This post continues in a series of posts I am writing on franchise investing. The series of posts initiated with an article I read outlining what private equity investors like about franchising. Today, I want to touch on the second “ingredient” of the Secret Sauce which is whether the product or service is “on trend.”
So what does it mean for the product or service to be sustainably “on trend?” According to the private equity pros:
Systems that benefit from sustainable and easy to understand tailwinds are going to be more attractive to private equity investors. Most private equity funds are adept at discerning trends from fads, so if the shiny new product doesn’t appear to have staying power, then they may pass on making an investment.
One of the industries that comes to mind for me when we discuss sustainably “on trend” is the fitness industry. I have probably reviewed just about every fitness craze imaginable in franchising during my career. In Iowa, I have seen a number of franchises pop up over the years and I have seen several disappear during my time in practice. Based upon my experience, I would say the competition in the fitness industry is fierce. Some franchises are sustainably “on trend” while others are simply a fad. Knowing ‘which is which’ can sometimes be difficult.
Specifically, you should look very carefully at the sustainable trends of the franchise concerning the number of outlets. Carefully study the number of transfers in the franchise and not just the number of closures. A high number of transfers may be an indication that franchisees in the system are struggling, but unprofitable franchises have not been shut down. Of course if there is a significant number of closures in the system that is definitely a bad sign.
In evaluating fitness franchises it is also important to determine whether the franchise system offered is unique in some manner and whether the franchisor’s intellectual property is protected. The uniqueness does not always need to be the exercise program itself. It could be a marketing plan or simply the way the exercise program is packaged to consumers. Some of the best franchises in the fitness industry do not necessarily involve the latest exercise craze, but instead have figured out a way to run the most tried and true exercise programs efficiently and profitably. Ask yourself, “do you see this fitness business standing the test of time for the next 10 years?” If you can’t answer that question affirmatively then it is time to move on!
See also the First Ingredient of Franchise Investing here.