Growing Strong

Is it better to join a company with a fast growth rate? These three things will tell you if a franchise is growing just right.

learn more about Jeff Elgin

By Jeff Elgin • May 5, 2006 Originally published Jan 1, 2005

Opinions expressed by Entrepreneur contributors are their own.

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

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

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

The most meaningful way to measure this growth rate in mostfranchise companies is as a percentage of new franchisees to totalfranchisees. If a system has 10 new franchisees out of a total of200, they're going to have far more support capacity than asystem that has 10 new franchisees out of a total of 20. As a goodrule of thumb, a strong but manageable number would be a percentageof new franchisees that represents somewhere between 10 to 35percent of total franchisees.

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

These numbers are not readily available in the standardfranchise disclosure documents. If you ask the franchisor for thisinformation, you shouldn't have any problem with them supplyingthe information on new vs. total franchisees and the numbers ofoperational support persons devoted to new franchisees.

Number of Units. The advantage of these numbers is thatthey are usually easily discernible in the Uniform FranchiseOffering Circular the franchisor provides to you. Again, these areimportant growth indicators, because they give you information onthe vibrancy of the system and the workload of the supportpeople.

The first thing you need to ascertain is the total number of newunit openings in the system, say, in the past year. Then you needto find out how many of these were franchisee first units vs.multiple units being opened by an experienced franchisee. This isimportant, because multiple units show that something is very rightin the system (or the existing franchisees wouldn't be openingmore units), and also because these multiple units don't tendto require much support, since the franchisee is experienced. A keypercentage 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 thatthe total number of units is actually decreasing, consider that ared flag. You need to find out why it is dormant, and enoughdigging usually shows one or more very serious problems that needto be fixed. If you see this pattern, find another franchise.

Franchisor Revenue and Income. This is the easiestmeasurement upon which to determine a growth rate, but it is alsothe least meaningful. What you need to see in relation to thefinancial statements is a franchisor that is strong enough to havelong-term viability. Beyond that, what difference does it make howfast their revenue or profit is growing, unless you want to buystock in the company?

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

Jeff Elgin

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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