BUSI 423 Week 7 Case Study: Franchise Project Example

Should I Buy This Franchise? A Feasibility Analysis of a Home Cleaning Franchise

Executive Summary

This case study evaluates whether to buy a territory from a composite residential cleaning franchisor, called here BrightNest Home Services, in a suburban county of about 180,000 people. After reviewing the franchisor's disclosure document, interviewing six current and two former franchisees, and building a five-year projection, I recommend buying, subject to three conditions: a territory definition that excludes online booking leakage, financing that keeps debt service below 12 percent of projected Year 2 revenue, and confirmation of the Item 19 figures with at least two franchisees in similar markets.

Screening the Franchisor

Grossman and Katz (2017) advise starting with the franchisor itself, because a weak franchisor cannot deliver the support its fees pay for. BrightNest has franchised for eleven years and has 214 units. Item 3 lists two lawsuits by franchisees in the past three years, both settled, concerning marketing fund spending, which I will discuss with current owners. Item 4 shows no bankruptcies. The audited financial statements in Item 21 show three years of profitability and royalty revenue growing about 9 percent a year, with modest debt. The franchisor passes the screen, with the marketing fund disputes noted as a question.

Investment and Fees

Lafontaine and Shaw (1999) found that franchisors rarely change royalty rates or fees as they mature, so I treat the 9 percent of sales going to royalties and the brand fund as permanent costs rather than terms likely to improve.

Territory and Agreement Terms

The agreement runs ten years with one renewal of ten years at the then-current terms. Item 12 grants an exclusive territory defined by ZIP codes but reserves the franchisor's right to serve customers who book through its national website, routing those jobs to the nearest franchisee. Kalnins (2004) found evidence that franchisors' expansion can reduce existing franchisees' revenue, and online channels are a modern form of the same risk. My first condition is a written addendum confirming that all online bookings from my ZIP codes will be routed to my unit. The transfer provisions in Item 17 allow sale of the territory with franchisor approval and a $10,000 transfer fee, so the business can become a sellable asset.

Outlet Turnover

Item 20's tables show 31 new units, 8 transfers and 5 closures last year, with 6 closures and 9 transfers the year before. Closures of about 3 percent a year are moderate for a service franchise, but the transfers suggest some owners sell within a few years. Two former franchisees I reached left for personal reasons and described the system favorably; one cited burnout from managing cleaning staff without a field manager, which informs my staffing plan below.

Testing the Earnings Claims

Item 19 reports that units open at least three years had median gross sales of $612,000 last year, with the bottom quartile below $380,000. Gross sales depend heavily on household income and density. My territory's median household income is slightly above the system's median market, according to the franchisor's own territory report, so I use projections between the bottom quartile and the median, reaching the median only in Year 5.

Franchisee Interviews

Following advice from the Federal Trade Commission (2020) to speak with owners at different stages, I interviewed six current franchisees, two in their first year and four with five or more years. All described training as strong and the scheduling software as reliable. Four said the brand fund had improved after the disputes, with quarterly reports now shared. Every owner said the business succeeded only after they hired a reliable field supervisor, usually in Year 2. Davies et al. (2011) tied franchisees' readiness to follow system standards to how far they trusted the franchisor, and the owners I spoke with described a relationship that had recovered trust after the fund dispute, which I count as a positive sign.

Financing Plan

The $170,000 budget would come from $50,000 of my savings and a ten-year, $120,000 bank loan carrying an SBA 7(a) guarantee, a common structure for franchise purchases. The annual debt service of about $19,600 is built into the pro forma. Keeping a personal reserve outside the business, equal to six months of household expenses, protects my family if Year 1 sales run below projection. I would not draw on retirement savings, since the loss of tax-deferred growth and the penalty for early withdrawal would raise the true cost of the investment.

Staffing and Operations Plan

The interviews made clear that this is a labor business more than a cleaning business. The owner's job is recruiting, scheduling and keeping cleaners, and the franchisees who struggled were those who tried to clean houses themselves while also selling and managing. I would start with four part-time cleaners in two teams, paid above the local market rate to reduce turnover, and spend my own time on sales, scheduling and quality checks. A field supervisor would be hired when monthly sales exceed $30,000, which the projection reaches early in Year 2. The franchisor's training covers cleaning methods and the booking software; I would add my own monthly team meeting and a small bonus tied to customer ratings, since repeat customers on recurring schedules are the core of the revenue.

Five-Year Pro Forma

Year 1 barely pays the owner, so the decision rests on whether sales reach the system's lower range by Year 2, which is why the earnings claims had to be tested against franchisees in similar markets. Debt service in Year 2 is about 5 percent of revenue, well within my financing condition.

Risks

The main risks are slower growth than projected, labor turnover, online booking leakage and a decline in the brand's reputation from another unit's failure. I would respond by keeping six months of personal living expenses in reserve, hiring the field supervisor as soon as sales exceed $30,000 a month, securing the territory addendum and participating in the franchisee advisory council, which gives owners a voice in the brand fund.

Recommendation

I recommend buying the BrightNest territory if the three conditions are met. The franchisor is financially sound, its system is respected by its own franchisees, and a realistic projection reaches a solid owner income by Year 3. If the franchisor will not confirm the online booking routing in writing, I would decline, because that single term could divert the growth the projection depends on.

References

Davies, M. A. P., Lassar, W., Manolis, C., Prince, M., & Winsor, R. D. (2011). A model of trust and compliance in franchise relationships. Journal of Business Venturing, 26(3), 321-340. https://doi.org/10.1016/j.jbusvent.2009.09.005

Federal Trade Commission. (2020, September). A consumer's guide to buying a franchise. https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise

Grossman, R., & Katz, M. J. (2017). Franchise bible: How to buy a franchise or franchise your own business (8th ed.). Entrepreneur Press.

Kalnins, A. (2004). An empirical analysis of territorial encroachment within franchised and company-owned branded chains. Marketing Science, 23(4), 476-489. https://doi.org/10.1287/mksc.1040.0082

Lafontaine, F., & Shaw, K. L. (1999). The dynamics of franchise contracting: Evidence from panel data. Journal of Political Economy, 107(5), 1041-1080. https://doi.org/10.1086/250090