So you’re thinking of buying a franchise. But, unlike Subway, the company that you’re thinking of isn’t a household name with locations around the world. And, unlike Dunkin’ Donuts, your franchise hasn’t been around since 1950. In fact, your company of choice is a fledgling, new franchise that might have its sights set on global expansion, but, as of now, has only just begun.
Investing in a new franchise could represent a fantastic opportunity to get in on the ground floor -- or it could be a risky proposition. With no established franchisees to speak to, you’ll need to do some extra due diligence before investing your entire life savings. Here are some factors to keep in mind.
1. Find Out About the Franchisor’s Track Record. Thanks to the power of the Internet, it’s not difficult to find out a lot about people and companies, so start by making sure that the franchisor you’re about to do business with has solid experience. “You want to look for a franchisor that has a business background and knows what he or she is doing,” says Hugh Fard, a franchisee of a major fast-food chain, who recently signed a deal to develop 155 locations of MassageLuxe, a massage therapy spa franchise that just started franchising in 2008.
2. You Have More Bargaining Power. On the upside, as one of the first franchisees in a franchising system, you have the power to negotiate. New franchisors are often more flexible with contract terms with the first few franchisees as well as more generous with territory sizes, says Linda Bremer Menter, Vice President, Marketing at FranChoice Inc., a network of franchise referral consultants. On the downside, says Menter, “The franchisor may not yet have been able to secure volume discounts on the types of supplies needed to operate the business.”
3. You Can Make an Impact. Established franchises are successful because they have well-oiled systems in place and, consequently, aren’t always open to feedback from franchisees. For some franchisees, this can feel confining. As a franchisee within a new system, you might find that you have more of a voice. “As a new franchisee, you are on the front lines and viewed to have very valuable insights and ideas for what is working well, as well as areas for improvement,” says Menter. “You will be called on regularly to share your perspective, not only with [the corporate office], but with prospective franchisees as well.”
4. The Return on Your Investment Is Not As Certain. When investing in an established system, you can talk to existing franchisees and get financial figures from franchisors in order to get an idea of what to expect in the beginning. Investing in a new franchise, however, is more of a guessing game. “Since there are few locations, it is difficult to get a feel for the real depth or scope of the financial opportunity,” says Menter. “Often, the only historical financial data available is from a single, corporate owned unit.”
5. Verifying the Franchisor’s Financial Strength Is Essential. Undercapitalization is one main reason that many new franchise systems fail. Before you make a significant investment of your own, make sure that the franchisor has the necessary finances to support your growth, advises Menter.
6. Don’t Be Afraid to Ask Questions. Asking questions is important when investing in any franchise, but monumentally so when considering a new franchise. Ask questions about everything including marketing strategies, technology, operations, training and ongoing support, says Doug Schadle, CEO of Rhino 7 Franchise Development, a franchise consulting firm:“These are all systems that a potential franchisee needs to understand about a franchisor prior to becoming a franchisee.”
7. Pay Careful Attention to the Franchise Disclosure Document. By purchasing a franchise, you will be entering into a legal agreement, so protect yourself by making sure that new franchisors have done everything correctly and have all their papers in order. “Be prepared to review a Franchise Disclosure Document,” says Schadle, “and if you feel the need for clarification, hire an experienced franchise attorney.”
8. Consider the Latest Trends. You don’t want to invest in a fad, but you do want to invest in a franchise that’s current and relevant. So research what consumers want and need and take a look at what products or services are lacking in your community, advises Fard. “When I chose MassageLuxe, there were many statistics that showed people were extremely stressed out in this economy but didn’t have the money to spend on spa services to de-stress,” he says. “No matter whether the economy is good or bad, people will always value a top-notch massage at a reasonable price.”
9. Research the Franchise’s Business Model. Unlike with an established franchise, a new franchise’s business model may not yet be fine-tuned. Cautions Fard, “You don’t want to invest in a business model that you don’t understand or will make it harder for you to succeed.”
10. Don’t Forget About Passion. Whether you’re investing in an established or new franchise, your passion for the franchise is key to your success. “You have to enjoy the concept and the day-to-day tasks,” says Fard. “The massage industry was something I was interested in, and when I found MassageLuxe, it seemed like the perfect fit for me.”
When all is said and done and all factors are considered, new franchises can offer a world of opportunity. “New franchisors make the franchise industry very exciting,” says Schadle. “Not everyone can own — or should own — Subway, Great Clips, or McDonald's. New franchisors offer the potential for someone to find the next McDonald's.”
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at email@example.com