Feasibility Studies to Evaluate Franchise Readiness and Viability

No matter the business model, entrepreneurs require feasibility studies to evaluate franchise readiness and viability. A feasibility study is conducted prior to undertaking a project. This serves as a way for business owners to determine how the creation of a franchise structure may affect their current business. A franchise feasibility study determines whether the business being evaluated has a reasonable chance for success as a franchise.

The franchise feasibility study comprises of vital information including the funding needs to complete the project, the market opportunity, government regulations, risk factors, strength and weaknesses, the management team and the financials of the company. While a feasibility study somewhat sounds like a business plan, these reports are much more detailed with information on the market and financials. Franchise Administration can assist to develop high quality feasibility studies for franchises across South Africa.

A franchise feasibility study will evaluate the business against key industry benchmarks. These broadly include; franchise ROI potential, scalability, market share availability, the owner/ownership group, and capital availability.

Franchise ROI Potential

In order for the business to be a viable candidate for franchising, it must generate an acceptable Return on Investment (ROI). A good rule of thumb is that, after the second full year in business, a franchisee should be realistically able to anticipate a 20% per year ROI, plus an equitable salary for whatever work they do in the business.
A feasibility study will look at the costs and revenue of a potential franchise model, and not the existing business model. Franchisees may incur more costs due to royalties, training, or build-out requirements, may experience higher revenue due to name recognition, and enjoy larger margins due to purchasing power.

Scalability

A business can be very successful and not at all scalable. If a business is significantly reliant on a unique combination of the background, education, and network of the individual owner it is most likely not a scalable model. Business owners must evaluate the scalability of their product line.

Market Share Availability

Because market share is a key indicator of market competitiveness, it enables executives to judge total market growth or decline, identify key trends in consumer behaviour and see their market potential and market opportunity. Market share is a measure of the consumers’ preference for a product over other similar products. A higher market share usually means greater sales, lesser effort to sell more, and a strong barrier to entry for other competitors. This also means that if the market expands, the leader gains more than the others. By the same token, a market leader – as defined by its market share – also has to expand the market, for its own growth.

The Business Owner

A franchisor typically switches focus from running a business to supporting franchisees. A franchise feasibility study must ask; does the owner or ownership group have what it takes to execute on a franchisor business model? You have to ask yourself, do you even want to?
The CEO of a small to medium size franchise organisation will likely spend his or her day managing employees, handling franchisee complaints, and working on the franchisees’ businesses. So before you take this step into franchising, make sure that you are optimistic about making a change from what you do now to being responsible for the success of many business owners.

Capital Availability

Franchising is not an inexpensive endeavour. This can be said from the franchisor’s viewpoint that the first few stages of franchising are capital-intensive. Capital is required to fund the franchise fee, purchase equipment and initial supplies, as well as to rent (or purchase), and renovate the business premises. Start-up capital is also used to pay for any legal fees or permits needed to get the business up and running.