Breaking Down the Due Diligence Process for Service Brands, Part 2
Editor’s Note: Part 1, in the previous issue, looked at how to work with a service brand candidate to discover their “why,” and how to create additional revenue streams with related services. This week dives into issues related to financials, scalability, the competitive landscape, real estate, and labor for service brands.
One of the most appealing qualities of franchising with a service brand is that the cost to entry is generally lower than that of large restaurant chain or big-box fitness concepts. While this can be attractive, you must consider that the upside may also be limited with certain franchises. Be sure that your financial expectations are in line with what the franchise brand can offer.
If comparing 2 or 3 different concepts in the same category, besides looking at initial start-up costs, also examine average unit sales and revenue numbers. This can be a clear sign of differentiation between one concept and another. What is the sale-to-investment ratio, or the return on that investment? Much of the time, higher start-up costs indicate the opportunity to yield greater profits in the long run because the business model is more robust. It should go without saying that if a concept does not provide these numbers in Item 19 of their FDD, it is a clear sign to avoid investing your hard-earned money into that franchise.
Equally important is the history of the brand and its performance. How long has the brand been around? How many economic cycles has it gone through, and how has it weathered them? For example, at Pinch A Penny, we’ve been around for 45 years and have had positive same-store sales for 43 of the 45 years! That not only includes the recent pandemic – where we continue to experience double-digit sales increases – it also includes the Great Recession, the 9/11 attacks of 2001, and the various economic ups and downs of the ’70s and ’80s.
With more than 500 start-up franchisors selling a new concept each year and more than 3,800 franchise brands (according to research by FRANdata), you must be sure that you are not seduced by “trend of the moment” franchises and that you stick with a franchise that has documented, proven performance.
Another thing to consider when conducting due diligence is how you want to scale. If you’re a long-time restaurant operator, scaling in that business traditionally means adding units to your portfolio. In the service sector, you may need to look at scalability differently. With many service concepts, you can look at expanding your trade area, or expanding trade within your area, by adding more offerings to your service menu. That can be accomplished by what the franchisor already has the capability to provide or by investing in another franchise brand held by the franchisor.
There are well-known home service companies that have families of franchise brands offering everything from home cleaning to plumbing to landscaping. This can create a tremendous opportunity for you to scale your business and diversify. On the other hand, there are other franchise companies that have additional service capabilities built into their overall business model. Pinch A Penny is one of the latter, where we provide other opportunities for franchisees to expand their business without having to invest in other brands.
The competitive landscape
As with any franchise brand, take a look at the competitive landscape and determine how you and your business will fit into it. What will you offer that others simply are not offering? How will you be of service to your neighbors and fellow community members?
Whatever brand you’re looking at in the service or niche retail space, great service is the major point of differentiation. To be successful you must be able to deliver superior service. This is why being involved in your service business is so important, because instead of just selling a product you are actually selling your expertise, your customer service, your dependability, and your integrity.
Two more factors to consider
Real estate. If you’re a foodservice franchisee, real estate decisions are heavily weighted on visibility and being in the right trade area. In brick-and-mortar service businesses, access and convenience are of primary importance. Customers come to you with an immediate need because you’re the expert in whatever field or trade the concept falls into. Real estate requirements for a service concept may be less pricey overall. However, something to consider for many concepts is finding a site with ample parking for service vehicles you might need to successfully operate your business.
Labor. Labor pressures for service brands can be different from other sectors of franchising because employees typically will be technicians who are skilled or trained in the trade. You’re recruiting a higher-level employee compared with what you might see in a restaurant setting where employees are more entry-level. While constantly recruiting employees is a reality today in all businesses, higher-level employees typically have lower turnover rates.
Michael Arrowsmith is Chief Development Officer at Pinch A Penny Pool Patio Spa, where he spearheads the brand’s development efforts in key markets and drives new franchisee recruitment. He has spent the majority of his more than 25-year professional career growing franchise brands in the food/restaurant industry, holding senior-level executive positions with concepts including Captain D’s, Denny’s, and Checkers & Rally’s.
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