A franchise system’s growth rate can provide clues about its health and long-term viability. When you are considering investing in a franchise, look closely at the numbers and determine if the system is experiencing year-over-year growth, as well as whether the growth is sustainable. Understanding the context around the numbers will help inform your decision about whether the system is one you should invest in.
Year-over-year growth is a good indicator of the strength and attractiveness of a system, but growth means more franchisees to support. Growth that is too rapid could mean the support staff is overburdened and unable to provide a high level of support to new franchisees. Steady growth is a good sign, because it means the brand has had time to build their infrastructure.
How many new franchisees entered the system in the previous year? Too few could mean there are problems attracting new franchisees. Too many could be taxing on the system and franchisee support could suffer. Ask the franchisor for the number of new franchisees versus the number of total franchisees. Ideally, as a rule of thumb, new franchisees should make up somewhere between 10 to 35 percent of the entire system. How many operational support people are devoted solely to new franchisees? Validate with new franchises about the level of support they received and whether it meets with your expectations.
Look at the number of units opened in the prior year. How many of those were franchisees’ first units versus how many were multiple units opened by experienced franchisees? Multi-unit franchise owners indicate the system is healthy and franchisees are experiencing growth. These franchisees also need less support than first-time owners. Examine the ratio of new units to support person to see if there is adequate support staff.
If there are few new units opening, or a decreasing number of units, that could be a red flag, as it could indicate a problem in the system. Look for patterns and ask questions.
Examining a franchisor’s continuity rate is a good indicator of whether it has sustained its growth over time. Continuity rate refers to the number of units opened during a period which remain continually operating. A high continuity rate equals successful franchisees. It means the franchisor has the resources to set franchisees up for success with strong support systems, dedicated field staff, and robust training.
You can determine a brand’s continuity rate by looking at Item 20 in the Franchise Disclosure Document. Start with the number of stores in operation at the beginning of a time period and add the number of stores that were opened in the following years. This is how many you would expect to be open at the end of that time period. Now find the number of stores that are actually operating. Divide the actual number by the expected number to give you the continuity rate.
Looking at a franchisor’s growth rate will help you determine if the system you are considering is healthy. Delve into where the growth is happening and at what pace. Most importantly, determine if the franchisor can support the growth at a high level. Sustainable and steady year-over-year growth in a system could represent growth potential for you.