Betting on the established brand or the hot, new franchise concept?
I am often asked whether or not it is a good idea to invest in a “hot, new franchise concept” or to go with a “safe” established brand. Certainly, established franchise brands typically have a higher success rate as compared to younger franchise systems. Yet, while investing in a new franchise concept may come with higher risks, the return on your investment, if successful, may be higher as well. Which is right for you? The answer really depends on two factors: you and the franchise itself.
First off, take a good, hard look at yourself. Are you a big risk taker or more risk adverse? Every business investment, even established franchise brands, involves some level of risk. You need to make sure that you are comfortable with the level of risk that you are going to take on. And if you are married or have a significant other in your life, you need to make sure that they are also comfortable with the investment.
Walk through all the possible outcomes of the investment. Obviously, you want to and expect to succeed, but can you survive and live with failure. Having a backup plan (or several backup plans) will help you get more comfortable with the risks that come with investing in a business, just in case things don’t go as planned. And when you are evaluating an opportunity, don’t just consider the money you are putting at risk, but your time, opportunity costs and all the other factors involved.
Secondly, take a good hard look at the franchise itself. As I said earlier, buying a franchise, even a well established brand, comes with the risk that the business might perform below your expectations or even fail. The Franchise Disclosure Document (FDD) will list current franchisees, as well as those that have left the system in the last few years. Is there a high turnover rate? What were the reasons for those franchisees leaving? Did they receive a fair return on their investment?
On the flip side, a new franchise concept may be a great opportunity to get in on the ground floor and build your business empire, but there is little track record to show that the business model will really be successful for the long haul. Is the model sound? Are current units making money or are sales at least tracking in the right direction? Is the concept based on long-term customer needs or is it simply taking advantage of a short-term industry trend? Does the management team at the franchise have a history of success?
There are obviously pros and cons to both new franchise systems and established brands. So no matter which direction you are leaning in, be honest with yourself about your comfort level with the risks and be sure to ask yourself and the franchisor the hard questions.
Eric Stites is the founder of Franchise Business Review, a franchise research firm based in Portsmouth, NH.