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Chapter 1. Franchising as Entrepreneursh... > Opportunity Recognition: Margin Anal...

Opportunity Recognition: Margin Analysis

Margin analysis is the final differentiator between an opportunity and an interesting idea. As part of your opportunity-assessment process, you must demonstrate that you can provide a product or service that is faster, better, or cheaper than what currently exists. If you provide better products or services, will the market pay for that offering, and will you gain a viable and sustainable profit margin?

Gross margin is the basic ratio you examine in the opportunity-assessment process. Net profit, cash flow, and consideration of the time necessary to break even are also vitally important. Common indicators of a competitive advantage are being the low-cost provider of a good or service and having a lower capital requirement than the competition. Many franchisors use a 20 percent return on investment (ROI) as their benchmark for successful store-level economics. However, everything starts with cash flow for the franchisee. The amount of positive cash generated beyond the breakeven point is the ultimate measure of a good opportunity. We discuss the financial ramifications and implications of a franchise’s service delivery system in Chapter 8 when we compare two franchises: Bagelz and Panera Bread.


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