If you’re a prospective franchisee, you’re faced with a daunting task. How do you assess whether a particular sector is the right one, and then sort through the large number of opportunities to make a good decision?
A quick glance at the franchise opportunities available will reveal you could potentially try your hand at a business in food (from ice cream to burgers to sushi), specialty retail (knives, curtains and blinds or safety equipment), service businesses (child care or photography), mobile businesses (coffee, couriers or car repairs) and many more.
You’ll probably give considerable thought to the type of business that will best suit you before making a decision. It’s important to also remember, that your business will not operate in a vacuum; it’s part of a broader sector.
Is one sector better than another? Will it stay that way; what are the market trends? Before you make a decision, it is appropriate to think a little bit about where your product or service offering might fit within the market and, importantly, where it might be in the next three to five years when you might wish to exit the venture.
What’s your passion?
It’s all very well to talk about the emerging sector or where the opportunities are, but if the business you’re buying into doesn’t excite you, my straight-forward advice is, don’t buy it. It may appear to be a great opportunity but it’s going to wear thin, usually very quickly, if ultimately you don’t look forward to going to work because you don’t have a passion for your product, your people, and your customers. So find something you really enjoy. Here’s a little exercise; imagine telling your best friend about the business you’ve just bought and it convincingly, look for something else.
I’m not suggesting for a moment that you sacrifice good research for passion; just that passion is a very powerful motivator. So, once you’ve found the opportunity that works for you, let’s take a look at the sector it’s in.
Sectors and cycles
I’m sure you’ve heard it many times before – business tends to go through cycles. The broader economy does, the property market does and so do particular sectors. Think back to the 90’s (if you are old enough to remember) for example, and you’ll recall the pick and pay confectionery stores that popped up in shopping centres all over town. Lots of lollies that you shovelled into a container and paid for on the way out. Not many of those stores are around any more... Although interestingly, many years later, they have started to appear in airports around the country. A pending revival perhaps?
If you don’t want to wait fifteen or twenty years for your business to experience a revival, take a good look at the sector it’s in and assess whether that sector is one that is growing, mature or declining. Each of these stages has its own advantages and risks.
At any time there are sectors that are ‘on the up’. These emerging markets are usually driven by a gradual change in demand. Take the fact that everyone seems to be getting busier for instance. With this comes demand for fitness centres that are accessible around the clock and higher demand for services such as laundry, cleaning and gardening as people try to work things into a busy lifestyle. A business that is ‘on trend’ and playing into a growing market will typically derive greater longer term value in both profit and goodwill.
Emerging markets also hold the attraction of the potential ‘ground floor opportunity’; getting in early and reaping the rewards as the market grows. The flip side is that emerging markets can fail to fully emerge. Sometimes the hype is not matched by the reality and areas that are tagged for growth, simply don’t deliver. If you’re considering a business in an emerging market, the challenge is to ensure the opportunity is not based on a fad, but something that will generate real, ongoing demand.
Mature markets are well established and most of us are familiar with the businesses and brands in them. Some things remain relatively constant; the demand for food in all its varieties, personal services such as hair and beauty and grooming, health and wellbeing, even pets and pet care. These things have become fundamental to how we live our lives. Mature markets generally don’t provide an opportunity for rapid growth. In fact by definition, mature markets tend to grow at about the inflation rate. Entering a mature market generally means you’ll be competing with established brands so look for your point of difference or competitive advantage.
Business sectors earmarked for decline, some in fact predicted to die out altogether* include wired telecommunication providers, video post-production services and record stores.
In a declining business sector, hunt for bargains. When a market sector declines, most businesses will suffer a drop in value, regardless of their underlying value. This can mean some good buying if you can identify a business that is fundamentally sound. A strategy of product innovation and brand refreshment can often counter the decline or at least slow it long enough to keep generating profits and reap more substantial benefits when the market turns. This assumes of course that the business is in a segment that will survive over time.
Due diligence is the key when buying any business. Adding an analysis of the market segment your business to your due diligence process will help ensure you make a better buying decision.
John Di Natale is a Senior Consultant at DC Strategy, Australia’s leading franchise consulting and legal firm. He has broad international business experience in franchising and business growth across Asia Pacific and Europe.
DC Strategy is the region’s premier franchising specialist with an experienced and respected team of franchise consultants and solicitors.
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* Ten Key Industries That Will Decline, Even After the Economy Revives Toon Van Beeck, Senior Analyst, IBISWorld May 2011.