During my presentations on business ownership and business buying the subject of the risks associated with a business always comes up. We cover a few of the big risks and one thing I always state is “Whether starting, buying or getting a franchise, you have to ask what is the business’ competitive advantage?”
In other words, why do the customers pay what they pay that allows the company to provide value and make a profit? Connected to this is the question, how high are the barriers to entry?
The examples I usually use are the following:
1. Ink cartridge refilling seems to be the current version of quick printing (of the 1990’s). There used to be quick printers on every other corner. Now it’s hard to find one (for reasons other than low barriers to entry; computers and inexpensive color printers have ravaged the market). There are cartridge refilling stores, kiosks and departments in Office Max, Staples, Walgreens, Costco and other big stores. It’s become a commodity and people make their decision based on price and convenience.
2. Curves had rocket ship growth. Now there’s a website titled, “buyourcurves.com” and prices are as low as $20,000. Back when curves was at its peak, BusinessWeek had a story about somebody on the East Coast who saw what curves was doing, created a close and within nine months had sold almost 90 franchises. Barriers to entry were low, there was no real competitive advantage and now there are tons of quick, informal exercise places.
I’ve mentioned two business models that have franchising and I don’t mean to pick on franchises. Independent businesses can also have low barriers to entry and a weak competitive advantage and some franchises have high barriers to entry and a distinct competitive advantage. But especially with lower priced franchises, just like very small independent businesses. You have to be really careful with the abovementioned factors. They can be killers!
PS Business owners/sellers, pay close attention to this just as buyers should. If your business doesn’t have a distinct competitive advantage you will sell for less, get less cash and have a tougher time selling (especially to very qualified buyers).