In the past 14 months, somewhere between 200 and 400 franchise systems have struggled to keep profits up and units open. However, according to Entrepreneur magazine, this is "Darwinism at its best." While the franchise model has proven resilient in the face of economic challenges, certain franchise systems have floundered because they were not prepared to handle the changes. When potential franchisees begin researching a system, it is important to look at the past few years and assess a system's response to best understand its strength and strategy in the years to come.
There are four questions today's franchisee should ask before deciding to invest in a particular franchise unit. The first question to consider is whether the product or service that the franchise is selling is one that will be valuable to consumers of today and the future, the magazine writes. To avoid getting caught up in the latest fad, franchisees should make sure that the "concept will hold consumer value" for as long as they hope to be in the business.
Next, potential franchisees should scrutinize company leaders to determine whether they have the skills to lead a system through tough times. One way to determine how well they will perform is to look at the most recent economic downturn. Did they have a plan in place? How did sales fare? An FDD will provide much of this information - from overall expenses relative to revenues to average unit revenues. Franchisees should make sure the system is not living off of franchise fees alone.
Potential franchisees are often encouraged to interview current unit owners. This will be particularly helpful in determining how a system has responded to the recession. Open communication and accessibility to senior leadership are good indicators that a sense of transparency exists between franchisors and franchisees.
Additionally, many franchise systems are offering financial incentives to buyers, such as reduced franchise fees or royalties for a certain time length. These incentives allow the system to continue to grow and compete while still profiting from its units.
It's important for potential franchisees to not be discouraged by an onslaught of negative business news. Take a second look, because franchise systems are generally not among those in trouble. Boosted by strong systems and sales, more and more professionals are leaving their jobs to invest in a franchise.
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