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Should I Buy a Franchise in a Crowded Market?

I have been researching a franchise that has a lot of competition in the area. I love the concept and think it would do great in the market, but how worried should I be about the surrounding competition in the area? I'm concerned that it could be a recipe for disaster.
Jeff Elgin answered February 21, 2011
URL: http://www.entrepreneur.com/answer/222254
Just because there is a lot of competition in an area doesn't necessarily mean that it is a bad business to go into. It could mean that there is huge demand for the product or service the business provides and the timing could be great.

The secret to being careful and avoiding any sort of disaster is to determine the answer to some questions:

1. Why is there so much competition? Is it because there is huge demand and they are all just filling the demand? If that's the case, then you need to figure out what your competitive advantage will be when the market does become stable and it is harder to get customers. If you think you have a strong competitive advantage with the franchise you're looking at, then the opportunity could be fine.

2. How are the existing competitors doing? I understand that there are a lot of them, but are they successful? Sometimes in situations like this you'll see that all of them are "minting money" and growing like crazy --that's good. Other times, you find that there are too many businesses and too few customers and then it is truly a disaster if you enter the business.  Take your time and figure out which situation exists in your market.

When any business attracts too many providers for too few customers, you have a "shakeout" where the marketplace makes everyone suffer through price wars and other distractions until the weaker businesses fail, and supply and demand come back into balance. Whatever happens, you want to make sure you don't get into that sort of situation because everyone loses while the shakeout is taking place.

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.