Experience versus excitement: The pros and cons of an established versus a fledgling franchise chain

Becoming a franchisee can be a rollercoaster of emotions and frantic activity in preparation to start or take over an existing business.

Potential franchisees need to consider a huge range of factors in their decision-making process, including an assessment of the relative merits of joining a longstanding and established chain, or joining a relative newcomer that might not be as experienced.

Consequently, there are some fundamental differences potential franchisees should take into account when considering whether to invest in a mature brand with lots of franchisees, or a new brand with just a few outlets (or where the potential franchisee could even be the very first franchisee).

Investment Cost

The up-front investment cost to buy into a franchise may often be lower for a new brand compared to an established brand. This is because established brands can usually charge a higher premium for the use of their intellectual property and have a greater range of inclusions in their franchise offer that new brands have not considered.

However the premium that a mature brand can charge for the use of its intellectual property can also be partially or even fully offset by the economies of scale it can generate among suppliers to potentially decrease the cost of a new store fitout, fixtures and equipment.

Risk

A fundamental difference between established and new brands is the level of risk involved in the business for new franchisees.

Mature brands that have been around for years can be expected to have a high degree of consumer awareness, whereas new brands will still be building that awareness and customer loyalty.

Additionally, mature brands will have more highly-evolved systems in place to support franchisees, which might not be the case with a new brand.

A combined lack of customer awareness and franchisor support substantially increases the level of risk a franchisee will face in a new franchise system. This is an important factor to consider because people invest in franchises rather than start their own independent small businesses to reduce their risks, but there will still be risks involved, and these will commonly be greater in a small network.

Access to finance

Another factor linked to the level of risk in the choice of a new or mature franchise is the potential franchisee’s capacity to raise finance.

A number of franchise brands operating in Australia currently have some form of bank accreditation, which means the bank has reviewed the brand and will take the expected cash flows of the business into consideration when assessing a loan application, rather than relying exclusively on the borrower’s real estate security.

In other words, it might be easier to get a loan for a mature brand that has bank accreditation than for a new brand without accreditation. However, if the borrower has 100% (or more) real estate security to back the loan and can demonstrate the capacity to repay the loan, then the borrower may still be able to access funding even if no bank accreditation exists for the brand they are buying into.

Ability to innovate

Another difference is that there is often much greater scope for innovation by franchisees in a new system compared to mature systems where the franchisor will place greater limitations on what franchisees can and can’t do.

As franchise brands mature, the franchise operations manual increases in size and complexity, placing greater constraints on a franchisee’s freedom and autonomy in their business. These progressive changes are often necessary to maintain competitive advantage, improve efficiencies and to tighten operational loopholes to ensure consistent high levels of customer service.

In new franchise networks, the operations manual will not be as highly evolved, and consequently franchisees may have greater influence in shaping future changes to policies and procedures.

Growth potential

Franchisees in new networks may have better growth opportunities available to them compared to mature networks that may be approaching market saturation.

New networks may have hundreds or even thousands of potential new locations they could open, compared to mature networks that might have only a few locations left, and these could potentially be in places far removed from where a potential franchisee currently lives.

A franchisee in a new network who is successful in their first outlet will be likely to have more opportunities to open additional outlets than in a mature network. This could potentially accelerate the franchisee’s wealth trajectory, subject to the risks of investing in a new franchise and the other factors outlined above.

Do your homework first

In determining whether to invest in a relatively new franchise, compared to a long-established brand, potential franchisees must assess themselves, their appetite for risk and their ability to capitalise on opportunities.

While franchising is often seen as a safer investment option than independent small business, there is no such thing as a safe bet in any business. Potential franchisees must always do everything possible to inform themselves about the pros and cons of any investment decision, and first-time business owners in particular must spend an extraordinary amount of time up-front to do this.

As a rule of thumb, first-time business owners are encouraged to spend one hour of due diligence and research for each $1,000 to be invested in the business. This can include participation in online courses such as the Franchise Advisory Centre’s
Introduction to Franchising, and the Australian Competition and Consumer Commission’s course for potential franchisees. Depending on the size of the investment to be made, it might require hundreds of hours to full research a franchise offer and build a solid understanding of franchising and the industry in which the business will operate, but by doing so, potential franchisees will vastly increase their chances of being successful.

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