Dangers of Being Franchisee No. 1

Is it wise to become one of the first franchisees in a new franchise system?

Dangers of Being Franchisee No. 1

Sure, it’s a thrilling proposition to get in on the ground floor of what is hopefully a superstar concept. And it might be particularly lucrative if start-up costs (compared with those of long-established franchises) are low.
But of course, the downside is that some new franchises don’t survive the journey and are buried in unmarked graves along the way.

Before buying into a young or unproven system, it’s important to research a franchise and weigh the pros and cons. There are typically three types of businesses in this category, including established companies that have finally decided to franchise. The common denominator is that each is asking you to invest when there are few, if any, proven results from other franchisees who have gone before you.

Here’s a look at the most common types of new franchise opportunities – and the questions you should ask before signing up:

1. The mature company that is new to franchising
In this situation, the company typically has many years of experience and has opened a number of company-owned units. The people at the top know the business inside out and have worked out the bugs in the operating methods.

The only transition the company needs to make is learning how to work effectively with franchisees rather than employees (and yes – there is a big difference between the two). This is typically the least risky young franchise to invest in, though it can still be a challenge to deal with growing pains.

Questions to ask:
How do your training programmes for new franchisees differ from the previous training programmes for new employees? What support systems do you have in place for franchisees, such as manuals, DVDs or online intranets? Are you willing to treat franchisees as business owners?

2. The experienced franchise company that is changing its traditional operating model to something new
Let’s face it, most companies don’t change their business model unless they are in trouble. We’re seeing a lot of this in today’s market, especially with retail and discretionary-service operations, as the continuing recession hammers franchisees’ results.

Though the company may have a big name in the marketplace and substantial operating experience, there is little assurance that the ‘new’ operating model will be a success until a group of new franchisees have put it to the test. You really need to consider the risk carefully, because an unproven model is just that.

Questions to ask:
What research and testing supports the proposition that this new model will work better than the old one? How many units of the previous model have failed in the past two years? How many do you expect to lose in the next two years? What changes have been made to your marketing programmes to support the new model, and how will you allocate marketing support and money in the future between the new and old models?

3. The fairly young company that’s new to franchising
You’ve got to admire the bravado of entrepreneurs who have the confidence to start a company and then begin franchising with little or no practical experience. That’s how most of the big franchise companies got started – Ray Kroc of McDonald’s or Fred DeLuca of Subway are just two examples.

That said, this is by far the riskiest venture to invest in. For every one success story, there are dozens of others that did not succeed.
As a new franchisee in a young system, you’ll have to suffer not only through your own learning curve, but the franchisor’s as well.

In fact, you may wish to find a different franchise with a proven track record or else to wait a year or two to see if the young company can create a reliable success pattern with other new franchisees. If you decide to take the risk anyway, the rewards for being a pioneer – namely, better economic terms and intimate relationships with top executives – can be great if the business succeeds.

Questions to ask:
Do the company executives have previous experience growing a franchise company, or are they working with advisors who do? Does the company have sufficient cash reserves to weather any storms during its initial ramp-up period? How many training and support people does the company have and what is their background and experience? What kind of discounts on fees and other expenses are you offering to the initial group of pioneer franchisees?

Before buying

What to consider before you invest.

There’s little doubt that the right franchising opportunity can be profitable and satisfying for the right entrepreneur, and the franchise industry appears eager to welcome and guide new owners.
Franchise ownership isn’t for everyone, however, nor is every opportunity a gold mine.

Determining Factors
Here are four factors to think about before you make a decision:

  1. Do your homework on the franchise, including its expansion plans.
  2. Make sure the company provides support in the form of training, construction and marketing.
  3. Pay careful attention to the Franchise Disclosure Document. Carefully review the earnings claim (which franchisors don’t have to provide, although this lack of disclosure might raise questions) and the disclosure of the number of units, closures, and current and former franchisee names and contact info.
  4. Heed the plethora of fees and costs associated with the business, and pay attention to anything that might warn about hidden costs. Owners should determine, for example, whether vendor rebates are allowing franchisors to profit from supplies or equipment that the franchisee purchases. This is particularly important for new franchises – make sure franchisor costs are not being passed on to you.
Jeff Elgin
About the Author
Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

Related Articles

© Franchise Zone / Entrepreneur Media SA (Pty) Ltd. All rights reserved.

Disclaimer: Reliance on the information this site contains is at your own risk. Readers are advised to consult their attorney and/or financial advisor prior to pursuing any investment. Please read our Editorial Disclaimer and Terms & Conditions of Use.

Is this information out of date or incorrect? Report it to our webmaster.

Leave a Reply