Threshold Analysis Part Three: Available Franchisees

By Michael Seid, Managing Director, MSA Worldwide

What types of franchisees should you be targeting?

In Part Two of this series, we addressed how to determine franchisability criteria for your Threshold Analysis, and covered criteria for the underlying business and its systematization. Here in Part Three, we’ll cover the different classes of franchisees and how to determine which class or classes you should be focusing on as you conduct your analysis.

You will need to have a system that is attractive to potential franchisees who are best suited to independently operate your branded locations.

Many potential franchisors still think of franchisees as those who own and operate a single location and some who own more than one. The trend over the past twenty years has been moving to franchisees that own and operate more than one location and often invest in one or more brands. Modern franchising is a bit more complex, which creates opportunities for franchisors in targeting and recruiting the appropriate franchisees for their system.

Potential franchisors will also consider third-party sales and support relationships, including area representatives and master franchisees, although the former is used by a limited number of franchisors and the latter is generally better employed in international markets. For domestic expansion, direct franchising is generally considered the method best suited for franchise expansion.

Sophisticated franchise systems have come to understand that different classes of franchisees have differing reasons for becoming franchisees.

This gives the franchisor the ability to develop their franchise offering, support services, royalty and other fees, marketing materials, and recruitment strategy to the classes of franchisees they want to recruit.

The basic classes of franchisees include:

Class of Franchisee

Primary Reasons for Becoming a Franchisee

Single Unit

Mainly looking for job replacement

Multi-Unit – Strategic

To leverage their core competencies and back-of-house resources from other businesses they own (franchised or non-franchised)

Multi-Unit – Investor

Alternative to other investments – may include third party management agreements

Conversion

Brand, supply chain benefits

In developing your recruitment strategy, it is beneficial to consider each class of franchisee and profile why each class might be interested in your franchise system. In addition to the above basic attributes, each class of franchisee will raise capital/debt differently; have different operating costs; measure their success differently; and, may provide dissimilar benefits and risks for the franchise system.

For the reasons above, it is essential during the Threshold Analysis that potential franchisors begin to define the classes of franchisees best suit their franchise system. Making that determination during the Threshold Analysis will allow for an analysis of whether there will be a sufficient number of candidates available, in the classes determined important by the franchisor, who will not only be interested in the franchise opportunity but also able and willing to make the investment. Many of the key analytics of the Threshold Analysis rest on having a sufficient number of franchisees available in the classes required.

As part of this review you should determine:

  • The classes of franchisees best suited for your system;
  • The skill sets, background, management and back-of-house organization each class of franchisee will require;
  • The operational, financial and other attributes of the offering that should be modified by class to meet the needs of the franchisees;
  • The methods and costs of acquiring the franchisees (advertising creative, marketing, internal sales, external sales by brokers, area representatives), etc.
  • Whether the expected offering will be marketable against the competitor for the targeted franchisee;
  • Whether any geographic limitations will impact your growth objectives; and,
  • Whether an adequate pool of franchisees, in the defined classes, exists.

You can’t wait until you begin offering franchises to have answers to basic questions about your system’s marketability and whether the franchisees you wish to target will likely be available to you. One of the reasons many new franchisors experience little if any growth in their systems is that the pool of necessary candidates was never adequate for their purpose, and ultimately they began to sell franchises to anyone, regardless of whether they fit into system’s growth and support strategy.
In the Threshold Analysis Part Four, we’ll cover how to determine the support system and fees needed to develop a sound system for your franchising concept, as they relate to a threshold analysis.

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