Never Buy New When Opening Your First Franchise

One of the biggest mistakes a first-time franchisee can make is buying or building a new location.

Be prepared: This is exactly the opposite of what 99.9 percent of the franchisors and the "free" franchise brokers are going to tell you to do. This is an EXTREMELY DANGEROUS, EXTREMELY HIGH-RISK strategy. This is the secret that all of us current and former franchisees know, even the ones who violated this principal and got lucky with a successful location.

Of course, the franchisor is going to tell you that their expertise and analysis will eliminate most of the risk in building a new location. They pay lots of money for demographic research that pinpoints exactly where a location will be successful. But remember, that computer program is going to give the answer the franchisor wants to hear, which may or may not be in the franchisee’s best interest. Garbage in, garbage out.

Let’s look carefully at the motivation, and risk, of the parties involved:

The franchisor makes money on your location from the day you open your doors. You may be losing barrels of money working 80 hours a week, but the franchisor will still be dipping into your bank account every week.

The franchisor has no financial risk in having you spend thousands or hundreds of thousands of your hard-earned dollars opening a new location. If it fails, you’ll sell it at a steep loss to the next franchisee, and the franchisor keeps getting income.

The franchisor gets very little marginal income, if any, when a franchisee buys an existing franchise. But they get lots of marginal revenue when a new location opens. Therefore, what do they want you to do? Open up a new location, of course! In addition, the franchise brokers get nothing for recommending that you buy an existing business. Are they going to recommend that option to you? I don’t think so.

The franchisor will claim that the cost of building a new location is cheaper than buying an existing location. Maybe, maybe not. For those businesses that require commercial real estate, be sure to factor in the monstrous amount of time and money it will cost to find a location, negotiate the lease, get a reputable contractor, secure the proper permits and licenses, and hire and train a staff. Often, the franchisee gives up after chasing many locations that don’t pan out. Many franchisors have encountered huge legal issues by accepting franchise fees from franchisees that couldn’t find a location, gave up, and lost their franchise fee in the process.

The fact is, if you are first-time franchisee, in spite of the franchisor’s claims, you have no clue what it takes to be successful in your new business. You don’t know what side of the street you need to be on, you don’t know the dynamics of your customer base, or how to market to them, and you don’t know how to recruit and train your employees.

So, you’ve been warned, but…

If you are still tempted to build a new location then at least please do the following:

• Test Drive your franchise. Go work in an existing franchise for at least six months, even as a laborer, even as an unpaid volunteer, before you buy or build a new location.
• Go down to your bank, get at least $1,000 in crisp, new $100 bills, come back to your house, go into the bathroom, and FLUSH THOSE BEN FRANKLINS DOWN THE TOILET. That will be good practice for what you are about to do.

Insider Secrets

Having been a franchisor for many years, I learned a number of things that a franchisor might not tell you upfront. These secrets that I am sharing with you might just be the secret to your success!

Secret: The strongest and most fundamental motivation of the franchisor is to get more system-wide sales, period, end-of-story. It is not to make franchisees profitable.

Secret: If a franchisee is losing money, or sells their franchise and loses their investment, the franchisor does not report this is a failure! In fact, they will report the fact that the location has been successfully operating in that location for "x" years!

Secret: Make sure you know exactly what the process is, if any, for recovering your franchise fee if the franchisor cannot or will not approve a location for you within a specified period of time.

Mark Leonard is a franchise expert and former franchise owner who offers prospective franchisees an inside look at this unique business opportunity. He is the author of 7 Surefire Steps to Buying a Profit-Making Franchise. Mark is no longer affiliated with any franchise, and neither seeks nor receives any financial consideration from any franchisor. Visit Mark online at www.yourfranchisementor.com.