Researching the market for buying a franchise

Though franchising is considerable less risky than starting a business from scratch, as with any new business an element of risk still exists. With this in mind you need to ensure that you thoroughly research the franchise you are interested in; there is no room for getting it wrong!

You cannot get carried away with the idea of running your own franchise without finding out whether that business is viable. Researching, and knowing your potential market inside out, is essential.

As it is the franchisor that makes any decision regarding changes or developments to the product or service provided, you as the franchisee must be 100% certain that the franchise you are buying has potential, and the future of the market is not threatened.

All successful businesses need to have a strong understanding of their potential and existing customers, and the marketplace they will work in. This will help you to target potential opportunities, market your product/services effectively, and identify and understand your competitors.

The questions you need to ask

You should undertake your own research of the market, covering all the following points.

• Who is your target market? i.e. who you would be aiming to sell your product/service to? Is it a specific age group or sex, income, etc. E.g. if looking to start a cleaning franchise you need to look at number of households in the area, what the average income is, number of businesses, size/structure of families etc, i.e. is there enough business out there for you to justify starting up a franchise in that area.
• What are the main and unique selling points of your product or service? i.e. what distinguishes you from your competitors e.g. cost, quality of service, technology advancement, brand name, reputation etc. Being in a franchise with a recognisable brand name, support structure in place and network of franchisees, has many advantages over a local sole trader.
• Who are your direct and indirect competitors? Direct competitors are those who offer the same or a similar service to you, and your indirect competitors are those who offer an alternative to your product/service which may not necessarily be in the same industry.

E.g. if you are selling DVDs your direct competitors are all those other outlets selling DVDs; online, in supermarkets, etc. Your indirect competitors could be the cinema, video game outlets, book shops i.e those offering a service/product that your target market could buy/use as an alternative to yours.

You need to therefore look outside the box and take into consideration all those who could have an impact on your business.

Other examples are:

Coca Cola - direct competitors include Pepsi, own brand coke; indirect competitors include other soft drinks, water, milk, smoothies etc.

McDonalds – direct competitors include Burger King, Wimpy; indirect includes Pizza Hut, Perfect Pizza, bar food, cafes, and restaurants in retail outlets/stores.

• How profitable are other franchisees? Look at franchisees in a similar demographic location to your potential territory. There is no benefit in looking at a successful franchisee in London if you are in a small village in the Highlands!
• Is the franchise suited to your local area? You need to make sure that your product/service will meet the needs of those in your area and/or if there is a requirement for it. No point in starting an umbrella distribution company in Spain, though it could have great potential in Glasgow or Manchester! City centres may not have the same potential for a number of franchise opportunities as the suburbs do, and vice versa. Would there be a great demand for e.g. pet walking, landscaping in a city centre, and would ink suppliers and residential cleaning companies meet the needs of those in a small village.

Undertake a SWOT analysis i.e. identify the strengths, weaknesses, opportunities and threats of your product/service. See Below for a full explanation of it.

Undertaking the SWOT Analysis

Undertaking a SWOT analysis allows you to look at the potential franchise business from the point of view of your target market and your competitors. It allows you to uncover opportunities that you could take advantage off and weaknesses of the business you would need to manage.

You should remember:

How can we Use each Strength?

How can we Stop each Weakness?

How can we Exploit each Opportunity?

How can we Defend against each Threat?

Strengths and weaknesses are internal factors and relate to your actual product/service.

Strengths look at the advantages your company has over others. This can include having a good sales team, previous experience in the required industry, a recognised brand name, a good support team, your product/service being more cost effective than others on the market, having the latest technology, a good corporate website/ high search engine rankings, strong customer service skills etc.

Weaknesses identify those areas in which you could improve on. This can include a lack of a specific skill within your team, e.g. no marketing experience, the cost of product/service being higher than your competitors, no online presence, lack of marketing presence etc.

Opportunities and threats relate to those external factors and trends in the market place that could affect your business. Most opportunities and threats relate to changes in technology, legislation, economy and demographics.

Opportunities are those areas that you should look to exploit to the benefit of your business. This can include new technology that improves the day-to-day running of your business where your competitors are slow to adapt to it, a change in legislation that opens your business to new markets, a shift in age groups e.g. people living longer and an increase in youth market, changes in social patterns etc.

Threats include obstacles your business could face that you will need to overcome or adapt to in order to survive. This can include advancements in technology that could make your product obsolete or reduce the lifecycle of it e.g. dvds vs videos; walkmans vs mp3 players. New legislations e.g. the “no smoking” ban which was initially seen as a threat to pubs and bars etc. Changes in the economy can also create cash flow problems and tighten purse strings. This could affect those b2b companies relying on the success of other businesses e.g. those in the media will notice less spending on advertising when the economy has went into a slump and estate agents may notice less people buying their homes. It all has a knock on effect.

By looking at the strengths, weaknesses, opportunities and threats of the franchise you are interested in, as well as those of your potential competitors, you can start to identify the potential of the franchise as a business opportunity.