"It's the economy, stupid"

That was the successful advice James Carville gave to Bill Clinton during Bill’s 1992 presidential campaign against George H.W. Bush.

In franchising I believe similar advice to prospective franchisees would be, “It’s the business model, stupid”.

In other words the basis of any successful franchise system is the business model. One of the most important things for a prospective franchisee to consider is whether the business model is proven to be successful, competitive and profitable.  

In general, companies franchise for three main reasons: money, time, and people.

The primary barrier to expansion faced by most companies is capital. Franchising allows companies to expand without the risk of debt or the cost of equity. Since the franchisee provides the initial investment at the unit level, franchising allows for expansion with minimal capital.

Moreover, since it is the franchisee, and not the franchisor, who signs leases and commits to various service contracts, franchising also allows for expansion with virtually no contingent liability, thus greatly reducing the risk to the franchisor. Since the franchisee is assuming most of the risk, they at least should be investing in a proven business model.

The first question I ask is when investigating a franchise is whether the business model can support a franchise system.

For a franchise system to be successful it must create a mutually beneficial relationship for all parties involved, the franchisee, franchisor, vendors, and the consumer.

If all parties benefit evenly from the relationship, then that is a business model that can succeed and prosper through franchising.

It certainly isn’t how “hot” the concept is! Just because a franchise is selling like “hot cakes” doesn’t make it a proven and successful business model. Whenever there is a “hot” segment, where a large number of franchises are being sold, copycats franchisors are sure to follow.

One of the “hot” segments in franchising today is “Meal-Assembly Centers”. The cynic in me says “I don’t get it”, why would people choose to cook a meal at someone else's kitchen and pay for that opportunity?  It maybe fun to give it a try once or twice, but you are expecting a lot from people to change behavior and lifestyle in order to create a loyal customer.

The key to success in any business is repeat customers. If the business model constantly requires new customers to be generated, that business will always have a challenge being profitable. New customers are expensive! Repeat customers are a profitable business’ bread and butter.

In the “Meals-Assembly Centers” segment there are many franchisors; Super Suppers, Dream Dinners, Entrée’s Made Easy, Dinner by Design, Cena Entrees to go, Dinner A’fare, Let’s Eat, Supper Thyme, Dinners Ready, etc. etc. Since none of these companies make an earnings claim in their UFOC’s, it’s hard to determine profitability, and since the segment is so new many of the franchisees have yet to earn a profit.

How many competitors, if any, can enter the market and you still survive?  What if they have slightly lower prices and a nicer, larger facility and more creative menu?  What is your competitive advantage?

Before you get caught in the next “hot” concept make sure you are investing in a business model that is proven!