Why Conducting a Threshold Analysis is Crucial
As leaders in franchising, we at MSA Worldwide often speak publicly about how the franchising business model can help create more robust, successful, and productive businesses by leveraging a brand’s efficiencies and experience. This is unequivocally true…for franchisor brands whose businesses are structured properly for franchising.
- Not every brand will succeed by franchising. Every year, we see far more companies start and stop offering franchises, than continue on to become successful sustainable franchise systems.
- Success as a franchisor depends chiefly on the business model, but also on timing, capabilities, personality, culture, industry and demographic trends, and a number of other factors that go into considering whether a company should franchise their business.
We talk to a lot of business owners who want to start a franchise system. For some, even during our first phone call we can tell that they are not good candidates for franchising. For others, we may help them to initially use an alternative method for growth, while working to help them make the changes necessary so that they can consider franchising later on. A Threshold Analysis provides the crucial initial evaluation that is often the difference between a franchise system that has legs, and one that fails at launch.
Shortcuts in Franchising are not Sustainable
Developing a proper franchise system takes time, and requires a significant investment to develop the proper strategy, offering, support requirements, and legal requirements. Sustainability is the essential goal in developing a franchise offering.
Companies that try to shortcut the process by using stock or template legal documents generally do not fare well. In those situations, the biggest losers are almost always the franchisees who agree to invest in the system, only to soon realize that either the business model is not suited for franchising at all, or that the support structures they were told they could leverage for success are deeply insufficient and underdeveloped.
Franchisees should not be Guinea Pigs
While there is no legal requirement to do so, the first step in developing a successful franchise system is to determine if franchising is the right growth path for your company to take. To do that requires a Threshold Analysis. Be wary of any company that claims you can franchise your business without conducting a proper Threshold Analysis.
One of MSA’s major practice areas is working with young franchisors who unfortunately realized that the franchise program they created quickly and cheaply now needs significant work to become a truly consistent, sustainable, and replicable franchise system. Each one of those franchisors wishes they took the time to do it the right way first.
What’s In a Threshold Analysis
So what do we look at in evaluating whether franchising is an appropriate method of growth? There are many buckets of evaluation that need to take place, varying by industry. Broadly, we begin our Threshold Analysis evaluation by looking at some of the following:
- Economics of the Existing Business: Will it be able to provide the necessary return on investment for the targeted franchisee? Is there enough margin to allow for paying a royalty, and ad fee, and other franchise-related costs while still taking enough money home for the franchisee?
- The Profile of Potential Franchisees: What classes of franchisee are best suited to the system? How should each class be recruited and supported? What is the availability of each class of franchisees?
- Legal, Licensing, or Regulatory Barriers: Do these impact who can be a franchisee? How does that affect the unit economics? How does that affect recruitment?
- Consumer Demand: Is the product or service a fad? A regional trend? Are we innovators or followers? Does it matter?
- Systemization: Are the business model, operations, and support structures efficient and trainable? Have we leveraged technology?
- Management Capabilities: What is the franchisor management’s culture and personality, and does it fit well with franchising? What are management’s long and short term goals?
- Available Capital: Creating a franchise system is not an inexpensive venture, and running a franchise system is not “passive income.” Emerging franchisors need available capital to design and develop the franchise offering and support requirements, as well as to recruit and support franchisees until the system is self-sustainable.
Answering these initial questions means taking a deep dive into your own business. The unit economics of your existing business need to make sense both for potential franchisees in each class, as well as for you the franchisor, both short term and long term. Additionally, looking honestly into your existing management structure, its capabilities, and determining what gaps exist, is a crucial piece of evaluation when determining whether and how to franchise.
Copycat Franchise Systems don’t do well
Understanding the competitive landscape is crucial. However – simply copying what your competition does is the fastest way to create a failed franchise system. It’s important to analyze and take note of what others both in your industry and your investment range are doing, but remember: your brand is unique. Whether it’s your operations, your culture, your goals, or otherwise, your brand is not fungible with other franchise offerings. Understanding what those differences are is often the difference between success and failure.
Building for Consistent, Sustainable Replication
Have franchise systems who haven’t done this type of analysis succeeded? Of course, but process matters. An established process creates a system that can be easily replicated, adapted, and leveraged effectively over the entire life of the brand. Franchising is about the consistent and sustainable replication of a business model.
Success in franchising is not only about the success of your franchisor business, but also about the continued success of the franchisees who believed in you and invested in your business model. They deserve to be part of a franchise system that is built to last.
If you have any questions about a Threshold Analysis, just send them through our contact form, and we’ll get back to you promptly.
By Andrew Seid, Senior Consultant, MSA Worldwide
MSA Worldwide’s franchise consultants are the leading tactical advisory group in franchising. Learn more here.