Back in January of this year, I started a series of blog posts regarding the Secret Sauce of Franchising Investing. I wrote the detailed posts on my first four “ingredients” and then Covid hit. I turned my attention to writing on issues impacting Iowa business relating to the government shut down, relief funding and other issues occurring due to the virus.. Then, I hunkered down helping clients through this terrible time period. As a result, I took my longest break from the blog since I started in 2006. But, I am back, and ready to get blogging on issues once again.
I wanted to touch on the “fifth ingredient” of the Secret Sauce for franchise investing which is whether the franchise has reached a critical mass of units. I know a lot of people want to find that new and fresh franchise. Who doesn’t want to get in on the ground floor of McDonald’s or Subway, right? While there can be a great deal of excitement with a new offering, professional investors are usually most comfortable investing in a franchise that has reached a critical mass of units. What is a critical mass of units? I think that number may vary depending upon the offering, but the example in the original private equity article mentioned 50 units as a good barometer for a critical mass.
Why is it important to have a critical mass of units? First it tells investors the franchise has had some reasonable success in attracting franchisees to pay fees and incur the risk of starting a new location. Second, if the locations have been open for some time, it demonstrates a longer-term viability of the concept. Third, the larger the system, the more resources the franchise will have to develop areas for further growth and marketing. And finally, it means the franchise has survived those initial growing pains that all new franchisors are sure to experience.
You may want to ask yourself, why be the guinea pig when you can let someone else take that risk?!