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Δευτέρα, 26 Ιανουαρίου 2015

How to Find Undervalued Franchises

What kind of potential franchise owner are you? Maybe you're going big: seeking a guaranteed success with a tried and true franchise––a household name that’s still growing at a rapid pace.
Picture Subway or Dunkin’ Brand Group, Inc. (DNKN), two franchises with strong brand recognition who both happen to rank among the top five fastest growing franchises this year.
Or perhaps you’re a risk-taker: searching for an undervalued franchise that’s poised for growth and offers a great deal on its ratio of investment to potential return.
Yet analyzing a franchise is not a binary, either-or proposition. Many franchises with unbeatable brand recognition and solid growth are also downright expensive: both KFC and Taco Bell's initial startup costs [both properties of Yum Brands, Inc. (YUM)], for example, range from $1 million to $3 million. Yet there remain plenty of well-known franchises — as well as a greater number of burgeoning brands — whose initial start-up costs are affordably low. While Cruise Planners and Vanguard Cleaning both ranked among the fastest growing franchises in 2014, both offer attractively low initial start-up fees of less than $40,000, pushing them into the undervalued category.
When it comes to analyzing a franchise investment, you’ll want to consider a number of factors rather than going on a gut instinct about a franchise’s potential future profits. A company’s return on investment, company leadership, growth, brand recognition and default rates are all essential factors to consider. But what if you’re seeking a diamond in the rough? Don’t overlook the underdogs of the franchise world: franchises that are poised to take off but are currently undervalued.

Undervalued Franchises

If you’re the kind of investor whose favorite two words are “good deal,” the hunt for an undervalued franchise might be a particularly worthwhile one. Yet when it comes to determining which franchises are on the rise yet currently undervalued, the equation can be a tricky one. It helps to understand that undervalued franchises tend to be elusive creatures: it’s only easy to realize in hindsight that a now-booming franchise was an underrated opportunity that you missed.
Some franchises offer great opportunities, yet don't qualify as undervalued brands. Case in point: Anytime Fitness is clearly a franchise on the rise, with a healthy portfolio of assets and profits — not to mention an admirably low loan failure rate. It wins out as the top franchise opportunity for 2014, yet the startup costs of approximately $79,000 to $371,000 are steep enough to keep many would-be investors from opening their own branch of the growing company. Undervalued? Probably not.

Bang for the Buck

Before you run to the bank to get approved for an SBA (Small Business Administration) Loan — or start hinting to your in-laws that you’d prefer your next birthday gift in cash — take a practical look at the qualities of franchises that offer that magical appeal: bang for the buck. (For related reading, see: Franchises Struggling Under SBA Loans.)
Don’t make the mistake of disregarding the slow and steady competitors in the franchise race. Plenty of franchises may return steady profits year after year, yet don’t earn a space in the franchise limelight. Reliable franchises with slower growth rates sometimes lack the sex appeal of hot new franchises doubling their stores every year, but that doesn’t make them unworthy contenders for your investment.
Some franchises are growing so fast, you’d swear that a new 7-11, Jimmy John’s or Starbucks Corp. (SBUX) pops up in your neighborhood every month. Other brands may seem to be on a conservative course of growth. But a slower and steadier growth pattern doesn’t necessary indicate a lack of performance — or future potential.

The Importance of Branding

When it comes to long-term value, sex appeal can have staying power. Founded in Milwaukee in 1903, Harley-Davidson, Inc. (HOG) just may be the Sophia Loren of franchises: experienced, a little bit dangerous, and still sultry well past middle age. Harley-Davidson remains one shining — or, you might say, roaring — example of a company that offers durability and healthy profit margins rather than meteoric growth. That’s partly due to the magical equation of branding, reputation, and style that has made the company into a brand so iconic that it requires only a single word for instant recognition: Harley.
While BMW and Yamaha motorcycles are considered by some aficionados to be superior vehicles, when it comes to branding, there’s no contest. Have you ever seen a BMW tattoo, a BMW bikini or been to a Yamaha cafe? No, but all of these things carry the Harley-Davidson moniker: the brand extends to furniture, glassware, accessories, clothing, and — of course — tattoos. To put it another way, Harley-Davidson isn’t just a brand: it’s a lifestyle. It’s a fantasy. It’s a culture. (For more, see: What's the Best Franchise Investment?)
High-profile brands such as Harley-Davidson can sometimes qualify as undervalued simply because of their scope, staying power, and consistent return on investment. For example, while the company failed to rank on recent lists of the top 100 fastest-growing franchises, it has outperformed its own growth targets. In 2009, the company set an ambitious goal: to open 100 new international dealerships by 2014. When the 100th new international dealership opened to great fanfare in Stuttgart, Germany, they hit their growth target early: certainly a fortuitous sign to would-be franchise owners looking for a brand that not only delivers on its promises, but exceeds them.
While Pizza Hut (another YUM property) has Papa John’s International, Inc. (PZZA), Little Caesar’s and Domino’s Pizza, Inc. (DPZ) vying for equal name recognition and growth, Harley-Davidson sits at the top of its game, uncontested among motorcycles for sheer brand power. While brand power may be difficult to accurately measure, the company delivers on sheer statistics: in the heavyweight motorcycle market, their market share is 49%. To put that figure in context, their closest competitor comes in at only 15% of the market share.

Is Smaller Better?

Aside from the durability and potential of brand power, another factor to consider when seeking an undervalued franchise is simple: size. Small and medium-sized companies are generally better places to look when seeking a high-potential investment that offers high earning potential with (relatively) bargain start-up costs.

The Bottom Line

Seeking an undervalued franchise can seem like a mysterious process: there’s not a single formula for determining which businesses offer a bargain investment with solid earning and growth potential. Don’t discount well-known brands that may be growing at a more conservative pace: they offer name recognition and staying power with a return on investment that’s more about a loyal customer base than rapid growth. Another overlooked area is fast-growing franchises that nevertheless offer attractively low initial costs: you may be able to pay off your loans, and begin turning a profit, much more quickly.


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