Analyzing Franchise Growth

An important measurement of the health of any given franchise company is the rate of growth of their system. Specifically, the franchise system should be growing at a rate that shows it is healthy and vital and is able to attract a number of new people to the system but should not be adding new franchisees so quickly that it will have problems managing this growth.

 

When doing your research on a franchise opportunity, you will find a variety of ways to evaluate a franchise’s growth. The following may assist you in your examination.

 

  • Determine the number of new franchisees added each year.  This information is not usually available in the FDD so you will have to ask the franchisor for these numbers. Ask also about the number of operational support people devoted to new franchisees.

 

It is obvious that if a franchise system has been franchising for a number of years but has added very few franchisees, there may be problems in their system. It could be that current franchisees don’t validate well due to problems with the business model so potential franchisees are rejecting them. Or the problem may be that the franchisor has insufficient staff to handle all the elements associated with getting a new franchisee up and running and must reject a number of qualified applicants. Either way, lack of new franchisees may mean this isn’t a healthy company.

 

  • How do you determine an acceptable number of new franchisees? The percentage of new franchisees to the number of total franchisees will give you a number you can use for comparison. For example, if a system of 30 franchisees adds 20 more in a year, they may be growing too rapidly and their staff may be too overwhelmed to have time for you as a new franchisee.

 

A good number to look for would be when the percentage of new franchisees falls somewhere between 10% and 35% of the total number of franchisees. A company currently with 100 franchisees should have the infrastructure to add up to 35 new franchisees in the coming year.

 

This formula will not work for very large or very small companies, however. Therefore, another number to look at is the ratio of operational support personnel compared to new franchisees. A ratio of one support person for every 10-20 new franchisees tells you that new franchisees are likely getting adequate preparation and support to develop their businesses.

 

  • Talk to existing franchisees. You will be contacting a number of existing franchisees from any system you are serious about joining. Besides asking them about such items as marketing effectiveness and earnings potential, spend a sufficient amount of time covering such areas as the training they received as well as initial and ongoing support. Pay particular attention to the answers from those franchisees that have recently joined the system as their answers will most likely reflect the type of support you would receive.

 

  • Meet the support staff. Once you’ve spent time evaluating the numbers and talking to existing franchisees, there’s a final step to take before giving a franchise company a thumbs up as a potential purchase. If everything looks good up to this point, you will want to personally meet the franchise staff with whom you will be working. You will evaluate their style, professionalism and competence.

 

Make a note of the impressions you get during this visit. Does the staff seem warm, friendly, knowledgeable and helpful? Are they able to spend time answering your questions or do they seem rushed, distracted and overwhelmed by their busy schedule? Will the staff be there for you, both at the beginning and also years down the road? Will you enjoy working with them or be frustrated by the lack of clear direction and slow response time?

 

There are many important elements to consider when researching a franchise business that will meet your needs and desires. A system that is successful and expanding should be right near the top of your checklist. If you’ve done your research and you are happy with all of the results of the interaction you’ve had with the franchisor, you can be confident that you are investigating a growing, healthy franchise system, one which will provide you an opportunity to make your personal and professional dreams come true.

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