Share, , Google Plus, Pinterest,


Posted in:

Pros and Cons of Purchasing New Franchises

Although logic suggests that a well-established franchise with many locations would be the safest choice, brand name and number of locations doesn’t guarantee success.

At the same time, disqualifying a new franchise system for the sole reason that it is new might cause you to miss out on that perfectly-suited investment opportunity that would have been an unequivocal financial success.

Still, new franchise concepts can be risky. So, what’s the best choice for you? Let’s examine some pros and cons of purchasing a franchise in a new franchise system.

First franchisees have the potential to make a lot of money on a hot new concept before saturation occurs. If you’ve done your homework in terms of research, and your entrepreneurial gut tells you it’s an opportunity too good to pass up, you may want to go for it. Glory and recognition may be yours if you get in on the ground floor of a successful new franchise system.

New franchisors and their corporate staff generally devote more time, attention, support and “tender-loving-care” to their first-born franchisees. The success of these franchisees is critically important to the success of the fledgling franchise company. First franchisees often feel like true partners in the development of the franchise system.

In contrast, franchisee #1000 may feel like just that; another number in a long line of fellow franchisees. This franchise system could turn out to be one experiencing rapid growth that is unable to provide or keep up with the necessary support system franchisees need.

In a new franchise system, you can reasonably expect to gain some benefit from the availability of prime territories and locations. In a long-established system, existing franchisees may have already taken those prime locations, and you as a newcomer may not have that same opportunity. So, keep in mind that there may come a time in a mature franchise system where saturation can occur.

In order to encourage prospective franchisees to come on board, new franchisors typically are more flexible in terms of contract terms and fees. You and your franchise attorney may be able to negotiate a number of contract items. Down the road, subsequent franchisees may find the same franchisor to be less flexible and more restrictive.

A new franchise system may be a good opportunity for true entrepreneurs who love to be pioneers, and for multi-system franchise investors seeking diversification. These individuals need to be willing or able to take on a greater than normal investment risk, and to be able to adapt to a new system’s changing and possibly unforeseen circumstances.
Being one of the first franchisees can lead to being in a position to recommend and help implement necessary franchise system changes, service in some capacity as advisor to new franchisees, and “graduating” to area developer/multi-unit franchisee.
Generally, more risk is involved. There is no record of proven franchise profitability. First franchisees will need to perform research in order to determine if there’s adequate demand, if the product can be easily copied, and who the major competitors are.

You may serve — unintentional as it may be — as guinea pig until the kinks are worked out. New franchisors may be inexperienced in providing the proper support and training new franchisees require. You need to be realist that mistakes will be made, but hopefully you and your franchisor can learn, benefit and prosper from them.

If this is your very first franchise, you may not want to learn how a franchise system works from a franchisor who is only now learning themselves. Second or third-time seasoned and experienced franchisees may be better suited for this type of risk.

A brand new franchise system literally has no franchise history you can check out. To name a few, they’ll be little or no franchisees to contact, no report on how many franchisees have left the system, and no franchise litigation history.

It may be more difficult to obtain business loans/capital with an unproven franchise or franchise concept. Lenders may evaluate and deem your venture as too great a risk. Acquiring capital/loans for a business investment with a long-established, successful, quality branded franchise may be easier to come by.

A new franchise system will not usually possess the same brand awareness as a successful mature franchise system. It can take years for a new franchise to develop a well-known brand that helps increase sales and provides a competitive advantage.

Despite the risks, buying a franchise in a new franchise system still offers advantages over starting your own business from scratch. Companies that make the decision to franchise do so in part because of their already proven and established concept and business success. They have by this time been in business for a number of years; whether it’s two years, 10 years or more. The decision to franchise then becomes their next logical step to build upon a foundation of already considerable success.

Matthew Anderson is the of The Franchise Shop website which specialises in New Franchises for sale and expert in franchise marketing and franchise blog