How to choose the right industry before you buy a franchise

By Sarah Stowe | 13 Apr 2018 View comments

Make it easy for yourself: apply some strategy to the research you need to do when investigating your future franchise sector. The more time you spend on understanding market trends and business potential, the more confident you will be in your choice of franchise.

Three critical factors will come into play when you make the decision to choose one sector over another:

  • What is the economic potential for the industry?
  • Will you enjoy working in the sector?
  • Do you have the right skills to be successful?

As part of the process of due diligence, you will be considering many factors, even if you have already have set your sights on a particular industry or even brand. It is not uncommon for franchisees to be weighing up the potentials for a range of businesses that interest them at an early stage of discovering what franchising is all about.

Some potential franchisees are undecided about brands, and are taking a helicopter view of the various sectors to spot potential before they dip down further into details.

Perhaps you are seeking an investment only, and will be looking for someone else to manage and run the business.

Where to get information about your franchise sector

Whichever approach you take, it is crucial to evaluate the status, potential and market challenges of any industry. You may not plan to be in your franchise for more than one term, which could be as little as three years, but you will still need to sell the business and make a good return on your investment.

That means picking a market sector that is on an upward trajectory, even if that is not fast-growth.

An extreme case in point over the past few years has been the entertainment industry which, as consumers have adopted digital streaming channels, has seen the decline and eventual death of the video store. Self-service kiosks are the sole remnants of what was once a small-business concept found in every neighbourhood.

It is hard to sell a business that does not have a future, so be sure to research the marketplace. Many research and consultancy firms issue predictions on market trends, highlighting industries in decline and those expected to grow substantially.

Deloitte, IbisWorld, PwC, the Australian Bureau of Statistics and major banking institutions, for instance, are just some of the organisations that can provide statistics and/or commentary about industries in Australia, population trends that will affect geographical demand, lifestyle habits that influence consumer spending choices, and so on.

IbisWorld in particular publishes reports that include market size and growth potential, whether the market is emerging or mature, competitive analysis such as barriers to entry, and a breakdown of typical costs.

Public company results, the rate at which small businesses open and close, employment levels and trends, access to funding, political change, economic sentiment, technological advances and, of course, global macroeconomic trends all feed into the bigger picture.

While plenty of information is freely available online – Inside Franchise Business reports on industry surveys and trends produced by market researchers across a variety of sectors – if you want to access in-depth analysis, expect to pay.

Industry organisations such as Australian Retailers Association, Fitness Australia or Restaurant & Catering Australia can provide insights into industry trends and challenges, including signalled regulatory changes that may have an impact on the performance or development of businesses in that particular sector.

These give you an overview of what is happening in any one industry. You can also gain an idea from industry associations and publications of issues of concern, and the community at large. Is this an industry where you can have empathy? Will you be engaged in the issues and challenges? Can you identify yourself with other players in the sector?

Seek independent views on the industry

It has never been easier to access commentary, resources and opinion on specific market sectors. Add general online searches to your research process, and speak with small-business owners (they need not be franchisees) to gain their perspectives on the way the industry is progressing.

Once you have researched the trends, demographics, the costs of running the business, the drivers for success, and the state of secondary industries that supply the market (think raw ingredients for a food business, for instance) it’s time to put yourself in the picture.

What is equally relevant is to focus on the skills needed to successfully run a business in a particular sector, and to reflect on whether you want to undertake the core tasks of the businesses within this industry.

At an industry level, there will be clear distinctions between types of small businesses in the market, and between specific brands. However, there are some overlapping fundamentals. For instance, just about every business involves customer interaction and a level of customer service, but some more obviously depend on high levels of energy, a positive personality and the ability to work at a fast pace: think retail, the hairdressing sector and the hospitality industry.

Favourite industries can have specific challenges for franchisees

Food, and fast-food in particular, has been a tremendously popular sector for franchisee investment. Working in a food environment has particular challenges, however: it entails stringent compliance to health and safety standards, depends on consistent product quality and efficiencies, relies on good equipment, requires adherence to workplace law, and is highly competitive… stores need regular refurbishments, and rental is a significant portion of the monthly takings.

That is without taking into account consumer trends and changing tastes. Will coffee continue to be a winner? What will the fast-food landscape look like in five years? How much can the healthy food sector be expected to grow?

On a personal level, will you want to show up to work every day in a seven-day-a-week business? How will you cope with the early trading hours of a bakery? Can you imagine yourself spending a day prepping, cooking, serving and cleaning up before getting on to the admin? If you have always been office-based, will you be able to manage a full day on your feet?

Of course, putting your personal and professional skills to work in an industry that will return you a good profit for your investment is like matchmaking. One element out of alignment can set you up for a tricky future.

The clue is to pay attention to the signals as you work out which market is going to give you the opportunity to meet the goals you are setting yourself – and to enjoy life along the way.