Franchising Consulting
Cheri Carroll - Franchise Consultant

Cheri Carroll
4404 Caminito Fuente
San Diego, CA 92116
Building Successful Franchises

Should You Consider Buying from a New Franchisor?

There is nothing more exciting than a new idea, a sensational new product, or a novel way of performing a valuable service! Here's some good news -many new franchise opportunities fit this definition. They're new, exciting, and innovative. They're very attractive to you, and you think that they will be equally attractive to others.

But should you spend a significant portion of your life savings to join a young franchise system that is hoping for, and betting on, the success of their great new idea? It could be the next McDonalds or the next Microsoft! Wouldn't that be great? On the other hand it might be the next shooting star destined to burn intensely for a brief period of time before it fizzles out and dies. OUCH. That would be terrible! What should you do?

Like so many other things in life, there is no absolute or singularly correct answer. Younger and newer franchise systems usually have a higher element of risk than a more established and more trackable franchise system. Although the new system may actually be terrific, you simply have less available information to research and check than does a more established system.

On the other hand, young systems offer ground-floor opportunities and the chance to cherry pick locations in your market. You also can play an instrumental part in the growth of that system.

It is very important to remember that every franchise, including the most successful franchise systems in the world, have to sell their first franchise to somebody. If someone doesn't buy the first, than it's axiomatic that there can never be a second!

Over the years, many people have said they would have liked to become part of McDonalds when it was first starting. They feel that they'd probably be multi-millionaires today if they had. That could very well be true. McDonalds has proven enormously successful to many people. However, you must also remember that some people bought Burger Chef at that same time, and no one eats there anymore!

So, it depends on what you feel most comfortable with. If you do like the idea of being part a young system, there are some things you should consider before selecting the one you want to join.

The big question for you when you select a franchise is: "when is a franchise system large enough and strong enough for you to be comfortable about investing in it and also still be growable enough for you to achieve your long term goals?"

If you're thinking of investing in a young franchise company, you should be certain to look for at least the five following key elements that each franchisor should offer to its franchisees. If your young franchisor can say "yes" to all five of these necessary elements, you may be on to something:

1. Good Concept. When a franchisor begins his business, he needs to enter the fray by identifying a market niche that can be exploited - some segment of the marketplace that isn't being served sufficiently well. The unique way in which this new company handles its niche can be a deciding factor in its success. Simply put, it has to "build a better mousetrap." There will have to be a reason why people will choose to patronize the system, so make sure that any system you consider becoming a part of has this "better mousetrap" as part of its concept. In addition to being unique, there are other factors to consider about the quality of the concept:

  • Is the niche served by the system you are interested in wide enough so that the concept will have a strong and broad-based appeal? If your franchise is looking for bike riders who will spend $1,000 on a bike, you must consider whether there will there be enough of these people in your city to support you in the style that you desire and need.
  • Creating a recognizable brand is both very time consuming and very expensive, yet it is one of the most important assets that a franchise can have. A young franchise doesn't have that yet - you'll be part of developing the name for them. You must be sure that you are comfortable with both the challenges and with the amount of time, money and effort that must be expended to help to build that brand name.
  • Another advantage that a franchise should bring you is the strength that comes from being part of a larger group -- this allows you to buy at better prices and to share the cost of developing and running advertising. If your franchise system is new, you may be one of just a few franchisees, or even all alone for at least a while. You must be sure you are comfortable with the extra dollars you may have to spend.
  • Is there a barrier to others entering the business? If your franchisor has a great new idea, what is going to keep others from copying it and competing with you? One excellent barrier to entry is high costs - opening a store or buying expensive equipment that the average person can't afford can be a great competitive advantage to you. However, since there's no automatic correlation between the amount you invest to acquire a franchise and how profitable that franchise will ultimately be, spending less can sometimes be more valuable to you when it comes to buying a franchise, too. Balance it where you think you will get the greatest benefit.
  • Another barrier is specialized training. This one is tricky, though. Let's say that you are trained for a week or two to refinish furniture. Then you return home, start the business and need an employee. You hire and train the employee, and six months later the employee starts his own business and competes with you, using the training you gave him! Unfair, but it happens. Unless your franchise gives you a competitive edge because of brand name, proprietary products, ongoing marketing assistance, etc., you could wind up competing on a relatively equal basis with someone who used to be your employee!

It's important for you to make sure that the system you join has some way of helping you to effectively defend the concept and the market niche that you're a part of.

2. Good systems. When you purchase a franchise, you should be buying systems that WORK. They should be written down in manuals and taught to you in detail during training so that your business takes off quickly without making costly errors. The manuals should include all facets of the business from accounting through sales, plus the human resources information you need to help you hire and train your own employees. You shouldn't have to guess - you should be able to look up every answer in your operations manuals. In today's "Cyber Age", you should also look to see whether your franchisor is using up to date technology. We all know about the Internet, and your franchisor should almost certainly have a strong website. In addition, your franchisor should also have an "Intranet", which is a closed circuit internet that allows your franchisor to get information, marketing tools, data, etc. to you electronically, rather than with paper alone. Surprisingly, some new franchisors are more advanced in this area than more established franchisors who are used to doing business the "old fashioned way". If they are, it may give you an advantage in the marketplace that makes that system more attractive to you.

3. Successful Prototypes. Perhaps the greatest joy associated with a franchise is that you are using a "proven" system. Before you become part of any system, but certainly before you join a new franchise system, you should be sure that others have already demonstrated that it works. If the franchisor hasn't opened and successfully run at least one prototype (and preferably several prototypes) there is simply no way that you can be certain that the system is proven and that it works. Additionally, these prototypes need to be able to stand the test of time. If they haven't been open and in business for at least a few years, how can you be sure that the concept really works? It's also important to see if a market can sustain multiple units. If a concept needs very high quality or highly specialized locations in order to be successful, you may be very limited in terms of availability and future growth.

4. Money. Perhaps the number one reason that businesses fail is that they run out of money before they can establish themselves in the marketplace. You franchisor must be able to tell you (within a range) how much you will need for the equipment, construction, and other hard costs. They should also be able to tell you how much money you will need for working capital until you break even.

Since younger franchisors typically don't have as much experience as more established ones, they may be hindered in their ability to give you information about start up costs in a new market. A young franchisor may have been lucky on their own first unit or two and may wind up underestimating your capital needs during start up. Be wise on this one and have more money than the franchisor says?.chances are good that you will need it.

5. Dedicated Management Team. Time and time again, young franchises fail in their first five years of business. Often it is because there weren't enough good management people in the company to keep the system going and growing. The cash flow of a young company is often limited. However, the need for highly paid experts is substantial, so there can be some real problems that will occur if the system you become part of doesn't have adequate internal staffing. It costs a lot to give new franchisees the service they need and expect. Real estate, construction, operations, purchasing, legal, accounting, training, and franchise sales all need to be handled, and someone has to be there to do the jobs that need to be done.

Often the staff of a young company is spread too thin. Be careful about this -- make sure that there are enough people on staff to do the jobs that need to be done.

The diagram below shows the kind of people and the jobs needed to get a franchise started. (If the franchise is in the retail franchise, add a purchasing expert, and expect that real estate help will come from outside agencies.)

So how do young franchises get started? Obviously someone had to be first in McDonalds, so why not you? It depends on a simple four-letter word: RISK.

A good young franchisor won't expect you to take all the risk - they will open the first units themselves as corporate units, study and perfect their systems and marketing, and then, when everything is working well, invite franchisees to join them in their growth. You should look for that in a system that you are considering joining.

They also will need to have sufficient capital and cash flow to sustain planned regional growth, and they will have a strategic plan, and the fortitude to stick with it. Before you buy, ask the franchisor you are investigating to explain their strategic plan and long term vision to you. Make sure you like what you hear and believe in the feasibility of their vision..

The final question you must ask yourself is: Will I be safe? Even in the largest and most proven franchise system there will always be some risk. So, study the market, study the franchise, and study the competition. If, after you truly understand the business, you feel that the franchisor complies with all of the above elements and truly does offer a unique and valuable product, then go for it! You may be on to something great.

Written by Cheri Carroll and Howard Bassuk