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THE 3 CRITICAL THINGS WE LOOK FOR IN A FRANCHISE SYSTEM

3-ticked-boxes THE 3 CRITICAL THINGS WE LOOK FOR IN A FRANCHISE SYSTEM

With 6311 franchise systems operating in New Zealand a potential franchisee could be forgiven for asking how on earth would they identify and choose the industry sector, brand and location in which they are going to be successful?  What are the key factors that come into play and how do these differ between individuals?

1.The Franchising New Zealand 2017 Survey http://franchise.co.nz/survey

Before we start to look at how individual potential franchisees find the right brand and location match, let's look at how Iridium Partners decide what franchise systems we will work with and why? In our minds, everything happens in threes, there are three primary colours, the rule of three - good things, and bad, come in threes, the triangle is the strongest geometric shape, the most stable stools have three legs…and we look for brands that have all three of the following characteristics;

Good single unit economics
A well-defined and resourced franchise support structure
Evidence or likelihood of long term sustainability


We would suggest that these should be at the forefront of any potential franchisee's mind, and pre-requisites ticked off before pursuing any opportunity. Let's look at these areas in a little more depth and identify some of the indicators or telltale signs that may or may not be evident.

1. The franchise system must have good single unit economics
Success has many measures, in business a good starting point is that the investment provides a reasonable profit and return to the capital and human resources engaged in the business. That is basically, one, the franchisee will at some stage, obtain an income from the business which either in absolute terms or in their mind, replaces the income they could have been earning as an employee, two, that the rate of return or income provides a return to the capital invested, and three, that the business is able to exist and generate these returns over time, including the actualisation of the business being on-sold and returning capital to the investor.

A single unit business or franchise which is able to achieve these three targets is often referred to as having good single unit economics.In the most basic sense, the business works on a single business unit level.It sounds and is fairly fundamental but not always evident when looking at franchise systems or brands! Do not be fooled that a franchise system with loads of outlets and franchisees and looks very much like a successful system has good single unit economics.  Remember that most franchisors make their income from the sales from within the system via franchise fees, or from granting new franchises, and franchisees make their living from the profit at a franchise unit level.  They are different dynamics and not always linked or both present in a franchise system.

So, what do we look for?  We discount the top and the bottom performers and look at how many units operate in the middle of the pack, do the middle or average operations in the system have good single unit economics.  How focused is the franchisor on ensuring that franchisees are profitable? What benchmarking information is available and reviewed by the franchisor? The questions for the potential franchisee should be about mitigating risk; on average does the system have good single unit economics, on average, if I follow the system, will I make money?  A potential buyer should be looking at the set-up costs for a new franchise versus those on the market or recently sold, and how long existing franchisees have been in the system.  Does the franchise system have any or many multi-unit franchisees, and are the multi-unit operations due to good single unit economics or poor?

2. Does the franchise system have a solid support structure?

The second criteria Iridium Partners examines is the support structure provided by the franchisor.  Starting with, what does the head office structure look like? Again, there are three particular areas that we focus on and believe need to be effective to consider a brand or system, initial training, ongoing support and marketing.

Initial Training - what is provided in initial training and on-boarding?  How long is the initial training period, who conducts the training?2 What does the franchisor believe successful training looks like?  Is it actually effective?  If the franchise operates bricks and mortar businesses a good indicator from an outsider's perspective is to visit different franchise outlets, is the experience consistent, this also speaks to our second point in the support structure – ongoing support.

2.Back in 2011 Nathan was interviewed by Simon Lord for Franchise Magazine when at Columbus Coffee on their training program and how to identify a franchise system with a good training program. http://franchise.co.nz/article/2146-how-do-i-learn-the-business- The pointers are still very relevant!

We want to understand, once a franchisee has completed initial training and is underway in their franchise business, what support is offered and provided by the franchisor?  How structured is this support and how effective is it?  What will the franchisor do if things do not work out well?  It is not enough that the franchisor has a great brand or even operates fantastic and successful outlets or franchises themselves, how do they support their franchisees?  What does the structure of the franchisors support office look like and who's on their team? As a potential franchisee, ask these questions, meet with the different support team members before you sign, ask to meet and get to know who you will be dealing with on a regular basis.

The third area of franchisor support structures that we scrutinise is marketing.  We look at what marketing activity on a brand level, how this is managed and how the franchisees marketing contributions are being spent and how effective it is.  Consideration should also be given to what support and material is provided for franchisees to undertake local marketing and how this integrates with national programs.  For a potential franchisee we suggest that they ask their friends, what do you know of x brand, does the perception of the brand created by marketing match the brand delivery and or what the franchisor is hoping to project?

3. Is the franchise system sustainable?

We look for a sense of where the brand sits on the scale of economic sustainability.  We're looking for brands with both demonstrated longevity and that will be around in 5 years.  Brands where franchisees have the best chance of ensuring profitability over that time, and the ability to exit the business.

Questions include; how long has the brand be around, how long has the franchisor operated the brand, will the brand (or even category) be around in five years?  Is the brand growing, if not why? It may be the leading brand in a market which is or is close to saturation, it may have peaked? Does the brand have a point of difference to it's competitors or a unique product?  Over time, how does the brand stack up against our first two measures, single unit economics and a solid support structure?  As much as its looking forward, we look at the previous performance of the brand and franchisor and how they have adapted and maintained, grown or waned in their market position.

Start a conversation with Iridium Partners

Our discussions with potential franchisees will usually start with their own set of three questions; what can you see yourself doing? In what location, site or market position?  What can you afford to invest?

But before we suggest or recommend any franchise system to a potential franchisee, Iridium Partners has run our ruler over the brand against our own rule of 3.
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