Next Big Thing or Next Big Flop?

New franchisors are risky propositions, and there are more of them than ever. Here’s how to put them to the test.

Next Big Thing or Next Big Flop?

With every year comes new franchise trends. Cast your mind back and you’ll spot a distinct increase in fish and chip concepts, frozen yogurt, and the lastest to hit the market is bubble tea.

As a novelty and trend, they’re bound to make money initially, but new franchisors are also a high-risk proposition.

They may become the next Steers or KFC (over 500 stores each), or they may go belly up before the ink is dry, leaving franchisees without a strong brand name or the economies of scale that come from being part of a big chain – not to mention their hard-earned investment.

Assessing the risk with a new franchise is harder, too: Much of the information about a franchise usually comes from existing franchisees, and with a new one, that’s hard to come by. On top of that, there are more new franchisors out there than ever before. In recent years, the numbers have boomed from 156 concepts in 1994 to almost 700 in 2014.

It’s too early to tell how those newbies will fare, and some of them may not be cut out for being franchisors. So how can you tell if you’re looking at a great ground-floor opportunity or a shaky foundation?

By doing much more research than you’d ever do on an established franchise. Here is what you should examine closely:

1. Check the track record

Start by asking how long the company has been in the business they are now franchising. You will be surprised by the number of franchise concepts that started their business that same year.That means the franchisor might not have a lot of expertise with the concept that it can share with franchisees, and that often leads to problems as it tries to support franchisees.

2. Vet the management

Especially if the original concept is new, you’ll want to know how much experience the management team has in the business sector it’s operating in. If the founders of a new retail franchise have never operated a retail business, they don’t have a lot of expertise they can share about how to do it.

3. Check the paperwork

Some new franchisors jump the gun and start selling franchises before they’re ready to do so. Be sure the offer is valid and that they provide a franchise disclosure document with audited financials that reveals their own operating costs and profits. You want to make sure they have the working capital that’s required to support their growth.

4. Ask about the growth plan

Before you open a franchise in a young chain, make sure your region is a priority for the franchisor. You may love the concept, but if you’re in the Western Cape and the five-year plan calls for colonising Gauteng, you’re going to find yourself alone in your territory.

You won’t gain brand strength from having other franchisees nearby, and you won’t be able to leverage advertising deals by pooling funds with those franchises.

5. Inquire about training

One common problem with new franchisors is that training may be rudimentary – perhaps a day or week spent observing at the company store. But new franchisors should be hiring experienced franchise managers who can present a full training programme.

You’ll want to see a formal training programme at the company headquarters, as that’s a big part of what you’re paying the fee for.

6. Talk to franchisees, if there are any

Your pool of possible sources will be small, but you still may be able to get critical information about the day-to-day realities.

Understand that if there are no franchisees, you’re not getting the benefit of what franchising should offer – the ability to verify what you’ve been told by the franchisor. If the franchisor says you’ll need R100 000 in working capital, a franchisee might say, ‘I actually needed R300 000.’

And you’ll never know.

Top tip: Try to form close relationships with the existing franchisees. If possible, meet them in person. Realise they’re crazy busy and don’t have time to spend an hour with you on the phone, so ask if you can spend the day at their store, and tell them you’ll pitch in.

While you’re there, ask about their experience with the franchisor. Find out what made them decide to purchase the franchise and whether they’d do it again, knowing what they know now. Find out if the franchisor is helpful and accessible when there are problems, and make sure the first few franchisees are successful. If the franchisor isn’t supporting these first ones, that’s could mean trouble for you.

7. Take your time

The newer a franchise system is, the slower you should go in your research. Be wary of any efforts by the franchisor to rush you into signing on to open a franchise.

8. Consider your background

Early franchisees of a new chain are often experienced entrepreneurs who don’t need as much support as a first-timer would. If you don’t have the required business experience, you should consider hiring an experienced manager to help run the store.

About the Author
Carol has been reporting on businesses large and small for 15 years now.

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