international. Competition can also come from other franchisees in a franchisor’s network or even from company-owned outlets. A prospective franchisee must evaluate fully the level of competition to expect in a given industry and with a given franchise.While caution suggests that it is better to go for a known and proven brand, new brands get into the market every day and many are doing remarkably well. Entrepreneur’s ranking of the top new franchises (those in the market for less than five years) indicates that many new brands are doing very well. According to Enterpreneur.com, the Top 10 New Franchises for 2013 in the US are: Kona Ice (#1), Menchie’s (#2), Orange Leaf Frozen Yogurt (#3), ShelfGenie Franchise Systems LLC (#4), Bricks 4 Kidz (#5), Smashburger Franchising LLC (#6), GameTruck Licensing LLC (#7), Paul Davis Emergency Services (#8), Signal 88 Security (#9), and Mac Tools (#10). Note however that while it is fool-hardy to get into a business where competition is stiff, it is also risky to be the first franchisee in a system. Being the first in the system may mean limited name and brand recognition for the company and its product or service. To be the first is also to deal with many unknowns (about the quality of franchisor’s product and service offered, about a franchisor’s reputation regarding fairness, and about consumer perception of a given product or service).
7. Evaluate the Brand. What do you know about the quality and reputation of the brand that you are considering? Does the brand have a good track record? It is important to consider the quality and reputation of the brand in the franchisor’s home country as well as in other markets that the franchisor is operating in. When considering a brand what factors must one consider? At least four. To come up with the list ofForbes Top 20 US Franchise Brands in 2011, Forbes Magazine compared four variables: estimated minimum initial investment (including initial fees plus equipment costs); total locations; survival rates (measured as the percentage of closings during the previous three-year period to the total number of existing locations); and the number of training hours offered to new franchisees measured against the startup costs. The top 10 on Forbes list were:Domino’s Pizza (#1), 7-Eleven (#2), Kumon North America (#3), McDonalds USA (#4), Papa Murphy’s International (#5), Merry Maids (#6), Great Clips (#7), Sport Clips (#8), Edible Arrangements International (#9), and Jimmy John’s (#10).
8. Evaluate Affordability and Credit Availability. What can you afford? One’s franchising goals depend largely on what one can afford. There are several questions to consider. How much does a particular franchise cost? Do I have access to financing? Does the government provide any kind of financing opportunity? Are bank loans accessible and available? These questions are important because lack of funds is one of the top reasons franchisees go out of business. Access to capital can affects franchising decision in at least three ways. First, Affordability and credit availability will determine the sector/industry you can get into. For example, hotel franchises are inherently much more expensive than fast food franchise or a dating service franchise. The start-up costs for Hampton Hotel franchise ranges from US$3.7M – US$13.52M. Compare this to the start-up cost for a McDonald’s franchise ($1.07M – 1.89M), a 7-Eleven franchise ($30.8K – 1.5M), Anytime Fitness franchise ($56.3K – 353.9K) or Bricks 4 Kidz franchise ($33,800 – $51,050). Second, even within an industry, financial considerations will also affect the particular brand one acquires. Within the same industry, more established brands are likely to be much more expensive than newer brands. Compare the start-up cost for a McDonald franchise ($1.07M – 1.89M) to those of Smashburger Franchising LLC ($560.5K – 909.5K).Third, cost will also affect whether one decides to go for a single-unit franchise, an area-development franchise or a master franchise. Note however, the potential profitability of a franchise is not determined by the price of the franchise; a low cost franchise may be a bigger earner than an overpriced or expensive franchise.
9. Evaluate the Franchisor: While a brand may be a good quality brand, the franchisor may be going through turbulent times, may be involved in multiple law suits brought by past and present franchisee, may be in bankruptcy, or may simply be caught up in a number of issues that can affect and ultimately destroy a franchise arrangement.A prospective franchise must therefore carefully research the franchisor. In some countries it is very easy to evaluate the franchisor because of mandatory disclosure laws. In the U.S. for example, a franchisor must complete an extensive disclosure document called the Franchise Disclosure Document (previously known as the Uniform Franchise Offering Circulate (UFOC)). Nigeria does not have any mandatory disclosure requirement. Consequently, it is up to the franchisee to carry out necessary due diligence. Examples of issues that merit examination are: the business experience of the franchisor, the franchisor’s current directors and executive officers, allegations of fraud embezzlement, fraudulent conversion, misappropriation of property, or restraint of trade, that may have been brought by a present or former franchisee or franchisees and which involves or involved the franchise relationship, and whether the franchisor has filed for bankruptcy or has been adjudged bankrupt.
10. Evaluate Your Team. Do you Have a Winning Team? Can you Put Together a Winning Team? Do you have a team of professional advisers (lawyers, accountants, etc.) that can help you with the legal, business, and financial aspects of a franchising deal? Do you have a cohesive team that can help you make your franchise a success once the deal is concluded and the agreements are signed? When one is thinking of a cohesive team one has to consider employees, suppliers, investors, business partners and even one’s family. Regarding employees, what is the labor market situation in the industry and in the geographic area that you plan to operate? How are changes in the population affecting the available labor market? Can you adapt to changing employee base? Would you have on-going access to excellent legal and accounting services?
At the end of the day, there is more to choosing and operating a successful franchise than a few dos and don’ts. Wisdom, perseverance, and above all prayers, are important. With these three one can go against all odds and still succeed. Walt Disney, the founder of the hugely successful theme park that almost every child in the world dreams of visiting, once said: “We did it (Disneyland), in the knowledge that most of the people I talked to thought it would be a financial disaster – closed and forgotten within the first year.” Albert Einstein once said, “A person who never made a mistake never tried anything new.” This is so true for franchising. Franchising is not for the faint hearted. Mistakes can and do sometimes occur along the way. A person who is very fearful of failure is not likely to be able to invest the capital and time necessary to make a franchise unit succeed. Prayer remains the key. Abraham Lincoln 1809-1865, Sixteenth President of the USA, once said, “I have been driven many times to my knees by the overwhelming conviction that I had nowhere else to go. My own wisdom, and that of all about me, seemed insufficient for the day.” Finally, Benjamin Franklin 1706-1790, one of the Founding Fathers of the United States and a scientist, publisher, author, inventor, and a diplomat, had this to say about prayers: “Work as if you were to live a hundred years. Pray as if you were to die tomorrow.”
Dr. Uche Ewelukwa Ofodile
LL.B. (Nigeria), LL.M. (London), LL.M. (Harvard), S.J.D. (Harvard)
Professor, University of Arkansas School of Law
By: Uche Ofodile