How to Recognize and Grow a Good Investment

March 07, 2016

Success is hard work and winning demands an indomitable entrepreneurial spirit in ourselves, brand leaders and in the entire company. With the right partners, great things can happen.

By Tom Wells

There are countless franchising opportunities available today across a variety of industries -- and more are popping up every day-- from what’s now been dubbed “fast casual 2.0” to blow-dry bars and STEM (science, technology, engineering and math) franchises for children. Some will take off and become the “next big thing.” Some may have potential, but languish in the middle of the pack or fall to the bottom, never quite picking up steam. However, there are strategies for recognizing a high-potential investment and then putting the business model in place to accelerate to the next level.

When evaluating a potential franchise investment, think of two main criteria

First and foremost, look for a brand that resonates with customers. There must be something unique and defensible about the brand. Dry cleaners are successful because of convenience. Nobody picks one for the name or is a fanatic about their dry cleaner. But when identifying a standout business opportunity, look to the product or service that customers choose over other options.

For example, diners will seek out Zoës Kitchen or Panera Bread over other, similar options in that space. Businesses thrive when they have fanatical consumers that are loyal and passionate about the brand. Also, the advantage of the brand needs to be sustainable in the long term. For example, frozen yogurt is a market that traditionally has limited differentiation between concepts, so they come and go, but brands offering unique products that create loyalty can last for the longer term.

Second, a brand must have strong unit economics or show the potential for strong unit-level economics if there are only a couple of locations. Investors obviously are looking to make money on their investments, so the brand needs to make money at the store level. Good unit economics are much easier to scale, particularly when there are multiple units operating under the successful business model.

What are some other ways to recognize a brand with potential? Among the myriad franchising opportunities out there, many will succeed initially, but will find themselves at a plateau when they reach the 25 to 75 unit level. They may have an outstanding base to build from with a loyal following of customers that are passionate and purchase regularly. The products may be differentiated and the best in that market. The product or service may speak to an emerging, sustainable market trend.

Despite this, the operational complexity of supporting that many units can often expose weak areas in franchisee support, distribution and technology. Small tweaks to these brands -- typically infrastructure investment and additional experienced team members -- can enable these emerging brands to continue strong growth as a franchise concept.

As mentioned, understand customer motives first. Go sit in stores or talk to customers to see how they feel about the concept. Do they come regularly? What do they like about the brand and why? Are there other products or services they may want?

Then dig into details such as the number of transactions, average check amount, positioning in the market relative to other brands and unit economics to determine if the customer loyalty and support translates to strong financial performance. There are additional metrics that can be valuable such as net promoter score, product mix, discount rates and seasonality, but the feel for the brand is usually evident by how consumers view it and how it differentiates compared to the competition.

Steps to maximize potential

When finding a brand with potential, it’s critical to identify the brand offers that are most important to consumers. It could be signature menu items in a restaurant, fast response times in a service business or best-in-class curriculum in education. This key value proposition for the consumer must be used as a pillar or guiding light for building the brand.

This is similar to a “North Star” -- a focal point to which all key decisions related to the brand must tie back. If consumers value fast response times from your service franchise, it’s crucial not to sacrifice this core component of your unique brand when scaling it. While this sounds simple, it could mean sacrificing short-term profits for long-term business health and sustainability.

From there, decisions must be made as to how to grow the brand. Controlled, methodical growth typically wins in the end. It’s always possible to grow a brand incredibly quickly with capital, but the balance is in finding the right pace to ensure that the growth is profitable and sustainable. This requires identifying and focusing on key initiatives before deciding to focus on growth, whether that's getting the product right, improving consumer experience and awareness or establishing detailed processes around distribution or training. Get all aspects of the brand right and then hit the gas pedal.

Brands looking for accelerated success must consider the following areas:

Ensure that adequate operational infrastructure is in place to support your franchisees, including training, franchise support and franchisee communication tools,
Utilize technology to improve inventory, training and customer service,
Creatively utilize advertising dollars to drive the highest possible return for brand awareness,
Ensure store design is modern (restaurants) and that employees look professional (services),
Invest in franchise development to utilize multiple lead generation sources, and
Hire the best available talent.

Capital is available

Growth often means raising capital. It is still a great time to raise capital, as valuations are high and investors are chasing growth. In particular, capital is available for high-growth, larger brands or small, hot concepts. The current market is starting to get tougher for concepts in the 25 to 50 unit range that have shown slow growth.

Although capital may be easily available, it’s critical to determine what type of investor you’re looking for. Many private equity firms provide capital and take a board seat, which may be all you need if everything is going well. But sometimes emerging brands are better off partnering with a firm that provides operational and strategic guidance in addition to capital. Those partners can be active members of your team, bringing their knowledge and experience in brand management, marketing, operations, training and more to the table to work together to help grow your business.

This is exactly what the BIP Franchise Accelerator, BIP Capital’s franchise development division, did with Tropical Smoothie Café. Four years after our initial investment and action plan, Tropical Smoothie Café has become one of the fastest growing brands in the country. It has expanded from 200 locations to over 465 and has signed more than 200 franchise agreements in the past 12 months (up from 30 in 2010). Additionally, average unit volume is at an all-time high, with the top 50 percent of franchisees reporting average unit volume in excess of $734,000 and same-store sales continue to eclipse 11 percent, well above the norm in the fast casual industry.

Success is hard work and winning demands an indomitable entrepreneurial spirit -- in ourselves, brand leaders and in the entire company. But together, and with the right partners, great things can happen.

Tom Wells is a vice president at BIP Capital. Find him at fransocial.franchise.org.