How healthy is your franchise? Nine signs of a blooming business

By Sarah Stowe | 27 Apr 2016 View comments

According to a study by FranchiseGrade, there are some common characteristics among franchises achieving good growth, and showing potential to be even more successful.

Here are nine signs of a franchise system in full health:

1. Good return on investment

A franchise can only be truly successful when its network of franchisees is profitable. Healthy franchise systems offer a good return on investment for franchisees.

2. Company-owned stores

It might be a surprise, but the inclusion of company-owned stores in a franchise network has two benefits: it allows the franchisor to use the outlet as a testing ground to pilot new ideas and systems, and it indicates the financial stability of the franchisor.

3. Steady growth

Is your business in the express lane? Accelerated growth can come to an abrupt halt – so there’s a fine line to tread between supercharged expansion and growing at a steady rate. The study found steady growth over time was a constant among the healthy franchise systems.

4. Low level of litigation

Transparency of communication and good documentation can only help the franchise relationship. Statistics from the Australian Competition and Consumer Commission indicate that misleading conduct remains the biggest generator of complaints, with 75 complaints about disclosure and 26 about termination of the franchise agreement submitted to the Commission last year.

Healthy franchise systems avoid litigation – in fact the study reveals they have on average 115 percent less litigation than unhealthy franchise systems.

The report showed a blooming business had 1.95 legal actions against the franchisor, and 1.3 legal actions against the franchisee. In comparison, franchisees in unhealthy systems were stacking up 4.16 actions against the franchisor, and the franchisor was taking 2.8 actions against the franchisee.

5. Clear franchise fee structure

Healthy franchise systems showed clear and concise disclosures of the ongoing fee structure that allowed for an easy cash flow analysis.

The study also found that although healthy franchise systems have a slightly higher royalty fee, other levies were lower than in the less healthy networks.

6. Royalties are the main source of income

A franchise system with a healthy profile will be focused on its franchisees, supporting its franchisees, and generating income from franchisee royalties; it will not consider selling franchises to be its main activity nor its main revenue stream.

7. Fewer rebates

In the study, unhealthy systems were found to be totting up the revenue from rebates – 175 percent more, in fact, than the systems showing a healthy outlook.

8. Financial disclosure

The US report found that healthy franchise systems were more likely to disclose more relevant financial performance data. It's important that information revealed does not focus only on the top performing outlets, skewing the overall data.

9. Outlet growth

A healthy system sustained franchisee growth of 11 percent or higher; an unhealthy franchise chain saw only a one percent increase in franchisee outlet growth.

Keep a competitive eye on other franchises

Overall, healthy franchise systems have up to four times higher growth rate than unhealthy franchise systems, reports FranchiseGrade.

"Be wary of bundling services into a higher initial franchise fee," the report concludes. Although it might be advantageous it needs to be explained to franchise buyers who are comparing systems.

It's also wise to check your franchise structure against other franchise chains in the same sector. "Ensure that your royalty structure and revenue generated from royalties allows you to grow as a brand."