Evaluating franchisor sustainability and buying a franchise is a critical issue when looking to buy a franchise business. Long term franchising requires a viable franchisor.
Franchisor Sustainability and Buying a Franchise
Buying a franchise is a complex undertaking. There’s a lot to understand; not least, the type of business, the market, the potential, the funding, your own skills and fit with franchising, and much more.
There is a lot to consider; so much so, that even for friends thinking of buying a franchise I refuse to go into real detail until they have completed the FANZ free online training program for potential franchisees. I’m then happy to pour in time to help their decision – but that’s after they’ve invested some time themselves.
One of the areas I have often written about that I think is highly important is the viability and sustainability of the franchisor. A potential franchisee needs to know thing about franchisor sustainability when buying a franchise.
Franchisor viability is a critical issue for franchisees because a long-term successful franchise relationship and an acceptable franchisee return on investment require both parties to remain in business throughout the franchise term and any renewal periods.
People often think of franchising as a safe option for business and in concept it is. However there are examples of failures. And importantly, franchisors can and sometimes do fail too.
Franchisor failure is terrible for franchisees because they are plunged into an uncertain situation without all of the typical supporting systems and guidance and, potentially, use of the brand – all mainstays of a great chain business and a good franchise system.
Potential franchisees and their advisors therefore need to make savvy assessments of their prospective franchisor’s viability and future in order to avoid what could be a potential total loss of investment plus ongoing liabilities (like lease obligations).
If the franchisor company is a public company or owned by a public company then this assessment is generally easier. Two quick key performance indicators I look to are 1) net profit and 2) debt. If net profit is small / declining it is a pointer that things may not be all be well. And if debt is high and /or increasing then important consideration needs to be given to if this can be adequately serviced. If there not satisfactory answers to any questions then I’d either steer right away – or dig much deeper into the state of affairs and future outlook. In the latter I would be advocating very good advice as no business has a ‘right’ to survive and profit. Business is much harder than that as the troubles and recent failure of certain high profile chains and other businesses have demonstrated.
Good advice is essential to help evaluate franchisor sustainability when buying a franchise.
In closing I would add that it is my opinion that a franchisor with viability issues should not be offering franchises. The franchisor, again in my opinion, should reasonably expect themselves to be in business and supporting franchisees for the total combination of all franchise terms offered.