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You’ve decided to open a pizzeria ... and have decided that franchising (that is, becoming a franchisee) is the way you want to go. Now all you need to do is to decide WHICH of the many franchising companies will best serve your needs. At first this seems like a simple task. But soon you realize that the many franchise concepts makes this a bewildering assignment.
So to help, you dig up web information on “selecting a franchise.” You even read the book Franchising for Dummies, but all this makes you even more confused. Swirling in your mind is a myriad of “vital factors” to consider – like company history, formulas, products, location, brand, company leadership, training programs, marketing efforts, franchise fee, royalty percentage, and on and on. Are these things important? Sure they are, but none is as important as this: Consistent Substantial Profitability – or enough after-tax income to yield a substantial, or at least reasonable, return on your investment of money and time.
Why is consistent substantial profitability the most important factor of all? Because without it nothing else matters. The franchise can have a great name, tasty product, compelling image, good locations, clever advertising, dazzling training programs, and so on, but if all this does not amount to consistent substantial profitability, it comes to nothing – the concept is an albatross. Conversely, if the concept yields consistent substantial profitability it’s a winner in spite of the fact that it might rank “average” in any or all of those “vital factors.”
So, when it comes to evaluating the many factors of a franchise concept, evaluate each in light of this simple question: Will this factor result in consistent substantial profitability of my franchise store? If the answer is “no” or “not much,” the factor is irrelevant. Scratch it from your list of considerations.
Finally, when it comes time to select a franchise concept to go with, choose the one that, in your best judgment, offers the best odds of deriving consistent substantial profitability. Because, in the long run, nothing else matters.
Following is a listing of suggested indicators to assist you in evaluating franchise concepts in light of each one’s likelihood for delivering consistent substantial profitability. Much of the information for these indicators can be found in each company’s Uniform Franchise Offering Circular, or UFOC (pronounced u-fahk.)
1 – Average Weekly Unit Sales. Average weekly unit sales – AWUS, for short – is a key indicator of a franchise concept’s strength within its market area. The greater its market-area strength, the greater its ability to deliver profit. Compare the AWUS of the various competing concepts. Look at two things: (a) dollars and (b) trend. AWUS dollars indicates a concept’s current strength within its market area. AWUS trend (over the last three years) indicates a concept’s likely future strength – or whether the concept is waxing or waning in market impact.
2 – Consumer Satisfaction Rating. A key driver of AWUS is consumer satisfaction rating, or customers’ average rating of each company’s product and service. The higher a company’s consumer satisfaction rating (vis-à-vis its competitors), the greater its ability to achieve higher AWUS. Examine both the current ranking and also the trend over the last three years. Getting this information is not always easy because such surveys are not readily available. However, franchise companies that rank higher in the ratings usually find a way to make such information available to you.
3 – Operational Consistency at the Store Level. Perhaps the biggest factor affecting consumer satisfaction is consistency of store operations, or the delivery of consistent quality product and service. The most expeditious way to gather info on this indicator is by personal sampling, or conducting your own mystery shopping. After you narrow the field of contender concepts down to three, perform your personal research into operational consistency. For a period of at least several weeks, visit various stores of the three candidates. Purchase the product and experience the service of a number of stores of each company. Compile your findings, then compare the three concepts. You need to answer this basic question: For each concept, how consistent was its product and service from day to day and from store to store.
More than any other factor, consistency of store operations indicates effectiveness of company (i.e., franchisor) management. Inconsistent store operations indicates ineffective company management; consistent operations indicates effective management. Many would-be franchisees are enamored with companies’ glitzy ad campaigns and use them as an indicator of company management. But, in fact, there couldn’t be a more unreliable indicator. (Ad campaigns, after all, are a product of agencies, not of company management.) If you really want to know how good a company’s management is, check out the company’s front line operations – meaning what’s going on in the stores. The higher a company’s product/service consistency, the more on-target and more effective is the company’s corporate management.
4 – Developmental Eagerness. A company’s ability to sustain substantial profit over the long term depends on outperforming its competitors in two arenas: (a) market impact and customer satisfaction and (b) operational consistency and efficiency. And a company’s ability to be top dog in those two arenas over the long term depends on its commitment to constant improvement. The greater a company’s rate of improvement, the stronger will be its future competitive position and, hence, level of profitability. To assist in evaluating a company’s rate of improvement, find out what marketing and operational improvements (if any) the company has instituted within its stores in the last 24 months. Interviews with company management and also franchisees can be helpful here.
5 – Franchisee Happiness. The higher the level of profitability of a particular concept, the higher is a franchisee’s happiness. So, the level of franchisee happiness is a prime indicator of the level of concept profitability. Sure, a franchisee can have a profitable concept and still have gripes. But a franchisee of a less-than-optimally profitable concept carries a continual deep-seated unhappiness and dislike/distrust of the franchisor. How do you determine the level of franchisee happiness? The UFOC provides a complete listing of every franchisee in the system, including name and phone number. Interview as many as feasible of each company that you’re considering. Ask each franchisee this question: “On a scale of one to five, with one being low, could you tell me how happy you are with the profit level of your franchise store?” When done, derive an “average happiness score” for each franchise concept and then compare the contenders.
6 – Company Store Profit and Loss Statements. Most franchisors have company-operated stores in addition to franchise stores. Ask the franchisor to supply you with some actual profit and loss (or income) statements of its company-op stores. To make these correlate to franchise stores you may have to make some adjustments to the statements, such as, for example, add in a deduction for royalty expense which franchisees are required to pay. Make sure that each P&L statement indicates the address of the specific store which it applies to. If a franchisor is reluctant to give you actual P&L statements for company-op stores, that could be a red flag indication that the statements for company-op are not very strong (or don’t show much profit). And if company-op stores don’t show much profit, there’s no reason to assume that franchise stores will either.
7 – Projected Return on Investment Percent. Once you’ve ascertained the projected profit, or income, level of a particular franchise concept (in large part from the info obtained from part 6 above), calculate the concept’s projected return on investment, or ROI. To do that, divide the concept’s annual after-tax income by the amount of money that you would have to invest to open up the franchise. This will give you the concept’s ROI percent. Then compare the ROI percents of the various contenders.