WHAT YOU NEED TO KNOW AND ASK YOUR FRANCHISOR?
A potential client rang me the other day and said he and his wife were looking at going into a mobile franchise relating to the auto industry. He said the franchisor had given him a territory and asked if we could do some work to decide if it made business sense.
Well, while I feel I am reasonably astute in these areas, my first question was,
“What did your franchisor tell you in the disclosure document, and what are the basic assumptions about the market and specifically the brand and business you are becoming part of?”
The answer from the client was that the franchisor had shared very little!
This seems to me to be a common problem, especially with small franchise systems. A potential franchisee sits with a franchisor, who is telling them enough to raise interest while trying to avoid saying anything of substance, in fear of later recriminations (legal), if there is a problem.
From my perspective, if a franchisor has put in some logical research and made assumptions based on concrete data, then the franchisor should explain the reasons for the way the territory is allocated. What you don’t want is the franchisor simply saying, ‘This should work GREAT, but don’t ask me how we came to that conclusion!’
Some franchisors simply haphazardly choose a territory which ‘seems’ fair.
SOME RESEARCH AND ARITHMETIC
As a potential franchisee, you are predominantly interested in your own market and probably not concerned with other capital cities where the franchisor may operate.
Let’s say you are in the automotive aftermarket business. Maybe you are joining a mobile franchise system doing vehicle servicing.
The first question is always, ‘How big is the market?’
Let’s assume you are going into business in an area of Melbourne – so we can visualise the area.
On a national basis, if the franchisor undertakes some research, they can produce a report that incorporates the following:
• The automotive aftermarket sector contributes over $8 billion annually in economic activity and employs 300,000 people in vehicle maintenance and repair, the manufacture and supply of aftermarket equipment and vehicle recycling.*
* Submission to the Commonwealth Consumer Affairs Advisory Committee by the Australian Automotive Aftermarket Association - August 09
• Across 8.73 million households in Australia, this reflects around $970 per household per annum.
• The Australian Bureau of Statistics have information available called the Household Expenditure Survey (HES), which was updated in 2009/10. This gives us an estimate on what $/household has been spent in various areas.
The survey was done using 9,774 households Australia wide, which is around four surveys per postcode. Whilst we would have liked to see a bigger sample, this is an improvement on the 6,957 households used in the 2003/04 survey.
In the example, the HES tells us there is $220 per household spent on vehicle servicing annually in Melbourne and Geelong. If you multiply this by the fact Melbourne and Geelong have around 1,644,000 households, (Spectrum’s 2010 population and household data estimates), you would expect the market to be $361.7 million.
The franchisor should have a business plan which addresses issues like total market size and forecast market share, and includes consideration of the prevalence of the likes of car dealerships, other bricks and mortar servicing locations, and even potential competitors.
The franchisor and their advisors, based on the data they have accumulated, have decided that they feel with their mobile system, they will target to gain four per cent of the market. This works out to be $15 million per annum in the Melbourne and Geelong market.
NOW YOU ARE STARTING TO UNDERSTAND THE MARKET!
Whilst you may dispute the detail, at least you are gathering an understanding of the big picture, so now you need to ask:
1. Are the franchisors assumptions realistic?
2. How many territories should be made and what should a territory comprise of?
THE FRANCHISOR’S ASSUMPTIONS
In your ‘due diligence’ – fancy wording for doing your own investigations to decide whether you proceed or not, you have every right to ask the franchisor to convince you that what they are putting before you is reasonable.
Information such as the above is available and should probably be included in the disclosure document. This disclosure document must be presented to you by the franchisor.
It does surprise me at times how some franchisors come to us for territory planning advice, and when we ask what is in their business plan and what assumptions have been made as far as market size and market share, the franchisor just gives a blank look.
A franchisor should approach the designation of territories in one of three ways:
1. They should have some successful territories which can be measured and replicated. This assures that each territory has been built to meet a requirement.
I call this the ‘cookie cutter’ approach. A franchisor can say that franchisees have been able to successfully operate the system within a specified territory. Normally this may be based on population, number of households or number of businesses in a B2B type application. This is then adjusted in size, if the area (and postcode) is seen to be better or worse than the average in regards to consuming the service you are offering.
2. The franchisor may have an internal view that a franchisee needs to invoice $500,000 per annum to cover his own labour, return on investment, parts that he would expect to use in mobile servicing and other operating costs.
If the Melbourne/Geelong target market is $15 million, then the franchise system should be able to support 30 franchisees when it approaches maturity.
This may be the five to ten year plan, but at least this allows the franchisor to take on some franchises and ask these franchisees to ‘care take’ other areas until the system can support the mature number of franchises.
3. Sometimes a franchisor has been successful in another market and can therefore use the territory numbers and size of territories from elsewhere and transpose that into the new market they are working in.
If they have been operating for some years and have 35 territories in Sydney, Newcastle, Central Coast and Wollongong, this would be equivalent to having 28 territories in Melbourne and Geelong, based purely on population and household numbers.
Whichever way it is put to you by the franchisor, you should expect to see realistic assumptions, facts and data to support their assumptions.
COMMITMENT OF THE FRANCHISOR
Many jobs we receive on territory planning start with the franchisor asking us, ‘How many territories should I have?’
Our initial reply is that we do not write the business plan. This type of work should be considered, urgently, before any territory planning can occur.
The franchisor can be walked through most of the steps above to come out with a logical and realistic position. Once established, it should probably be a board ratified decision, as it is fundamental to the future of the system.
We recently had an inquiry on behalf of an overseas franchise wanting to come to Australia. We were told, based on their English experience, they should have 300 – 360 territories.
The concept was IT based, and when we delved deeper into the logic, it was a wet finger in the air approach based on the number of businesses.
If a franchisor has undertaken reasonable research, they should be able to show you a logically thought out set of information based on realistic assumptions, with mapping to back it up.
ASK FOR ANSWERS
If you are looking at taking on a mobile franchise, or any franchise that requires a territory, ask the franchisor what research they have done, and more important, what assumptions they are making in working out your territory. Ask if this decision has a reasonable chance of sustaining the business.
If the answer is vague or the franchisor tries to avoid the subject it may be time to look at another franchise system.
Select well Grasshopper.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia. He is a certified Management Consultant, and a Fellow of the FCA and IMC.