CONVINCE ME ABOUT MY TERRITORY
What is your franchisor doing to ensure your proposed territory is a sound proposition?
Why a franchisor’s assumptions aren’t enough.
Apotential client rang me the other day and said he was looking at going into a franchise relating to the health and fitness industry. He said the franchisor had given him a territory, and could we do some work to decide if it made business sense.
Well, while I feel I am reasonably astute in these areas, my first questions were ‘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 was very little!
This seems to me to be a common problem, especially with small franchise systems, where the potential franchisee sits between a franchisor telling them enough to raise interest, and trying to avoid saying anything of substance in fear of later legal recriminations if there is a problem.
BASIC ASSUMPTIONS
My view is if some logical work and assumptions have been formulated by the franchisor, then there is a reasonable case to give a territory with a realistic explanation, not just ‘This should work well, but don’t ask me how we came to that conclusion’.
DOING THE RESEARCH AND ARITHMETIC
As a potential franchisee, you are predominantly interested in your own market and probably not other capital cities where the franchisor may operate. For this example let us consider the health and fitness business. Maybe we are joining a fitness group of 24/7 gyms, in direct competition to the likes of Anytime Fitness, Jetts or Plus Fitness.
The first question is always – how big is the market? Let us imagine we are going into business in an area of Melbourne – so we can visualise.
If we undertake some research we can find information about the size of the fitness industry. For instance, IBISWorld reports reveal helpful statistics such as market size, the number of businesses, and employment figures.
Gyms and Fitness Centres in Australia industry outlook (2020-2025), IBISWorld
• Market size: $2bn
• Number of businesses: 6,601
• Industry employment: 24,342
The size of the market may even be broken down to state level, and ultimately to specific areas.
The franchisor should have a business plan that addresses issues like total market size and forecast market share, and a good understanding of where the opportunities lie for the business.
In our hypothetical case, the franchisor and its advisors have decided to target five per cent of the market, or a Melbourne and Geelong market of $25 million annually.
UNDERSTANDING THE MARKET
While you may dispute the detail, at least we are gathering an understanding of the big picture, so now we need to understand: 1. Are the franchisor’s assumptions
realistic?
2. How many territories should there be
and what should a territory include?
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.
In my view a franchisor should consider the question of territory numbers in one of three ways:
1. COOKIE CUTTER APPROACH
Have some successful territories that can be measured and replicated, and therefore understand that each territory has been built to meet a requirement; when a franchisor can say that certain successful franchisees have been able to successfully operate the system based in the following territory.
This may be based on population, number of households or number of businesses in a business-to-business model. This is then adjusted in size if the area (and postcode) is seen to be better or worse than the average for the potential to use the service you are offering.
2. PROJECTED REVENUE AND COSTS
The franchisor may have an internal view that a franchisee needs to invoice out or generate revenues of $500,000 p.a. to cover his or her own rent, wages, incidentals, return on investment, and other operating costs.
If the Melbourne/Geelong target market is $25 million, then it should be able to support 50 franchisees as it approaches maturity. This may need to be the five to 10 year plan, but it creates a structure and allows for flexibility with franchisees able to carertake unassigned areas until the franchise system can support the target number of franchises.
SUCCESS IN A DIFFERENT MARKET
Sometimes a franchisor has been successful in another market and therefore we can use the territory numbers and size of territories from elsewhere and transpose that into the market we are working in.
If the franchisor has been operating for some years and has 60 territories in Sydney, Newcastle, Central Coast and Wollongong this would be equivalent to having 49 in Melbourne/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 this view.
COMMITMENT OF THE FRANCHISOR
Often a franchisor seeking help with territory planning asks us how many territories it should have.
Of course we do not write a franchisor’s business plan so the number of territories needs to be considered before any territory planning can occur. We walk them through most of the steps above to come out with a logical and realistic position.
Once a franchisor has undertaken reasonable research, it should be able to show you a logically thought out set of information based on realistic assumptions, with mapping to back it up.
IT’S YOUR DECISION
If you are looking at taking on a franchise, ask the franchisor what research has been done, and more importantly, what assumptions have been made in working out your territory and whether it has a reasonable chance of sustaining the business.
If the answer is vague, may I suggest either referring the franchisor to a company such as ours, or consider looking at another franchise system. n
Peter Buckingham is the managing director of geodemographic and sales prediction modelling firm Spectrum Analysis Australia. He is a Certified Franchise Executive, and also a past director and Vic / Tas president of the Institute of Management Consultants.