Saturday, 17 March 2018

Franchise Business Life Cycle

It's not unusual for retirees and other people looking for a career change to consider buying an existing Franchise business or acquiring a greenfields territory within a particular Franchise system.

Even though the Franchise system itself may have been in existence and operating for some time, and although the Franchisee may be provided with initial training in the system, procedures and processes - all new Franchisees to that system still need time to get up to speed on how best to operate the Franchise business with a view to its ongoing growth and staying profitable.

A factor which Franchisees should make themselves of is the business life-cycle.

Business Life Cycle Diagram

By understanding this cycling process, Business owners will be in a stronger position to recognise trends, adapt business planning, and put appropriate strategies in place to remain profitable.

Introduction

The introduction or establishment stage is the birth of the Business. In this stage:

  • New services and products introduced at this stage are more susceptible to failure. This may be attributed to:
    • Technical issues with new products/services;
    • Delays in product/service availability;
    • Reluctance by consumers to change established behaviours and adopt the Business owner's new product or service;
    • The Business owner not fully understanding customer pricing behaviours.
  • Detailed planning should have been commenced pre-start up;
  • Customer numbers are low; 
  • Sales turnover is low; 
  • Expenses are higher; 
  • Profit is likely to be negligible (if any); 
  • The Business owner needs to more aggressively market the products/services of the Business to break into the marketplace; 
  • The Business owner's aim should be to get the Business onto a stable foundation of profitable sales and a consistent cash flow as soon as possible. 
Growth
  • Typically after the Business survives the introductory phase, product and service sales will experience more rapid growth; 
  • However, progressively over time as more customers purchase new products or services, the size of the potential customer base decreases and new customers become more difficult to find; 
  • Assets needed to operate the Business should now have been acquired; 
  • Cash flow will remain positive; 
  • Expenses will still increase but at a reduced rate; 
  • Profit will be positive; 
  • Customer satisfaction may be more challenging if resources are insufficient. There may be an increasing need to employ more staff and/or outsource Business functions; 
  • The operation and management of the Business will likely become more complex as it grows; 
  • Planning must be revisited on a regular basis; 
  • Marketing remains a key focus; 
  • There is likely to be a greater need to make capital injections, for example, to update equipment. 
Maturity
  • As the market approaches saturation, Business growth will slow until sales stabilise; 
  • Income continues to rise for a period, then levels off; 
  • Profits will peak then begin to decline. This might be attributed to: 
    • Increasing numbers of competitive products and services in the market;
    • Increasing costs related to research & development to find better versions of the product;
    • The product or service starts losing its distinctiveness.
  • Because of the potential profit erosion, it will be important for Business owners to put appropriate strategies in place. Such strategies may aim to extend the product or service life cycle, resulting in renewed growth followed by further stabilisation at an overall higher level of sales. This could be achieved by: 
    • Promoting more frequent use of your products and services among existing customers;
    • Attracting new customers;
    • Promoting a wider or different range of products and services;
    • Product or service improvements;
    • Repackaging;
    • New pricing regime; or
    • New advertising/marketing campaign. 
  • Ultimately the aim is to maintain profits as long as possible before they start to fall; 
  • The customer base will be relatively strong for a period but will start to decline; 
  • Cash flow should remain consistent for a period; 
  • As growth slows more detailed long term planning is required; 
  • Finances need to be monitored; 
  • Spending will need to be reduced to match income. 
Decline

Triggers for decline in a Business may include:
  • Technological innovation which may make the Business owner's products and services obsolete;
  • Changes in the economic environment – the 2008 global financial crisis (GFC) being a prime example.
  • Where a product or service is declining the Business owner needs to consider either: 
    • Removing the product or service from their Business without delay; or
    • Gradually phasing the product or service out over a period of time; or
    • Looking at ways to rejuvenate the product or service;
  • Income and profits consistently drop; 
  • Competitors are increasingly able to entice away the Business owner's customers either with better service, lower prices or more modern products/services; 
  • The Business Owner needs to advertise aggressively to maintain their customer base; 
  • The Business owner needs to continually look at ways to differentiate from the competition. 
Conclusion

In order for businesses to continue to exist they need to reduce their dependence on individual product or service lines. Instead they should develop a portfolio of products or services so that when one product or service may be in decline, a different product or service will be in the growth stage.

Difficulties arise where the Franchisor has a significant degree of control over the Franchise system and the individual Franchisee has less flexibility to alter price, products and services and engage in marketing activities outside of what the Franchisor approves.

Prospective Franchisees should include as part of their due diligence investigations an assessment of:
  • at what point is the Franchise system along the business life cycle;
  • the business life cycle in respect of the individual Franchise Business;
  • the degree of control exercisable by the Franchisor over the Franchisee and the Franchise  Business, taking into account how this control can impact on the Franchisee's ability to manage the business life cycle of the Franchised Business.
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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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