Brand or Bluff?

You’ve almost sent yourself crazy asking questions about each and every franchise opportunity that you think might be suitable for you and in all sorts of categories. And you’ve finally drilled it down to at least a business category. You know you want to get into the category of retail coffee, but aren’t sure if you should choose a Coffee Club over a Gloria Jean’s Coffees, or a Hudsons Coffee.

You’d think, from here, it should be easy. After all, you now have clarity as to what category of business you’re going to get into. Now it’s just the task of determining what business within that category you choose, right? Well, not quite.

So how can you make it easy? It’s really the same story no matter what business category you’ve chosen. The key to the process is the series of questions you ask from here on in.

It’s at this point a lot of potential franchisees start to fall in love with a concept, a brand, or the romance of working in a particular business because they ‘like it’. It’s the old Gillette story – ‘I loved the product so much I bought the company’. A romantic thought for sure, but reality says that this is not the right strategy when purchasing a franchise business, or any business for that matter.

The first step you need to take is to separate the emotion of the purchase from the business decision. In other words, never fall in love with an asset. It’s ok to love what you do for a living, but be clear that your business – that thing that provides you with a living – is an asset, and there is always a time to buy a business and a time to sell a business. For that reason, the decision to choose one business system in a category over another boils down to a series of business decisions. And the best way to make those decisions is to build a checklist to follow.

Following are the key points you should include in your checklist.

Right on target

It’s true, consumers all over the world buy products and services because of their relationship with a brand, and it’s this relationship that gives the brand ‘value’.

Strong brands have the ability to sway a consumer to purchase, give them comfort in that purchase, and remind them of the perceived quality of that purchase. So, of course, brand value in any business is important, and therefore important in your decision to purchase a business. But when assessing brand value, be clear you are doing this from the ‘third party’ perspective of the business’s target market – not just from your own brand preference.

Of course, that might sound a little strange as you say to yourself, ‘I like this brand so it must be good’. But ask yourself: are you the target market for this business you are about to purchase? You might choose to own a business that sells to a particular target market, but within that market, can you be sure that your opinion of the brand is relevant if you are not the target to which the business is selling? If you aren’t, then you’ve already compromised your brand value assessment.

It’s easy to believe that the brand value is strong because you like it. It’s also easy to believe it because the franchisor repeatedly tells you that. They will say: ‘We have great brand recognition in the market and it’s building everyday’. At the end of the day, the only real way to evaluate brand value is feedback from the market you are selling to. Target market research is the only true benchmark of brand value.

Of course, in order to create brand value the brand must have a solid advertising and marketing program in place to assist in its development. This is not to say that the business has to be on television every night of the week or that it needs a billboard on every second corner, but it does need to have some structure to the development of its brand in the market.

Do some research to find out if the business has a structured and planned advertising and marketing campaign in place. If so, is this campaign present over a range of marketing concepts? History tells us that the businesses that build the strongest brand value do so through both new and existing customers. In most instances, this is done through the integration of their advertising and marketing campaigns on a national, regional, local and consumer relationship level. Look to understand how your prospective franchisors are dealing with these elements and ask how they truly intend to build brand value through the use of this strategy.

The second trap you can fall into is to believe that brand value is the only thing on which you should be evaluating businesses. Sure it’s important, but there are many other business performance indicators that need to be addressed for you to truly evaluate which business you should run with within your chosen category.

Let’s take a look at a few.

Sustainability or shooting star?

Categories in business will always remain relatively strong, but the positioning of some of the players within those categories sometimes leaves a lot to be desired. There are some key issues to consider when assessing the sustainability of the business you are looking to invest in within your chosen franchise category.

These include:

• How long has the business been running? Can the franchisor support the claims they make – through experience rather than intuition – of how they see the market?

• Does the business really understand its target market?

• Is the business going to be relative to that target market moving forward, or is it going to be seen as a fad to the market?

• Do you believe the principals or franchisors of the business are truly in touch with the target market? Do they display this to you with real, independent, professional market research as opposed to their ‘gut feel’ of the market? In other words, can they show you the facts, Jack?

• Do the franchisors have a clear understanding of the category and how to address market and product changes within that category moving forward? Have they demonstrated to you that they are not only prepared to change, but have a plan to change to keep ahead of the competition?

• Does the business have a Unique Selling Proposition (USP) – a unique product or service, or a unique market advantage? Does it have something that not only sets it apart from the competitors it has today, but also sets it apart from its competitors in the future? It’s important to note that if you don’t see a competitive market proposition or advantage in the future you at least need to know that the franchisors have the ability to want to look into the future and think laterally about the category and how they apply their business, your business, to that category.

• Is the franchisor financially secure? Any rising star in business always has its ups and downs, as most fast growth businesses suffer the age-old problem of a lack of cash. So do you really believe that the business has the financial backing to support the system it provides and the growth it promises? Don’t be afraid to ask how the franchisor intends to fund the growth or the development they speak of in the businesses.

• Does the franchisor have the human resources to deliver the things they speak of? It’s comforting to know that they have the cash to support growth and development, but it’s also good to know that they are actually going to spend that cash in the right places.

• Have you spoken to the existing franchisees? Under the Franchising Code of Conduct, your potential franchisors must give you a disclosure document that includes a list of the existing franchisees to offer you the ability to call them and ask about the system. These individuals are a great reference for you and offer an opportunity to obtain a first hand view of the business, and to understand their view for the future based on their own market research in their territories.

All of these things are important in helping you determine if your chosen business has long-term sustainability, and can give you the longer-term return you seek. Remember – you’re about to enter into a three to five, or maybe even a ten year term with this business, and you don’t want to find yourself at half-time without a game plan for the second half.

I like you…

A very important element in determining which business to run with in a chosen category is your relationship with the franchisor. It’s a fact that a greater percentage of franchisor/franchisee disputes come from personality clashes and poor communication.

Be clear

This business relationship you are about to enter into is a marriage and, to spend this much time in a marriage, you need to have a great relationship built on open and honest communication.

While this seems to go against the earlier rule of not showing emotion in relation to the purchase of the business, or the ownership of an asset, it is important for you to know that you can get on with the people whom you are about to get married to – because, if you can’t, then the value of the relationship already has very low equity.

Time is on my side

Take the opportunity to spend some time with the potential franchisor in each of the businesses you are evaluating. It’s a bit like dating – the more time you spend together, the more you will learn about each other and gain an understanding of each others needs, personality and values.

Get me out of here!

So, now that you’ve worked out that you are all good to get married, how are you are going to get divorced? Well, maybe not divorced, but at least how are you going to separate?

As part of your entry evaluation to your new business, you need to take into consideration how you are going to exit the business. Will the business you are purchasing offer you a way out when you are done, and provide a solid return on your original capital investment? Your exit evaluation is as important as your entry evaluation as it’s one thing to buy an asset and another to be able to sell it for a profit when you are looking to exit.

Take a look at the recent store sales in the business. Again, the franchisor disclosure document will have these listed. Seek out the circumstances of the sale and try and establish if these sales took place profitably.

In addition, look to set a sunset date as to when you’re going to exit the business. This may seem difficult at the outset, but if you are mentally prepared for a term in business, then you have a start, middle and finish to your journey. This way you have a better chance of avoiding business ‘burn out’. If you don’t have a place in the future to work towards, then every day you are working is just another day torn out of the calendar, with no purpose or goal.

Now, you might say that there is no way for you to know when that finish might come. After all, you haven’t even opened the doors yet, or served a customer. So try this: set a business plan that identifies what your end game is, and when you get there, pause and review your position. Work out if you are ready to go or if you’d like to set another end date a little further into the future to again offer you a goal and a vision.

Opportunity – gained or lost?

Now that you have answered all of the other questions, and assessed the business using some of the simple performance indicators, it’s time to do your own homework. Work up your own cash flow projections, profitability estimates and forecasts, and slide this all into a structured business plan. Do this for each of the businesses you have shortlisted in the category you have chosen.

Even if your potential franchisor does not ask you for a business plan, do it anyway as this will help pull all of the above pieces of the puzzle together, and give you clarity over which of the businesses are the best opportunity for you. Good luck! l

This article was written by Troy Hazard, who has more than 20 years experience in advertising and marketing. Troy is the Managing Director of the edge Corporate Strategies. You can contact Troy on 1300 726 123 or visit: www.theedgecs.com

The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.