Part 2 Going Deeper in Validation: How Item 20 Insights Can Improve Your Sport Clips Validation Process

Part 2 Going Deeper in Validation: How Item 20 Insights Can Improve Your Sport Clips Validation Process

Buying a franchise is a big decision. It is important to make it an informed one. Knowing the right questions to ask is a good place to start when beginning any validation process.Franchise Disclosure Document (FDD) Item 20 contains valuable information savvy franchise buyers can use to determine the health of a brand they are considering.

A quick glance will provide growth rates, transfers and unit closure information. Delving deeper into this information leads to critical benchmarking statistics likecontinuity and “churn rates”. Through critical analysis of the data in Item 20, a vivid depiction of the franchisor’s personality, and its relationships with its franchisees begins to emerge.

By understanding what these numbers mean and using the derived information to guide your validation process, you will be able to ask the right kinds of questions, leading to decision aligned with your goals.

In part one of this article, published on 1851 Franchise, we looked at the five core charts included in Item 20 and highlighted key insights to be probed in the validation process. In this follow-up article, we will use the specific data included in Sport Clips Haircuts’ Item 20 to show how this information can be applied practically.

Table No. 1 - System Wide Outlet Summary

In this table, Sport Clips shows strong franchised store growth between eight and 12 percent annually. Company-owned [Office1] stores have remained consistent over the years and make up a small percentage of the overall network size. The net number of store openings per year appears to be on a slightly declining trend. Questions to address during validation might include:

“Is new store growth primarily driven by existing franchisees or new franchisees?”

“How does Sport Clips maintain standards for real estate and franchisee selection through this strong growth?”

“How has operational support changed as the number of stores has increased?”

Table No. 2 - Transfer of Outlets from Franchisees to New Owners

In this table Sport Clips shows annual transfer rates between three and six percent. A few states stand out as having unusually high numbers of transfers in certain years. This may be an indication of some consolidation among franchisees in these markets, but is probably worth examining further if you are looking at one of these markets in particular.

“Are most transfers being acquired by existing franchisee or new franchisee buyers?”

“Are you seeing a lot of consolidation with larger franchisees acquiring smaller franchisees? Do you see this as a positive or a negative?”

“Do transferred stores generally perform better under new ownership?”

“What do you think is driving the number of transfers in this particular state?”

Table No. 3 - Status of Franchised Outlets

Here you will see a lot of store openings, no terminations or non-renewals, one store reacquired by the franchisor in an area where the company already operates stores, and very few closures. Using this information, the brand’s three-year continuity rate for franchised stores is 99.7%. While all of these appears to be very positive, the data presents some opportunities for discussion with franchisees.

“With no reported terminations or non-renewals, do you feel Sport Clips is protecting the brand by enforcing the standards in the franchise agreement?”

“What do you feel is the reason behind Sport Clips’ low number of store closures?”

“Do you feel there are stores in the Sport Clips network that should be closed?”

“Do you feel the closures that did occur were due to operator or system issues?”

Table No. 4 - Status of Company-Owned Stores

Sport Clips shows a total of 32 company-owned stores in two states. (A peek at Item 19 shows that Sport Clips operates company-owned stores in two designated company-owned markets.) The number of stores has remained relatively consistent.

“What is the Sport Clips’ strategy behind operating company-owned stores?”

“Do the company-owned stores generally outperform or underperform the franchised stores?”

“Do you feel the company-owned stores compete with the franchised stores for customers or resources?”

Table No. 5 - Projected Single Unit Openings

Because Sport Clips only awards multi-unit development agreements, it is not surprising that they have a significant number of sold but not yet opened licenses. It is also important to note that Sport Clips has stopped awarding licenses in most of the U.S. and only has select markets available for development. Their growth strategy involves awarding a certain number of licenses in a given market and then allowing time for the stores to open and for franchisees to expand by filling in gaps. It is important to understand how many licenses are sold but not yet open in your particular area of interest and how sites are presented through the Sport Clips priority policy.

“Do you feel Sport Clips is responsible in executing its growth strategy?”

“What is Sport Clips’ policy on extending licenses that are not developed on schedule?”

“How do you feel about the Sport Clips priority policy? Do you think it represents a fair approach to site selection?”

Maintaining brand integrity starts with ensuring franchisees and franchisors are a good fit for each other. Only through complete transparency can this be determined. Our top goal in the Discovery Process is to provide you with the information needed to make an informed decision. By educating you on how to use the information available to you to delve deeper, we hope you will feel in a better position to ask right kinds of questions to help you in this process.

To continue the conversation about what you have learned here, contact us here.