Buying a franchise is not an easy decision.
Not just because the length of the contract can easily be 10 years or more, not just because the cost of a franchise can be substantial, and not just because franchise ownership means heavy management of time, people and a risk of resources.
Comparing franchise opportunities is part of your due diligence. There are 4 important categories to review before making a decision: 1. The management and franchise support team, 2. Marketing systems, 3. Financial metrics, and 4. The Customer Value Proposition (the core business model) chosen by the company.
But another huge piece of the puzzle is finding fit — the fit between you and the actual core business structure of the franchise model. This is also called the Customer Value Proposition.
You see, research shows there are only 3 fundamental business models. They are:
This is important because your skills and experience may be best tailored for one of the customer value propositions. This doesn’t mean you can’t learn to master all the models (although this would be very rare). It just means your success will be smoother if you choose the right fit between your skills and the customer value proposition you are most suited for.
Let’s review some common factors and then work through an example.
What factors should you consider when deciding to acquire a franchise?
Buying a franchise is a set of decisions that is largely unique to your wants, needs and resources.
You know this already.
There can be a long list of factors to consider when buying a franchise, including investment pay back projections, free cash flow projections, local and state regulations, your grand opening plan, average sales revenue projections, etc. Here are 4 categories to make part of your initial review:
- The management and franchise support team
- Marketing systems
- Core metrics to show the health of the company
- The Customer Value Proposition (the core business model) chosen by the company.
Let’s briefly review each.
First, your job is to carefully review the management structure and the franchise support team. Every franchise is different and has their own set of systems. You might start by looking at the history of the CEO and do as much research here as you can. Check the funding sources (debt and equity), if any, see if there is a board of directors, and review them as well. Then look at what the daily support team looks like and ensure the level of nitty gritty support is what you are looking for.
Second, look at the marketing systems. This is more tactical in nature and key systems are usually kept close to the headquarters. The more specific strategic and tactical questions will be saved for your Discovery Day. But you can still get a good idea by doing your own research and contacting existing owners to get an idea of the level of sophistication offered by the corporate marketing team. After all, marketing is the most important function of the business as it’s job is to: 1) gain a customer, and 2) keep a customer. Nothing else matters.
Third, review some important financial metrics to check the health of the company. We clearly outline and have examples in the McDonald’s review. This information is not hard to find and calculate by reviewing the company’s FDD, assuming the company produces their financial statements. If not, just have a friendly conversation with the accounting team — they’ll be happy to provide and will know exactly why you are asking. The purpose here is to simply look for red flags and educate yourself, i.e., is their debt ratio at 500% (very high risk) or is their current ratio at .10 (an unhealthy number)? For comparison which we listed below, Anytime Fitness operates with a very healthy 20% debt ratio and an excellent current ratio of 3.6. (The importance of these numbers are very simply explained below).
There are dozens of financial metrics to review, but the metrics we typically start with are:
- Current ratio
- Debt ratio
- Gross profit margin
- Net profit margin and
- Return on assets (ROA).
For a complete review of these metrics see the Anytime Fitness example below. You can also review these metrics and an explanation of each here, where we review McDonald’s: What is the #1 franchise? (Answered!)
Fourth and last, is the actual business model review, a.k.a. the Customer Value Proposition. Let’s explore a simple example below.
How to Compare Franchises: The 3 Fundamental Business Models
The best companies clearly integrate their customer value proposition (not to be confused with the Unique Selling Proposition – USP) in their daily operations. And, more importantly, the best companies choose one customer value proposition and go ALL-IN, making the other two customer value propositions just ‘good enough’ to compete in the market.
When a company chooses their strategy, they have important decisions to make that have a profound impact on the balance sheet, hiring procedures, inventory management, product training, manager training, customer demographics & psychographics, and more. Then, of course, this highly impacts sales and marketing strategies and how messaging is communicated to the customer.
Your decision on which business model you choose should not be taken lightly.
Here’s a definition of each customer value proposition:
Customer Intimacy – Businesses that choose the customer intimacy strategy are messaging to their customers,
“Choose us because we can customize our products and services
to meet your individual needs better than the competition.”
Quality flooring service-companies, physical therapy, Home Depot and a company like Nordstroms are examples of this strategy. This model may be better suited for a people person, an expressive extrovert with outgoing communication skills, and a highly creative problem solver.
For more information visit: Customer Intimacy Customer Value Proposition.
Operational Excellence – Businesses that choose the operational excellence strategy are saying to their customers,
“We can deliver products and services faster,
more conveniently and at a lower price.”
McDonald’s, Snap fitness (cheaper 24-hour key club) and Walmart are examples of this strategy. This model may be better suited for more of an introverted personality, supply chain experience, and someone experienced in managing budgets and tight timelines.
For more information visit: Operational Excellence Customer Value Proposition.
Product Leadership – Businesses that choose the product leadership strategy are saying to their customers,
“You should choose us because we offer a
higher quality product than our competitors.”
Apple, Orange Theory and Cisco Systems are examples of companies that succeed because of product leadership. Interestingly, product leaders act fast and avoid bureaucracy at all costs because it slows decisions and time to market.
For more information visit: Product Leadership Customer Value Proposition.
CAUTION: Here’s a friendly precaution before we move on:
If a company tells you they are competing to be the best in all three value propositions, turn around and walk the other direction because they will spread their resources too thin, have a lack of focus and won’t be able to gain or sustain a leadership position in any one position, let alone all three.
Let’s now explore an example fitness franchise that everyone knows: Anytime Fitness
Example Fitness Franchise: Anytime Fitness
As you probably know, Anytime Fitness is a leader in the key club fitness niche. This means that customers pay a membership fee in exchange for 24-hour gym access.
Anytime Fitness franchises in the United States and Canada, as well as sold master franchise rights in Australia, Mexico, Japan, China and other countries.
Their largest direct competitor in this space is Snap Fitness. Because they offer typical gym equipment, personal training services, a variety of fitness classes, tanning, and even vending machine options, Anytime is doing a good job in expanding their revenue streams.
Anytime franchisees face fierce competition from dozens of national chains and independent facilities — many of whom are found right here at the Fitness Franchise Information Center.
Anytime reported 2,374 total outlets in 2020 which includes 13 company owned locations. Anytime reports in their FDD that average total revenue per location is about $440,000 with about 650 members. The footprint tends to be about 4,000 square feet, based on an express or standard center.
Anytime Fitness Customer Value Proposition
The first paragraph of Item 1 of the Anytime Fitness FDD sums up their customer value proposition (this is our abbreviated version of their statement):
Our franchise system consists of fitness centers offering convenient access and one-on-one, small and large group training … we require you to staff your center for a minimum amount of hours per week, and we require you to offer personal training services to your members … we require you to use a telephone answering service … we have developed an access / security system that allows members to have access 24 hours a day, automated services, and reciprocal benefits between centers.
Here’s what these statements mean to the customer (club member), as well as a closer investigation of the model:
Customer Intimacy as Anytime’s Value Proposition
Minimal staffing time means lower labor costs (a sign of operational excellence) and suggests to the customer that ‘you need to know what you are doing because there may not be anyone here to help you’. This is an environment where you get what you see, and there is little flexibility in the customization of the services to match the needs of each customer (a sign it’s not a Customer Intimacy proposition). While there is certainly individual customization during personal training services, i.e, working around an injury, a rehab, or sport specific training, this is a standard practice and meets obvious industry baselines. For these reasons, among others, Anytime Fitness is not competing on the Customer Intimacy value proposition.
If you are a franchisee we would love to hear your feedback about how you would score Anytime corporate in this category. For a franchisor to achieve a stellar score in this category, they would have to do an absolutely extraordinary job in serving their franchisees, within the boundaries and consistencies of the FDD.
Operational Excellence as Anytime’s Value Proposition
Minimal overhead suggests to the customer that this is a no frills, medium-benefit environment that isn’t going to win any AAA 5-Diamond awards (again, not a Customer Intimacy proposition). But this doesn’t mean Anytime is leading the low cost gym experience. If anything, they tend to be at least in the mid-range of monthly gym membership fees, and the low end of a small fitness boutique. But the customer can expect a convenient, consistent, safe environment that provides a quality fitness experience (a sign of Operational Excellence). And offering convenience is where Anytime Fitness truly excels, especially to the marketplace of gym goers that value a reliable experience, earning Anytime a high score as convenience to the customer is their bread and butter (another sign of Operational Excellence).
To provide an Operational Excellence value proposition to their franchisees measures: faster, more convenience and low prices. Fast and convenient can be tough to measure for this metric, but with the franchise fee more costly than Snap but still competitive in the industry, Anytime earns a solid positive score here, too.
Product Leadership as Anytime’s Value Proposition
Because there are not many players in the 24 hour key card space, Anytime has a leadership position while offering a quality product in this space. In many cases Anytime is the only 24-hour option in their geographic market. They do not make the promise of delivering the most innovative product or service in the industry, nor do they communicate with the most cutting-edge health and fitness celebrities and experts (although many may be franchisees), and they don’t promote innovative R&D to support their market position (a sign they do not compete on Product Leadership). It’s their ability to lead the industry with an operationally excellent value proposition while also leading within a solid product that meets industry expectations (but not a clear Product Leadership value proposition) that makes Anytime shine in the fitness franchise industry.
Additionally, this strong Product Leadership position is probably why the Anytime model is attractive to franchisees and franchise candidates.
Keep in mind, as it is possible and probable that a franchisor is competing on one value proposition that the end-use customer sees, and different value proposition that the franchisee sees. For example, Anytime Fitness may be offering the most convenient, safest, fairest price 24-hour access membership to acquire members (operational excellence), but offering the best, most innovative franchise product to their franchisees (product leadership).
Anytime Fitness Franchise Financial Ratios
We are going to close out by reviewing some key financial health ratios. These number are easy to find, and easy to calculate. Each simple formula is explained below. No one formula is meant to be a tell-all. The purpose is to simply do your research and get more information about the financial health of the organization you are reviewing.
As you review these numbers for Anytime, keep in mind that they are a very mature, very experienced brand. Anytime’s total revenue, assets and liabilities are big impressive numbers, especially compared to most of their competitors, but it’s the ratios that may reveal more information about the financial management structure and financial strategy — regardless of the size of the company.
Knowing that every company has a different financial structure and a different financial strategy, these financial ratios are excellent analysis tools. And if you happen to be on the franchisor side, then these are great bench marketing tools to see how your organization compares to the industry leaders. For a better understanding of each of these ratios go here for an explanation.
Here’s the comparison between McDonald’s and Anytime Fitness, comparing their common ratios. You will most likely want to see how the fitness franchise you are reviewing stacks up against Anytime Fitness. As a reminder, the purpose here is to simply gain more information so you can ask better questions:
These numbers are taken from the Anytime Fitness 2021 FDD, from the 2020 Financial Statements.
- Anytime’s current ratio (current assets / current liabilities) is stellar.
Current ratio = Current assets: $40,869,373 / current liabilities: $11,339,757 = 3.60
When a company is over a value of “1” they have a good handle on their ability to pay their short term obligations.
Anytime Fitness has an impressive current ratio value of 3.60.
Kudos to Anytime.
- Their debt ratio (total liabilities / total assets) is also a very healthy number, saying that 20.3% of their assets are financed by debt. As long as interest rates don’t go up, and even when they do, they should be in great shape.
Debt ratio = Current liabilities: $11,339,757 / Total assets: $55,736,332 = 20.3%
Again, great job to Anytime.
- Their gross profit margin (Gross profit / sales) is extremely healthy, indicative of a lot of room to pay for expenses.
Gross profit margin = Gross profit: $95,623,285 / Total revenue: $96,732,248 = 98.9%
- Their net profit margin (Earning available for common stockholders / sales) is a healthy 47.1% net income for every dollar earned.
Net profit margin = Net profit: $45,586,623 / Total revenue: $96,732,248 = 47.1%
- Return on total assets (Earnings available for common stockholders / total assets) is also a healthy figure at 86.3%. In this case we also used net income instead of EBIT.
Return on total assets (ROA) = Net profit: $45,586,623 / Total assets: $55,736,332 = 81.8%
An absolutely excellent ROA.
This is precisely why we featured Anytime Fitness as a model as one the best fitness franchises in the world.
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