Over the years, this section has often written about the importance of proper preparation before starting a franchise establishment. For a franchisee, and often his financing bank in particular, it is very important to know what the business economic perspective of the establishment in this case looks like in the short and also the longer term. To this end, franchisors often provide franchisees with turnover and result forecasts, which, in accordance with settled case law, must be based on a carefully conducted market and location survey.
The regular reader of this section is familiar with the main features of such a market and location survey. This should include, among other things, the population of the intended exclusive area of the franchisee, the competitive relationships, the accessibility of the location, the target group and the composition of the population. When historical data of the site concerned is available, this is of course an advantage in principle. Consider, for example, the situation in which a franchisee takes over an existing establishment. In such situations, the franchisor often performs the preliminary work for revenue and profit forecasts itself, which is more than sufficient in many cases. However, practice is increasingly showing that this situation in particular can be a pitfall. Historical data is not always reliable. In recent years, various demographic shifts have taken place in the Netherlands. This includes aging. This also includes the changing character of urban districts in particular as a result of, for example, urban renewal or migration. (Large) infrastructure projects can also have a major impact on the turnover potential of a retail establishment. Historical data relating to an existing location are then, and that goes without saying, not sufficient to base an adequate prognosis. A concrete example from practice concerns a book and tobacco shop in a suburb of a medium-sized city. In that neighborhood a gradual shift from middle to low incomes took place. High-margin book sales collapsed and tobacco sales rose, albeit marginally, because there was a lot of competition for tobacco sales in the shopping street concerned. Moreover, little margin is generated on tobacco. The history of the location involved showed thriving book sales. The changing population composition of the neighborhood was not taken into account in the turnover forecast of the franchisee concerned. The franchisee eventually had to leave the field, resulting in a lot of damage.
Carefully conducted market and location research, with knowledge of the facts, and therefore not based solely on the history of the relevant location, could have prevented these problems. The changed composition of the population, the aging population, infrastructural projects: these are all matters that have an extraordinarily long lead time and, with adequate research, can be recognized in good time. A good franchisor ascertains such matters and ensures that this is incorporated into an adequate turnover and result forecast. Again: the importance of a good market and location research can therefore never be overestimated.
Ludwig & Van Dam franchise attorneys, franchise legal advice