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Understanding Franchise Growth

Is it always better to join a company with a fast growth rate?

When evaluating any franchise company, it's important to consider the system's rate of growth as it relates to potential risk factors...and your investment. You want to make sure the franchise has the long-term viability associated with vibrant growth, but also that it's not growing too fast to manage the issues associated with this growth.

Growth can be measured in many ways--some of these are far more important than others. The most common and important measurements of growth in a franchise company include:

Number of New Franchisees. This number shows you how many new franchisees are being added to the system each year. Since each new franchisee in a good franchise system represents a lot of work (while they get up the learning curve), make sure this number is reasonable. If there are too few, it may be a sign that the system has a problem preventing it from attracting additional franchisees. If there are too many, it could mean the support staff is overburdened, and support services might suffer.

The most meaningful way to measure this growth rate in most franchise companies is as a percentage of new franchisees to total franchisees. If a system has 10 new franchisees out of a total of 200, they're going to have far more support capacity than a system that has 10 new franchisees out of a total of 20. As a good rule of thumb, a strong but manageable number would be a percentage of new franchisees that represents somewhere between 10 to 35 percent of total franchisees.

Very small or very large franchise systems usually don't fall into this range, for obvious reasons related to their total number of franchisees. A good secondary rule of thumb is that there should be at least one full-time support person for each 15 to 20 (or fewer) new franchisees. This ratio lets you know the support staff won't be overwhelmed, and you'll get the help you need.

These numbers are not readily available in the standard franchise disclosure documents. If you ask the franchisor for this information, you shouldn't have any problem with them supplying the information on new vs. total franchisees and the numbers of operational support persons devoted to new franchisees.

Number of Units. The advantage of these numbers is that they are usually easily discernible in the Uniform Franchise Offering Circular the franchisor provides to you. Again, these are important growth indicators, because they give you information on the vibrancy of the system and the workload of the support people.

The first thing you need to ascertain is the total number of new unit openings in the system, say, in the past year. Then you need to find out how many of these were franchisee first units vs. multiple units being opened by an experienced franchisee. This is important, because multiple units show that something is very right in the system (or the existing franchisees wouldn't be opening more units), and also because these multiple units don't tend to require much support, since the franchisee is experienced. A key percentage is the number of new unit openings per support person, for the same reasons listed in the previous point.

If you find out very few new units are being opened or even that the total number of units is actually decreasing, consider that a red flag. You need to find out why it is dormant, and enough digging usually shows one or more very serious problems that need to be fixed. If you see this pattern, find another franchise.

Franchisor Revenue and Income. This is the easiest measurement upon which to determine a growth rate, but it is also the least meaningful. What you need to see in relation to the financial statements is a franchisor that is strong enough to have long-term viability. Beyond that, what difference does it make how fast their revenue or profit is growing, unless you want to buy stock in the company?

Growth is important and a great indicator of the strength and attractiveness of a franchise business. You need to focus on the key growth rates and how these rates affect the ability of the franchisor to support you properly. With that as your orientation, you'll have a great chance of picking a vibrant franchise with great potential for you.

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.

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