How to Find Hot Franchises in a Cold Market

To win over buyers in today's increasingly competitive franchise market, it's all about the money.

The past two years have seen many franchisors humbled as their systems got smaller. After growing by more than 40 percent between 2001 and 2008, the number of franchise units dropped by nearly 4 percent between 2008 and 2009, and just barely grew at all in 2010, according to a 2011 report from PricewaterhouseCoopers for the International Franchise Association.

Still, some franchise companies are bucking this trend. They are experiencing rapid growth in spite of the down market and the obvious challenges that exist. What's their secret? They either have powerful brands or a compelling value proposition driving their growth.

Over the last two to three years, companies like Subway, McDonalds and 7-Eleven haven't had any trouble attracting buyers because their brand names are so strong and well known. Being part of a brand with virtually 100 percent top of mind awareness with consumers gives potential buyers confidence and security.

Without a famous brand name to rely on, however, a franchise company desiring rapid growth in today's market must have the numbers on their side -- in a big way. In fact, the money side of the business has become even more important than the product or service the business offers. That's why we see rapid growth in companies as diverse as Vanguard Cleaning Systems or Tutor Doctor learning centers or HOODZ commercial grease cleaning services.

Here are three key factors that lesser known but still rapidly growing franchises have in common -- and buyers are increasingly looking for:

1. Low investment. It's no secret that financing a new business startup has become an almost impossible task. Therefore, buyers in today's market need to find lower investment levels. Where the average franchise startup investment may have been about $250,000 three years ago - with perhaps 70% of that amount financed -- many rapid growth franchises today have total investments of $125,000 or less.
    
2. Rapid Breakeven. Traditionally, a business was viewed as a success if it reached profitability by the second or third year in operation. In today's market, buyers are looking for a much quicker path to profits. They simply don't want to be in the position of having to feed additional cash into a new business to cover operating deficits for any significant length of time. Many of the fastest growing franchises boast a breakeven point within the first year of operation and, in some cases, within the first few months.
    
3. High Margins. Also important in today's market is being able to deliver high profit margins. That way, a business can quickly increase its total profit to a meaningful level once it starts making money. A normal business might put five or ten cents of every sales dollar toward the bottom line after reaching breakeven but today's buyer is looking for businesses with sales margins at least three to five times that level.

If a company scores well on these money issues, they still need to convince potential buyers that they have strong and dependable consumer demand to support their business with plenty of paying customers. Service based franchises often seem to be the best fit in terms of satisfying both the money requirements and the need for reliable demand.

So, how do you find these hot franchises if you're a buyer?

Start digging. Look for evidence of rapid growth and then burrow down to find the story behind that growth. When you find a company that's growing rapidly and has all of the characteristics discussed above, you've got a good target for moving forward and conducting a complete and thorough investigation.

Among other things, get to know the staff at the franchise company, carefully read their disclosure documents, talk to a number of their existing franchisees and make sure that their culture and values match yours.