- Tip 3-1 Risk Management: Ownership and Wealth
- Franchise Risk Profile Template: An Introduction
- Agency Problems and Administrative Efficiency
- Buy a franchise, or launch a standalone?
- How Do Franchisors Determine the Amount of Franchisee Fees and Royalties?
- Size and Risk Management
- Balancing Company and Franchised Outlets
- Resource Constraints
- Franchise Disclosure: An Insight into Individual Franchisor Health and Wealth
- License Agreement: How the Franchise Shares Responsibilities and Wealth
- Key Factors in the Franchise Relationship
- Public Capitalization: An Expanded View of the Franchise Company
- Conclusion
- Endnotes
This chapter is from the book
This chapter is from the book
This chapter is from the book
Franchise Risk Profile Template: An Introduction
The franchise risk profile template (FRPT), shown in Table 3-1, is a guide in the franchise environment to perform due diligence on a specific franchise. As a prospective franchisee, you can use this tool to evaluate the risk–return scenario. The template allows the franchisee to filter the prospective franchise and the franchisor to construct or modify the franchise so that it scores well and appeals to a larger segment of the prospective franchisee population. This guide has been constructed to help you make an initial assessment of the franchise’s strengths and weaknesses that will likely require further investigation. It is by no means meant to assess the overall potential of a franchise. Rather, it offers a perspective on the balance of risk and return that the franchisee requires. The FRTP is a mapping device, not a formula. We have segmented the FRTP by the business model–scaling hurdles that franchising addresses: administrative efficiency, risk management, and resource deconstraining. In the FRTP the level of market performance a franchise has achieved indicates the extent to which it has overcome the given hurdle.
Table 3-1. Franchise Risk Profile Template
|
Criteria |
Risk/Return Profile |
|||
|---|---|---|---|---|
|
Low Risk |
Acceptable Risk |
High Risk |
Extreme Risk |
|
|
Avg. Market Return |
Incremental |
Marginal |
Large Return |
|
|
15–20 Percent Return |
30 Percent Return |
40–50 Percent Return |
60–100 Percent Return |
|
|
Agency Concerns: |
||||
|
Outlet performance disclosed or discerned |
Yes, 90 percent + apparently profitable |
Yes, 80 percent + apparently profitable |
Yes, 70 percent + apparently profitable |
No, or less than 70 percent profitable |
|
Business format |
Sophisticated training, documented operations manual, identifiable feedback mechanism with franchisees |
Initial training and dynamically documented operations manual, some field support |
Training and operations but weak field support |
Questionable training and field support and static operations |
|
Term of the license agreement |
20 years with automatic renewal |
15 years with renewal |
Less than 15 years or no renewal |
Less than 10 years |
|
Site development |
Quantifiable criteria clearly documented and tied to market specifics |
Markets prioritized with general site development criteria |
General market development criteria outlined |
Business format not tied to identifiable market segment(s) |
|
Franchise fee and royalties |
Present discounted value (PDV)a of the fees are less than the demonstrated economic advantages (reduced costs or increased revenue) of the franchise versus standalone |
PDV of the fees are equal to but projected to be less than the economic advantages of the franchise versus standalone. |
PDV of the fees are projected to be less than the expected economic advantages (reduced costs or increased revenue) of the franchise versus standalone |
PDV of the fees are not discernibly less than the expected value of the franchise |
|
SIZE/RISK MANAGEMENT: |
||||
|
Multiple market presence |
National |
Regional |
State |
Local |
|
Market share |
#1 and dominant |
#1 or #2 with a strong competitor |
Lower than #2 |
Lower than #3 with a dominant player |
|
Number of company owned outlets |
Cluster of company owned outlets near headquarters and or regional franchisor offices |
Some company owned outlets used for R&D |
No company owned outlets or a large number of company outlets purchased from former franchisees |
No company outlets and no strategic plan to develop such outlets |
|
RESOURCE CONSTRAINTS: |
||||
|
National marketing program |
Historically successful creative process, national media buys in place |
Creative plus regional media buys |
Creative plus local media buys |
Local media buys only |
A company that is lower on the risk scale will offer a lower average market return than a company that is higher on the scale. The higher risk franchise will clearly require the promise of an extremely large return to induce investment. You should consider the criteria in the FRTP before purchasing a franchise. Of course, franchisors should therefore consider these criteria when they make a franchise offering.