Overlooking an Important Item When Buying and Selling a Franchise
by Ed Teixeira
Whether you’re an individual considering the purchase of a franchise or a
franchisor seeking qualified franchisees there is an important item both groups
often overlook.
Evaluating a franchise opportunity requires investigating and reviewing
various aspects of the business and franchise. Yet, during the evaluation
process individuals considering a franchise may sometimes overlook the single
most important area. On the flip side, franchisors that seek to attract the most
qualified and competent franchise candidates can fail to grasp the importance of
this area, which is the market that both parties seek to capture.
Although the franchise program, franchisee performance, franchisor support and
numerous other factors are important components of a successful franchise
program the market for the product or service is critical. The most well
structured and administered franchise program will fail if the market that the
franchise looks to penetrate and capture is lacking. On the other hand, a strong
and viable market for the franchise offering can serve to overcome certain
deficiencies in a franchise program. In other words, the franchisee will be
successful in spite of the franchisor. Since most franchise agreements are for a
10 year term and franchisees look to keep a franchise, sell it or leave it to
their children, then the market size and its long term potential is the critical
factor that will impact these decisions.
Following are the important aspects of a franchise market that should
be available from the franchisor and analyzed by the franchise prospect. These
attributes should and can be applied to any market from hamburgers to yogurt.
The size of a market is defined in terms of revenue and potential. The market
potential is important since the objective is to describe total demand and
potential customers. For example, the home care industry includes over 12
million people receiving services from over 33 thousand providers. The market
potential for home care is projected to grow as the population of people 65 and
older continues to increase. It’s currently at approximately 49 million. There
is little doubt that the franchise home care sector will benefit from a vibrant
and growing market.
The market trend is an important factor to consider and evaluate. Is the
trend moving up or down? Are there certain parts of the country where the trend
is different? Some products are trendy and the market will reflect that. As a
result the market potential may be limited. A number of years ago the market for
frozen yogurt was dynamic and TCBY and several other franchises were high flying
franchises, then demand waned. Now years later, the market for frozen yogurt has
re-emerged with an emphasis on the health benefits of probiotics. This has
spawned a number of successful franchises. It remains to be seen if this trend
will continue or market potential will diminish.
- The Growth Rate of the Market
Studying the growth rate and trends of related or similar products can be an
indicator that is more accurate than trying to predict growth using current
data. The increased market for children’s services is reflective of the success
of tutoring franchises and the market for these services. Over time a number of
markets reach maturity and then decline.
- The Market Earnings Potential
The final step in our market analysis is to identify the earnings potential
of the market. This enables both the franchisor and prospective franchisee to
gauge the potential profits that the market can deliver. In order to identify
this profit potential there are several factors that need to be considered. A
franchisor should be able to provide prospective franchisees the availability
and the cost of the products or ingredients necessary to make the product. In
the food sector information regarding available suppliers and product costs,
while protecting confidential information, should be made available to a
prospective franchisee. In addition, what is the level of competition in the
market and what are the costs to market the product. Some of this information
will need to be gathered by the franchisee on the local level. However, the
bottom line is that identifying the profit potential in a market will require
having the answers to these questions. Knowing the market factors for franchise
products and services is perhaps the most important factor in recognizing the
potential success of a franchise program. Franchisors and franchisees need to
have an in-depth understanding of these factors if they wish to be successful.
© 2012 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at
franchiseknowhow@gmail.com
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