READING THE SIGNS
in this article:
What does the latest survey tell us about how to back a winning franchise?
The figures from the latest Franchising New Zealand survey are hugely impressive, but what do they tell us about where you should be putting your money if you’re thinking of buying a franchised business right now?
Well, just as there are seasons in nature, so business and the economy go through cycles, too. To make the best decisions, you need to consider the overall outlook for the economy, the prospects of the industry within which your chosen franchise operates, and the future of the products or services the franchise offers.
The recent growth in franchising can be attributed in part to a strong economy, low interest rates, increased immigration and strong business and consumer confidence. That’s all good news, but it won’t always be the case.
When you look at a graph of NZ’s GDP since 1990, we see that our economy expands and contracts. That’s normal, but it does mean that you shouldn’t count on current conditions lasting forever. Don’t let it put you off buying a business, but be conservative with your assessments. Consider the sustainability and resilience of the franchise to a decline in spending. A rising tide may lift all boats, but that works in reverse, too. If sales dropped by 20 percent, how would that affect not just your income but your ability to service your debt? Consult a franchise-experienced accountant before you buy and listen to their advice.
The Survey of Franchising reveals that franchisors have a median level of 25 years’ operational experience and 17.5 years franchising experience, suggesting that many franchises have business models that have been resilient and sustainable during all seasons of the economy, or have been reinvented or adapted in the face of competitive pressures in accordance with the usual business life cycle (see chart below).
However, the survey identified 185 franchise systems less than five years old which have yet to face the adversity of tougher economic times. That doesn’t mean you shouldn’t consider them – newer brands may have more growth potential, face less competition, be more technologically advanced or have better locations available. But it does mean that you need to check them out thoroughly. Take advice and consider carefully their funding models, supply chains and systems. Will they be prepared and able to re-invest in themselves when the time comes? Will you?
Just as economies and individual businesses have cycles, so do whole industries. You therefore need to give consideration to the future of whatever the franchise offers. Techological innovations can disrupt the way that goods or services are delivered in some industries, making them obsolete almost overnight. Consider how we consume entertainment now: Netflix has essentially finished off video stores, and a once highly lucrative franchise model has died. Or compare the effect that email has had on postal services with the massive boost that online retailing has given courier services. How will 3D printing or the launch of Amazon locally affect your chosen business?
Have a look at the product/service life cycle chart (above). Where on the chart does your chosen industry sit? Is the product or service a fad, or does it have long term sustainability? How will it be affected by technology? What advantages does your preferred franchise have within the industry that might make it a leader in the future?
The important thing to remember is that, no matter how the overall franchise sector may be performing, individual franchises will perform differently – not only better or worse than the average, but better or worse than their individual industry.
Changing technologies mean that what worked once may not work in the future, but the core fundamentals that a franchise needs to be sustainable do not change. A franchise needs not just to be founded on compelling competitive advantage, but to be able to maintain that competitive edge.
Looking at the Survey of Franchising results, my prediction for the next five years is that some franchise brands will fall by the wayside as they are geared more for the good times than for the long haul. Some franchises will stagnate because of a lack of underlying profitability to fund growth. Some may merge or be acquired by stronger competing brands.
But many will get stronger, no matter what the economy does. These will be the ones governed by experienced business leaders with a vision for the future. They’ll be well-funded and well-managed. They’ll adopt new technology and adapt to changing markets. And they’ll take their committed, well-trained, flexible franchisees with them.
If you want to make a wise investment, these are the ones to look out for. Remember, you’re not on your own – by seeking informed advice from experienced franchise advisors with insights into your chosen industry, you can give yourself the best possible chance of backing a winner.
This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.
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This material is copyright © Franchise NZ Marketing Limited, Franchise New Zealand ™ magazine and Franchise New Zealand On Line . While it may be downloaded for personal use, no part may be reproduced in any form whatsoever without the specific written permission of the publisher.