Investing in a New Idea!

Investing in a New Idea!

There are a variety of reasons why most people purchase a franchise as a way to become self-employed, rather than attempt to start up a new ‘mom and pop’ business in our rather trembling economy. The biggest reason revolves around the idea that franchises, being developed systems, are far less risky and have a higher rate of success than starting a business from scratch.

When one enters the business realm through a well-established franchise system, a great deal of the guesswork and fear is already taken away. The business owner/franchisee is fully trained in what to expect at the onset of opening the franchise, and receives a full education in dealing with both clients and vendors. But evaluation and the thought-process is still very much involved. Because there are so many types of franchises out there, the “value” of an established brand is something that each individual franchise buyer must decide for themselves. Many times, with newer/younger franchise systems, they are willing to give the ‘early’ franchisees a much more attractive opportunity, as there is negotiating leverage for early buyers that will most likely not be there as the system expands. For the franchise buyer who is extremely risk averse, this may not be something that appeals to them.  However, for a person or party with the right risk profile and mindset, the amount of value this brings to the table can be considerable.

Most new franchises do not have a great number – if any – established franchisees that prospective franchise buyers can actually ‘sit down’ and speak with about the concept of the business. (Validation is the term used for the process by which franchise prospects speak with existing franchisees and learn all about the company they are wishing to join, as well as the people behind it.)

Prospective franchise buyers should be encouraged to speak candidly with current franchise owners about the brand, but this is impossible to do if there are no franchise units already in the system. Not everyone who is looking into purchasing a franchise is a good candidate for a newer brand. Many people are just not comfortable with their own ability to determine if a newer franchise is one that is solid enough for them to join. In many cases franchise buyers simply avoid new concepts and only consider those that have a minimum number of units. We’re not here to say that they’re wrong in doing so, however, just because a brand is newer doesn’t mean there are not some extremely good reasons for the right people out there to consider it.

So, what are the important things to look for in newer franchise brand? First and foremost, the people behind the brand are the place to start any evaluation. How long has the actual brand been doing business? What is the actual experience of the franchisor/owners with this brand, or with the related concept? For example, if an owner has a lot of experience as a food concept franchisee, they certainly should know all the ins-and-outs of how to operate a food based business even if this is their very first franchise offering. They should also be aware of what they have liked or not liked about the way they’ve been treated in the past by their franchisor(s).

Experience in a ‘like’ concept can mean a tremendous

amount in evaluating a newer brand. So make sure to ask the right questions in order to get a ‘feel’ for the company. What systems and processes are in place to support the franchise as it grows? Does the franchisor stumble over the more in-depth questions you ask? Make sure that the franchisor has very quick, concise and knowledgeable answers. If you see an issue with this during your evaluation, then the brand – most likely – is not for you. On the other hand, if you find that the franchisor has a compelling story and solid answers to your inquiries, you may want to seriously consider that brand. Sure it would be nice to have some other franchisees to speak with and question about the franchise, but having them doesn’t mean everything when it comes to assessing risk – nor does it guarantee success.

Most franchise buyers that buy early in the history of a concept are much more risk tolerant and entrepreneurial than those who want to see 50 to 100 franchise units sold in four to five years. Early franchise buyers see opportunity where others see risk; they believe in themselves and their ability to make things work even if everything is not yet perfect. For that willingness they are often rewarded with larger territories, more locations, or lower fees than what later adopters will receive. When buying one of the first units, that buyer is investing in the owner, his team, his experience and in a belief that they are going to make a good franchisor by supporting and helping as much as possible.

Asking the right questions and really getting to know the franchisor is very important. It’s vitally important to spend time face-to-face and really get to know the franchisor on a personal level. It’s critical to evaluate the kinds of people they have surrounded themselves with in their business, and also see what kind of team is in place to support new franchises. Often new franchise concepts are supported by staff from the original store or location that the franchise is based on. This can be great because these people really know how the business works. That said, things can get a little challenging if the franchisor does not hire the right people fast enough when the franchise takes off, then there isn’t enough staff to go around. While that’s a nice problem to have profit-wise, it still is a problem for the new franchise buyer who needs a lot of help and support in the beginning. If the franchisor has a track record of building and running businesses that have grown to a considerable size, or at least large enough to know what it’s like to manage a great number of people, they should be taken into consideration.

Again, buying one of the first units in a system is not for everyone. When dealing with a newer concept ask for more than you think you’re going to receive. Ask for a reduced fee or options on more territories later on. All the franchisor can say is, “No,” so ask for some special considerations if you think you can get them, and if they’re offered without asking, make sure you get them.

When it comes to making the final decision it’s a judgment call. Take into consideration all of the things we’ve discussed in this article and also see what you can find out about the owner’s past. It comes down to two things: doing your homework and following your gut instinct. You need to make sure that you believe in the owner, their sincerity and their competence. If it all looks good, you might want to take a chance! In the end, it could turn out to be the best business decision you’ve ever made.

For more information: