The value of a good franchise brand matters because it offers security and familiarity with consumers and a higher return for investors. Many investors are unhappy with the small returns of passive investments (stocks, bonds, etc.). With the Fed forced to maintain low interest rates in the depressed economy, most bank- CD interest payments are not enough to cover for inflation. Not only has this caused individual stocks and mutual funds to become overpriced, but also has forced investors to reconsider passive investments altogether.
This has been a boon to entrepreneurial development, with small businesses comprising an ever-increasing share of the GDP in both America and Europe. This creates tremendous competition in the free market. Competition is good, but it also creates more risk for the investor who may be considering opening a small business.
For a number of reasons, franchises, and particularly franchise resales, offer the opportunity to lower that risk. A franchise that carries a solid brand value and that is already fully operational lowers the risk of uncertainty and the start-up costs associated with a brand new business.
Brand value is a component of economic goodwill, which is defined as the intangible advantages a franchise has over its competitors. These intangibles might include a positive reputation, a business network of associations, or even strategic locations. These all work to enhance and strengthen brand value, which in turn attaches a premium cost to buying the rights to operate a franchise.
Brand value is also comprised of a number of different factors. By breaking down brand value into its individual components, the potential investor of a franchise can better understand why and how a good brand value is worth a premium of lower risk.
Consumer Awareness: A good brand will carry a strong, favorable presence in the minds of consumers. They will recall and recognize the brand name easily. Good examples might include Coke, BMW, or Burger King. The general public is aware of these brands, the quality, the colors or features, or even the nostalgia attached to them from past associations.
Brand Association: Everyone attaches traits or features to people and places. These traits or attributes also become associated with businesses in the consumer’s mind. For instance, BMW is associated with quality engineering and affluent consumers, whereas Coke is so well known that many people call cola sodas of any type, a “coke,” while still recognizing the value attached to the real Coca-Cola brand.
Consumer Loyalty: Franchises with a good brand have earned that value by properly marketing their image over time. But ads are only effective in the long-term by strong follow through with quality, customer service, or value pricing. These attributes build customer loyalty. Customer loyalty means a consumer is likely to re-visit an established franchise and re-purchase goods and services. As Warren Buffet is renowned for saying, if a person is willing to cross the street to purchase a product, or pay a higher price for say Coca-Cola rather than generic cola, that is customer loyalty.
Such brand value in a franchise carries brand equity, the preference customers feel for a selected product or service amongst many similar brands. This preference means customers are more likely to pay a higher price or visit more consistently. This not only increases sales and profits in the long run, but also decreases risk to the investor in a tumultuous economy. A franchise with positive attributes of consumer awareness, association, and loyalty means strong consumer demand. Strong demand lessens the need to undersell competitors or rely solely on price competition, which helps to offset an inflationary environment. With these underlying factors of a franchise brand value, the investor can be comfortable paying a premium for the franchise name. Investing in brand value, followed by good management, marketing, and customer service means an investor can begin reversing the downward pressure of inflation and start reaping the rewards of a solid investment.