Franchise Buying Guide

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Step One
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Conduct An Industry Analysis
Every franchise operates in an industry that has a direct impact on the way the franchise conducts its business and on its potential for success. McDonald's operates in the fast-food industry; Jiffy Lube operates in the automobile services industry. Some franchises operate in more than one industry, like quick-print franchises, which operate in the printing industry and the marketing industry. Industries are constantly in flux. New consumers and competitors enter the marketplace; technologies are replaced; and new methods of reaching customers are discovered.

Before you decide to purchase a franchise, you need to understand its industry's big picture. By conducting an industry analysis, you'll learn how rapidly an industry is growing and how long it's expected to thrive. You'll discover its strengths and weaknesses, and be able to confirm whether you're about to join an industry that's robust or one whose prospects are dwindling.

You can gather primary field data on the industry by talking to the following people:

  • Customers can provide clues to satisfaction with the industry and the product or service supplied. If you get lots of complaints, listen to them.
  • Suppliers and distributors are in an excellent position to comment on the financial strength and market practices of major firms in the industry and to assess the demand for an industry's products and services.
  • Employees of key firms in the industry will be able to provide insider information about your potential competitors.
  • Direct and indirect competitors can tell you about the intensity of the competition for customers. If three major competitors are sharing a market, is there room for a fourth? Are they acquiring new customers or merely fighting over existing customers? Visit trade shows to quickly identify major players and assess the strength of their market strategies.
  • Current franchisees can also share their perspectives on where the industry is headed.
  • Industry experts who report on particular industries for the media can provide global information and identify major players and issues that may affect a franchise.
  • Attorneys, accountants and other professional service providers who work within the industry are also knowledgeable sources.

Acquaint yourself with basic industry knowledge before you meet with key industry figures. The people you want to interview are busy and may not have the time to bring you up to speed. Demonstrate your knowledge of the industry, and show a genuine interest in it. Don't forget to offer the person a summary of your analysis. Follow these guidelines, and you'll begin to gather a great deal of information as one interviewee refers you to another, and so on.

Secondary sources are also a vital part of an industry analysis. Use them to gather statistics on sales, products and prospects as well as information on key figures in the industry. Don't let the magnitude of available facts overwhelm you. Your goal isn't to write a formal report on the industry but to learn enough to confirm that it's the right place for you to be.

In the end, your industry analysis should tell you the following:

  • Current size of the industry
  • Industry growth potential
  • Geographic concentration
  • Industry trends
  • Seasonality
  • Profit potential
  • Sales patterns
  • Typical gross margins on products
  • Major players and their product lines and market strategies
  • Channels through which products reach end users
  • Typical buyer behavior
  • Technology
  • Major suppliers
  • Economic environment
  • Regulatory environment
  • Sociopolitical environment

Conducting an industry analysis is an important part of the due diligence that goes into a sound franchising purchase decision. Skip it, and the consequences may be dire. You could find yourself owning equipment that will be obsolete in a matter of months-or, worse, find yourself locked into a 20-year contract in an industry with three years to live. Before you sign any franchise contract, you need to evaluate the industry and make sure your franchisor is aware of, and planning for, industry changes. After all, the only sure thing in business is change.

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