Franchise Success Starts With Market Research: Here's How To Do It

When doing your own market research for a franchise, make sure to ask the following questions:

1. Is there a demand for this franchise in the local market?

One of the most important questions to ask when doing market research for a franchise is whether there is a demand for the business in the local market. Investors must consider the market size, the buying habits of potential customers, and any potential barriers to entry.

For instance, a residential cleaning franchise might have high demand in a neighborhood with a high concentration of working professionals who have little time for household chores. Alternatively, a franchise might not perform as well in an area where the population consists mainly of families with stay-at-home parents who have more time for cleaning.

To determine demand, investors should analyze market trends, consumer behavior, and local competition. Another way to gauge demand is to conduct surveys or focus groups to gain insight into consumer preferences and habits. This information can help investors tailor their marketing strategy and service offerings to meet the local market’s needs better. Also, franchise investors can reach out to the franchisor to better understand the brand’s popularity and growth potential in the region.

2. What is the franchise’s reputation in the market?

A franchise’s reputation can greatly affect its success in a particular area and potential customers’ overall perception of the brand. One way to evaluate a franchise’s reputation is through online reviews and customer ratings. Websites such as Yelp and Google Reviews can provide valuable insights into customer experiences and opinions about the franchise.

Additionally, social media platforms such as Facebook and Twitter can also be useful for gauging public perception of the franchise. By analyzing customer feedback, investors can better understand the franchise’s strengths and weaknesses and determine if it’s a good fit for their goals and the local market.

3. How does the franchise’s business model work?

A business model is a plan that outlines how a franchise operates and generates revenue. Understanding a franchise’s business model is crucial in determining its potential for success in the local market. This involves examining the franchise’s overall strategy, operational procedures, and revenue streams. For example, a cafe franchise might have a business model that relies on a combination of dine-in and takeout orders, as well as catering and online sales. By understanding how the franchise generates revenue and serves its customers, investors can better assess its market potential and profitability.

Moreover, evaluating the franchise’s business model can help investors identify any potential weaknesses or areas for improvement. For instance, if the franchise heavily relies on a single revenue stream or has high overhead costs, it may not be as resilient to market fluctuations or changes in consumer behavior.

4. What is the growth potential of the franchise?

One way to assess the growth potential of a franchise is to look at its history of expansion. How many new franchise units has the brand opened in the past year, and in what regions or countries? This information can help you determine the potential for future growth and identify any untapped markets you can capitalize on. It’s also important to consider the franchise’s plans for expansion, such as new products or services, and whether they align with current market trends and demands.

Questions to consider when evaluating a franchise’s growth potential:

• What is the brand’s expansion strategy?

• What is the demand for the franchise’s products or services in the market?

• Does the franchise offer unique products or services that can help it stand out in the market?

• Are there any emerging trends that the franchise can leverage to drive growth?

5. What is the financial performance of other franchise units in the same brand?

To gain more insights into the potential profitability of the franchise, investors should examine the financial performance of other franchise units within the same brand. This information can be accessed by reviewing the Franchise Disclosure Document (FDD), which franchisors are required to provide to prospective investors. The FDD contains financial performance representations (FPRs), which are historical financial data on the franchise system’s existing units.

FPRs can include information such as the average revenue, cost of goods sold, and gross margin of other franchise units. For example, if you are considering investing in a car wash and detailing franchise and the FDD shows that the average revenue of existing units is steadily increasing year over year, it may indicate a strong growth potential for the franchise. On the other hand, if the FDD reveals that the average revenue is declining or stagnant, it may be a red flag and warrant further investigation.

When reviewing FPRs, it’s important to consider other factors, such as the age and location of the franchise units. For instance, a new franchise unit may have lower revenue than an established unit but may still have high growth potential. Additionally, franchise units in different geographic locations may have varying financial performance due to differences in local market conditions.

6. Who are the competitors in the local market, and how do they compare to the franchise?

Knowing who the competitors are in the local market and how they compare to the franchise is crucial in determining the potential franchise success. Competitors can range from similar franchise businesses to independent local businesses that offer similar products or services. Understanding their strengths and weaknesses, target customers, pricing strategies, and market share can help the investor identify any gaps in the market and differentiate their franchise from the competition.

For example, a coffee shop franchise may face competition from other coffee shop chains, as well as local independent coffee shops. By researching the competition, you may find that there is a high demand for organic and ethically sourced coffee, which the franchise could emphasize to differentiate itself. Additionally, the competition may not offer any vegan or gluten-free options, which could be an opportunity for the franchise to attract a niche market of customers.