This lesson is part of our free Franchise 101 course.
When you’re picking a franchise to work with, it’s not enough to look at its current metrics, you need to look at its past as well.
Going Back in Time
All sorts of information can help you in understanding the value of a franchise. Revenues, profits, sales-to-investment ratio, how many outlets there are and where, whether it’s been in the headlines and why. When you’re looking for this data, you want to make sure that you have the most up-to-date version.
But it’s important that you don’t just look at that recent data. For financial measures in particular, a longer view will give you perspective on what a business represents and what it can or can’t do for you. We all have a history, and you shouldn’t get into business with someone whose history you don’t know.
Seeing the Direction of Travel
One reason for looking at a franchise’s recent history, and particularly its financial history, is to understand which direction it’s traveling in.
Financial figures that look great compared with other businesses are usually a good sign, but if they’re not also good compared with the previous few years then they may not be the symbol of success that they seem.
If revenues, profits, or other important financial indicators have been trending down, then they’re likely to continue in that direction. It’s probably a sign of an underlying problem, whether a fall in the popularity of the service the franchise provides, being out-maneuvered by a better competitor, or perhaps some failing of management at the corporate level. While the business is in decline, you probably don’t want to get involved.
Looking for Consistent Success
Looking at longer term performance, consistency is an important indicator of real success. Every business is going to have the occasional bad year that isn’t their fault – most businesses have just been through one. The question is, how do they cope with the ups and downs? Do they stay relatively steady over time, maintaining highs and quickly recovering from lows, or does their performance vary wildly?
Consistency indicates stability and a franchise that will last. If you want to know where you stand, this is important.
What Sort of History Do You Want?
As with so much about picking a franchise, personal taste comes into play. If you’re looking for security, then pick a franchise with a consistent, steady track record. If you’re willing to take a little more risk for greater potential profit, then you might consider one with a shorter record but that’s been rising in recent years.
What you don’t want is to hitch your fortunes to a franchise that’s in decline. Only looking at historic data can tell you if you’re at risk of doing that.