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Franchise Risk Profile Template: An Introduction

The franchise risk profile template (FRPT), shown in Table 3-1, is a guide in the franchise environment to perform due diligence on a specific franchise. As a prospective franchisee, you can use this tool to evaluate the risk–return scenario. The template allows the franchisee to filter the prospective franchise and the franchisor to construct or modify the franchise so that it scores well and appeals to a larger segment of the prospective franchisee population. This guide has been constructed to help you make an initial assessment of the franchise’s strengths and weaknesses that will likely require further investigation. It is by no means meant to assess the overall potential of a franchise. Rather, it offers a perspective on the balance of risk and return that the franchisee requires. The FRTP is a mapping device, not a formula. We have segmented the FRTP by the business model–scaling hurdles that franchising addresses: administrative efficiency, risk management, and resource deconstraining. In the FRTP the level of market performance a franchise has achieved indicates the extent to which it has overcome the given hurdle.

Table 3-1. Franchise Risk Profile Template

Criteria

 

Risk/Return Profile

   
 

Low Risk

Acceptable Risk

High Risk

Extreme Risk

 

Avg. Market Return

Incremental

Marginal

Large Return

 

15–20 Percent Return

30 Percent Return

40–50 Percent Return

60–100 Percent Return

Agency Concerns:

       

Outlet performance disclosed or discerned

Yes, 90 percent + apparently profitable

Yes, 80 percent + apparently profitable

Yes, 70 percent + apparently profitable

No, or less than 70 percent profitable

Business format

Sophisticated training, documented operations manual, identifiable feedback mechanism with franchisees

Initial training and dynamically documented operations manual, some field support

Training and operations but weak field support

Questionable training and field support and static operations

Term of the license agreement

20 years with automatic renewal

15 years with renewal

Less than 15 years or no renewal

Less than 10 years

Site development

Quantifiable criteria clearly documented and tied to market specifics

Markets prioritized with general site development criteria

General market development criteria outlined

Business format not tied to identifiable market segment(s)

Franchise fee and royalties

Present discounted value (PDV)a of the fees are less than the demonstrated economic advantages (reduced costs or increased revenue) of the franchise versus standalone

PDV of the fees are equal to but projected to be less than the economic advantages of the franchise versus standalone.

PDV of the fees are projected to be less than the expected economic advantages (reduced costs or increased revenue) of the franchise versus standalone

PDV of the fees are not discernibly less than the expected value of the franchise

SIZE/RISK MANAGEMENT:

       

Multiple market presence

National

Regional

State

Local

Market share

#1 and dominant

#1 or #2 with a strong competitor

Lower than #2

Lower than #3 with a dominant player

Number of company owned outlets

Cluster of company owned outlets near headquarters and or regional franchisor offices

Some company owned outlets used for R&D

No company owned outlets or a large number of company outlets purchased from former franchisees

No company outlets and no strategic plan to develop such outlets

RESOURCE CONSTRAINTS:

       

National marketing program

Historically successful creative process, national media buys in place

Creative plus regional media buys

Creative plus local media buys

Local media buys only

A company that is lower on the risk scale will offer a lower average market return than a company that is higher on the scale. The higher risk franchise will clearly require the promise of an extremely large return to induce investment. You should consider the criteria in the FRTP before purchasing a franchise. Of course, franchisors should therefore consider these criteria when they make a franchise offering.

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