Franchise Profitability

Just because you have purchased a franchise does not guarantee you will make money. There is always the possibility of a franchise failing if you fail to follow the franchise system or you select the wrong location.

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Daniel Cloete is the National Franchising Manager for Westpac. As a specialist franchise bank manager, he has had discussions with a large number would-be franchisees and explored many franchise opportunities on behalf of clients. Daniel has compiled a list of Hallmarks of a ‘Good’ Franchise. He believes a successful and profitable franchise should have the following characteristics:

• good management information systems and benchmark information on the performance of existing franchisees
• a proven product or service
• a strong brand or accepted company name
• a tried, tested and documented way of doing business
• ongoing development of the product or concept, which is very important in mature systems to stay competitive
• initial and ongoing training and support
• increased purchasing power: the franchise system can negotiate better pricing from all suppliers, reflecting the volume of the total system
• co-ordinated marketing and advertising

The reasons why one franchise is more profitable than another often comes down to choice of location. It may be best to take up a franchise opportunity in the early stages of the roll-out of the franchise when the best locations are still available.

Later franchise purchasers may have a poorer choice of location and be handicapped from the start. They may have higher costs like rent or greater competition than the more profitable franchisee. The ability of the franchisee to control costs and motivate staff can be crucial. Franchisees inexperienced in management will struggle to match the advantage of someone with experience in staff training, cost control, sales & marketing, advertising & promotion and stock control. Lack of working capital is another common problem, especially if the franchisee is unable to finance growth of the business.

Daniel Cloete firmly believes that no matter how good the franchise system, different people will make each franchise perform differently. Daniel says you can find very profitable or very poor-performing franchises in every industry or franchise system.

He gives the following advice to people looking at buying a franchise:

1. choose a strong or growing industry
2. make sure that the chosen franchise demonstrates the characteristics of a successful system
3. look at the fundamental drivers of profitability in your chosen business to make sure you are investing in a profitable, growing business
4. choose something you believe you will enjoy which is a good match for your interests and skills

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