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Overlooking an Important Item When Buying and Selling a Franchise

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Whether youíre 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 the Market

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. Itís currently at approximately 49 million. There is little doubt that the franchise home care sector will benefit from a vibrant and growing market.

  • Market Trend

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 childrenís 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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