What’s in a name? A lot. Go to nearly any corner of the world and say “McDonald’s,” and people will instantly think of the franchise’s sweeping golden arches. In a small Spanish town on the Mediterranean, the locals not only know what Burger King is, but can direct you to the closest one. Meanwhile, Subway has fed millions of consumers worldwide. Part of the appeal of investing in a franchise is that the products/services have already been researched and developed, the system is already in place, and a support network is available. But some franchises offer something far less tangible but just as important: a well-known name.
When researching franchise opportunities, what are the possible pros and cons associated with a well-known brand? Does buying a big-name franchise ensure a safe investment? We set out to find out.
You get instant recognition from customers: When you buy a well-known brand, the name speaks volumes. Little education about your product or service is needed, says Joel Libava, a franchise advisor. In addition, extensive marketing is unnecessary, unlike with an unknown brand where at least 25 percent of your time will entail sales and marketing, according to Tom Scarda, a franchise consultant.
You’ll have more bargaining power: Having the weight of a big name brand behind you can greatly increase your power to negotiate. Landlords, especially, are drawn to the idea of having big-name tenants, says Scarda. Libava agrees, saying, “Commercial real estate representatives pretty much jump for joy with the prospect of having a big-name tenant. It helps them attract other tenants, and sometimes they even feel that it’s a lower-risk proposition for them.”
It may be easier to access capital: Well-known franchise brands are familiar to most lending institutions’ underwriters, says Libava, so getting access to capital might be easier and more clear-cut. “Bankers are more apt to lend you money for startup and expansion,” agrees Scarda, “because they feel comfortable knowing the concept.”
A big name means a big investment: If you want the backing of a big-name brand, you’d better be ready to pay for it. “The systems may be more sophisticated, which means that they are more expensive to put in place, and the franchise fees and royalties may be a little higher than average,” explains Libava. In addition, says Scarda, the franchisor may require you to make a multi-unit investment and set up shop in a highly visible location where rent is usually more expensive.
You must play by the rules: If you’re an entrepreneur at heart and don’t like to play by the rules or want to have more of a voice, investing in a well-known franchise brand might not be the best option for you. “Well-known brands are older and have less tolerance for renegades in the company,” says Scarda. “All rules in the FDD (Franchise Disclosure Document) must be strictly followed. With years of experience, no market testing is needed. They will handle that at the corporate level.”
A big-name franchise can be impersonal: “Many of the older, larger brands are owned by holding companies or investment firms,” says Scarda. “There is less of a family feeling, as opposed to smaller, less known brands. A first-time business owner may benefit from the hand-holding that happens within smaller franchise companies.”
In the end, it’s important that you don’t get swept away by the name alone. In some cases, a brand can have a positive image among consumers, but have a whole different reputation among its franchisees. Don’t rely on your image of the brand as a consumer, but talk to franchisees about issues such as market saturation and buying requirements.
Likewise, a small franchise brand can translate into serious dollars for franchisees even though the franchisees don’t have the backing of a big name. Scarda was able to semi-retire at the age of 41 thanks to his success as a Maui Wowi Hawaiian franchisee; now, as a franchise consultant, he has seen others enjoy similar success at other small, relatively unknown franchise brands.
Beyond the Brand
When it comes to investing in a franchise, make sure you’re not choosing it based on name alone. Libava advises considering factors such as:
- What professional skills do you have that fit with the franchise you’re thinking of buying?
- How much are you budgeting for your investment?
- How many hours are you willing to put into your franchise?
- Are you sure you’ll be comfortable following the franchisor’s system?
Scarda advises identifying your short- and long-term goals. “Do you need to pay your bills in Year One via your business, or are you investing money long-term in lieu of investing in the stock market or real estate?” says Scarda. Also, get a clear picture of the financial investment. “Make sure your financial and operational expectations are in line with reality,” says Scarda, “and that there are no unexpected expenses or operation details.”
Both Scott Mashuda, Managing Director of River’s Edge Alliance Group, a business brokerage firm, and Scarda advise talking to existing franchisees of the concepts you’re considering. “Interview other franchisees to learn how the company really operates,” advises Mashuda. “A big pro of a big franchise is having a larger pool of franchisees to interview.”
Finally, make sure the franchise is in line with your passion, because at the end of the day - name or no name - the daily tasks have to be things you love doing. “Burnout is the number-one reason for failure,” says Scarda. “If a person is in a business they hate, no matter how much money they are making, that is not success. People often gravitate to the big brand because there is a sense of security, but a much better fit may exist that makes better sense for an individual investor.”
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at [email protected]