When evaluating any franchise company, it's important to
consider the system's rate of growth as it relates to potential
risk factors...and your investment. You want to make sure the
franchise has the long-term viability associated with vibrant
growth, but also that it's not growing too fast to manage the
issues associated with this growth.
Growth can be measured in many ways--some of these are far more
important than others. The most common and important measurements
of growth in a franchise company include:
Number of New Franchisees. This number shows you how many
new franchisees are being added to the system each year. Since each
new franchisee in a good franchise system represents a lot of work
(while they get up the learning curve), make sure this number is
reasonable. If there are too few, it may be a sign that the system
has a problem preventing it from attracting additional franchisees.
If there are too many, it could mean the support staff is
overburdened, and support services might suffer.
Content Continues Below
The most meaningful way to measure this growth rate in most
franchise companies is as a percentage of new franchisees to total
franchisees. If a system has 10 new franchisees out of a total of
200, they're going to have far more support capacity than a
system that has 10 new franchisees out of a total of 20. As a good
rule of thumb, a strong but manageable number would be a percentage
of new franchisees that represents somewhere between 10 to 35
percent of total franchisees.
Very small or very large franchise systems usually don't
fall into this range, for obvious reasons related to their total
number of franchisees. A good secondary rule of thumb is that there
should be at least one full-time support person for each 15 to 20
(or fewer) new franchisees. This ratio lets you know the support
staff won't be overwhelmed, and you'll get the help you
need.
These numbers are not readily available in the standard
franchise disclosure documents. If you ask the franchisor for this
information, you shouldn't have any problem with them supplying
the information on new vs. total franchisees and the numbers of
operational support persons devoted to new franchisees.
Number of Units. The advantage of these numbers is that
they are usually easily discernible in the Uniform Franchise
Offering Circular the franchisor provides to you. Again, these are
important growth indicators, because they give you information on
the vibrancy of the system and the workload of the support
people.
The first thing you need to ascertain is the total number of new
unit openings in the system, say, in the past year. Then you need
to find out how many of these were franchisee first units vs.
multiple units being opened by an experienced franchisee. This is
important, because multiple units show that something is very right
in the system (or the existing franchisees wouldn't be opening
more units), and also because these multiple units don't tend
to require much support, since the franchisee is experienced. A key
percentage is the number of new unit openings per support person,
for the same reasons listed in the previous point.
If you find out very few new units are being opened or even that
the total number of units is actually decreasing, consider that a
red flag. You need to find out why it is dormant, and enough
digging usually shows one or more very serious problems that need
to be fixed. If you see this pattern, find another franchise.
Franchisor Revenue and Income. This is the easiest
measurement upon which to determine a growth rate, but it is also
the least meaningful. What you need to see in relation to the
financial statements is a franchisor that is strong enough to have
long-term viability. Beyond that, what difference does it make how
fast their revenue or profit is growing, unless you want to buy
stock in the company?
Growth is important and a great indicator of the strength and
attractiveness of a franchise business. You need to focus on the
key growth rates and how these rates affect the ability of the
franchisor to support you properly. With that as your orientation,
you'll have a great chance of picking a vibrant franchise with
great potential for you.
Jeff Elgin is the "Buying a Franchise" coach at
Entrepreneur.com and has almost 20 years of
experience in franchising, both as a franchisee and a senior
franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best
matches their needs.