BY MARC KIEKENAPP | January 4, 2013
Understanding the “Lifecycle” of the franchise system can help you make a better decision on what may be the right franchise for you. Here are a few hints on what to look for during your research and to hopefully help you understand what is best suited for your needs
Like people, franchised business systems have a lifecycle.
- Embryonic
- Entrepreneurial
- Fast Growth
- Maturation
Each stage of development has different characteristics, and a potential franchise investor should understand the characteristics of each stage. Consider the level of opportunity, degree of risk, equity potential, work requirements, level of home office support, brand awareness, marketing activities, etc.
STAGE 1: THE EMBRYONIC STAGE
At this stage, a person, group, or company develops an idea for a business that they believe fills a need in the marketplace…a market niche.
Typically the parent company (the franchisor) launches one or more operating business units to test the new business concept. Once they “work out the kinks”, and continue to believe they can build a franchise system around their proven business unit, they then offer the business to the public under a franchising arrangement.
Before investing in a franchise that is in its “Embryonic Stage”, one needs to know yourself and what you are expecting from a franchisor.
If you are reasonably adventuresome, then consider this a great option. On the other hand, if you have a low tolerance for risk, prefer to dabble in the KNOWN versus the UNKNOWN. You may want to consider a franchise opportunity in a more mature stage of development.
STAGE 2: THE ENTREPRENEURIAL STAGE
Typically, franchises in this development stage, have their new franchisee training and support programs in place and they are somewhat refined. The franchisor can guide their owners on how to market and manage their franchise, the home office staff has grown, vendor relations are improved, and there are 30-100 franchises in place with 2-4 years of experience building their respective businesses.
It is much easier to study a franchised business that is in its “entrepreneurial phase” because there are more owners with whom to speak and the home office generally has more data to use to describe their business. There are still “growing pains” at this developmental stage, and they are usually easier to resolve. It is important that the franchisor has experienced and operated units similar to the franchise offering.
STAGE 3: THE “FAST GROWTH” STAGE
In general, during this phase, the home office knows what to do, how and when to do it, how to fix problems quickly, and overall there is little question about the direction and operation of the business.
The key factor to watch for in a company at this stage of growth is the franchise support team. You want to make sure that the “support infrastructure” of the company is maintaining its ability to provide the needed start-up and on-going support required to promote success among the new owners.
This phase is best for investors/entrepreneurs who look for less risk and more certainty. This stage has a high potential for expansion and multi-unit ownership and the best territories are still available.
STAGE 4: THE MATURATION PHASE
Companies in their final stage of development have it all, e.g.,
- Well-established brand name (typically a “household word”),
- Franchisees around the country (or the world)
- “Locked up” vendor relationships…and others waiting to “get in”.
- A very knowledgeable home office staff
- An effective marketing program
Without question, all of the above characteristics apply to the major, top-ranked franchise companies in the U.S.
What more could a franchise candidate ask for? Right? Well, maybe. It all depends on what the franchise candidate is seeking in a franchised business.
One negative is that locations are harder and harder to find for these franchised businesses and the franchisee may have to relocate.
If you are very risk-aversive and like certainty, then perhaps you should explore owning a franchise that is in its Stage 4 of development. This also offers an opportunity to purchase an existing franchise operation instead of a start up location that can give you immediate cash flow.
Now here comes the hard part. You’ll need to do some self-reflection on what YOU really want and what would make you the most comfortable in the franchise opportunity you choose.
