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Should You Consider Buying from a New Franchisor?
1. Should You Consider Buying from a New Franchisor?
There isnothingmore excitingthananew idea,a sensational new product,oranovel wayof
performingavaluable service!Here'ssome goodnews -manynew franchise opportunitiesfit
thisdefinition.They're new,exciting,andinnovative.They're veryattractive toyou,andyou
thinkthat theywill be equallyattractive toothers.
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 anddies.OUCH. That wouldbe terrible!Whatshouldyou 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'tbuythe first,than it'saxiomaticthatthere can neverbe 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,andno one eatsthere 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 enoughforyoutoachieve yourlongtermgoals?"
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
2. franchisees. If your young franchisor can say "yes" to all five of these necessary elements,
youmay 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 andneed.
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,
moneyandeffortthatmust be expendedtohelp tobuildthatbrandname.
Another advantage that a franchise should bring you is the strength that comesfrom
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 withthe extradollarsyoumayhave 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 whousedtobe youremployee!
3. It's important for you to make sure that the system you join has some way of helping you to
effectivelydefendthe conceptandthe marketniche thatyou'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 systemmore attractive toyou.
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,youmaybe verylimitedintermsof availabilityandfuture 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 youbreakeven.
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
moneythanthe franchisorsays?.chancesare goodthat youwill needit.
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
4. estate, construction, operations, purchasing, legal, accounting, training, and franchise sales
all needtobe handled,andsomeone hastobe there todo the jobsthat needto be done.
Often the staff of a young company is spread too thin. Be careful about this -- make sure
that there are enoughpeople onstaff todo the jobsthat needtobe 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 purchasingexpert, and expect that real estate
helpwill come fromoutside agencies.)
So how do young franchises get started? Obviously someone had to be first in McDonalds,
so whynot you?It dependsonasimple four-letterword: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
lookforthat in a systemthatyou are consideringjoining.
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 whatyouhearand believe inthe feasibilityof theirvision..
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,thengoforit!You may be on to somethinggreat.