This post continues in a series of posts I am writing on franchise investing. The series of posts initiated with an article I read outlining what private equity investors like about franchising. Today, I want to touch on the third “ingredient” of the Secret Sauce which is whether the product or service has universal appeal across geographies.
The private equity pros from Clearlight described it this way:
Some products or services may be relatively more embraced in certain geographies than others. A good example might be a food concept that is cherished in one part of the country but is not portable to other markets based on regional dietary preferences. So, investors will look for systems that are thriving within their original markets as well as new markets that they’ve entered. Example: Have you ever been to a part of the country that doesn’t have a McDonald’s?
If you are investing in a new franchise it may be difficult to determine whether the product or service has universal appeal. That’s why I think most professional investors will tell you to invest in franchises that have experience and history of franchising in multiple geographies. But if you do that, isn’t it entirely possible you will miss out on the opportunity?
The answer to that is that you could absolutely could miss out on the opportunity! But is it better to lose your money or miss out on an opportunity? You’ll need to determine your ability to take on risk. If I am throwing almost all of my net worth into a franchise opportunity perhaps it isn’t the best idea to invest in a delicacy from Louisiana in Iowa. But…if I have an appetite for risk and a healthy bankroll, then perhaps it’s a little easier investing in a concept like Raising Cane’s which as far as I can tell has been a rousing success in Iowa (with it’s long lines and awesome chicken fingers). It all depends upon your situation. (Side note: I have read about Raising Cane’s as it started up. Bankers got it wrong with that restaurant on two points. First, selling only chicken fingers can be successful. You don’t need other options. And two, the regional concept has proven to be successful across multiple geographies).
But the only way you will truly know is for the franchise to expand across multiple geographies before you invest. It is okay to wait on a concept to see if it has legs. In Iowa, that usually isn’t a problem because most franchises start elsewhere before coming to Iowa. By the time a franchise is ready to come to Iowa you will often know whether the franchise has universal appeal across geographies or not.