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10 things to watch out for with smaller franchises by Brody Sweeney

Diary Entry #2 – 10 things to watch out for with smaller franchises

While there are lots of good reasons why you should consider getting in on the ground floor with a young franchise, there are just as many things that you should watch out for before jumping on board to a concept just because it sounds exciting.

I’m Brody Sweeney, the founder of Camile Thai Kitchen, an award winning home delivery franchise. This blog is not about my business, but rather some advice for if you’re thinking about franchising generally.

Buying into any franchises is a thrilling prospect, something that can help you fulfil your career and personal goals. But like any “marriage”, the more you find out about your new business colleagues before you make a commitment, the more likely you are to get it right the first time. I want to help you frame the right questions so you can make a good decision for you, even if that ultimately means rejecting the franchise you currently courting. These are the kinds of questions I encourage my own franchisees to ask us, and any other franchise they may be thinking of joining. Doing this due diligence has lead to greater satisfaction – and profit – for their businesses in the long run. 

Armed with the information I have set out below, you’re much more likely to improve the quality of your decision making.  

1. With a smaller franchise, your risk will be higher.

Starting any new business is risky. According to UK bank statistics, something like 4 out of 5 new business start-ups – not including franchises – don’t make it to their fifth year. In good franchises, it’s the complete opposite., and more than 90% will still be around after 5 years. One of the main reasons you invest in a franchise is investing in a proven concept. In a newer franchise, it may not yet be fully proven, and so the risk of it not working out are higher than in an established franchise. 

 

2. The franchisor may not have full worked out the business model. 

Sometimes franchisors start selling franchises before they have proven the business model. A good newer franchise will have established pilot franchises first to fully test and prove the business idea. Through operating their own pilot outlets, franchisors get to put theory into practice, and confirm their hunch that they are on the right track, and that there is demand for their product or services, that can be served profitably. This is one of the main comfort factors a prospective franchisee can get when looking at the viability of the new business. It’s perfectly in order for a prospective franchisee to ask for evidence that the franchise works, mainly by looking at a profit and loss account for an existing franchise or pilot of the business.

 

3. Brand recognition is lower.

It stands to reason that if it’s new, it won’t be well known. One of the things you pay for in an established franchise is the goodwill attached to your brand’s name and reputation. That means before you even open, there is usually latent goodwill there, which helps get your new business into profitability quicker than if the name is unknown.

But remember Subway, and McDonalds and Starbucks started with a single store, and were not known at all at that point. So while I wouldn’t worry unduly on brand recognition, if your new franchise is going into direct competition with an established player, it can be very hard to break through to establish your franchises name.

 

4. The Franchisor may not be very experienced.

This means that you may end up paying for the franchisors mistakes as they learn how to operate the business, and make all the mistakes that are a normal part of getting a new business off the ground. A bit like they say the eldest child in a family has the hardest time, because the parents learn through them. They will find out lots about how to operate a franchise, both good and bad, through their dealings with you. The bad stuff can be painful and unless you and your franchisor are on the same page, and have the type of positive relationship which allows you to weather these storms, can lead to a breakdown in the relationship. 

A good young franchisor understands this point, and will test innovation on their company owned businesses first before asking their franchisee to take the risk.

 

5. The Franchisor may not have much purchasing clout.

One very important thing in a franchise is the benefit of the franchisor’s purchasing power, as this helps you to cover at least in part some of the royalties and marketing fees you will be charged. There may be special circumstances where this is not as important. In some franchises like Domino’s, you may actually end up paying more for goods than purchasing independently, but the bottom line is so good the food and packaging costs are higher doesn’t matter. In a new franchise, your expectation of lower cost of goods should be realistic, and in keeping with the scale of the purchases the entire group is making.

 

6. It may not be as easy to get finance as an established franchise.

One of the first lessons you learn as a business person is that banks are not supposed to take risks with their depositors money. They need assurance that the money you borrow will in fact be paid back. Banks love franchising because it’s considerably less risky than backing independents, and the risk is shared across a network of individual businesses under the franchisors umbrella, rather than lending to the franchisor on their own.

Established franchises by virtue of having been around longer, and having ironed out the kinks in their system, are less risky in the eyes of banks than new ones. This may mean the bank is more risk averse in a new franchise, which may mean they load extra security (like personal guarantees), and want to loan you a lower amount than if your franchise was well established.

 

7. Training may not be developed sufficiently.

Taking you in as a raw recruit, and training you how to set up and operate the business successfully is Franchising 101 for an established franchise, and one of the most important aspects of what you are buying into, particularly in the early days. In a new franchise, they may not have recorded or worked out all their training systems in a way that is easy to replicate and pass on to you and your team.

 

8. The franchisor may not be very good at picking other franchisees, and go for quantity rather than quality.

In my view, this is one of the biggest dangers you face in a relatively new franchise. Your franchisor may be under pressure to recoup some of the heavy initial investment they have made in getting the franchise off the ground, and when a prospective franchisee shows interest in the concept – well, that can be flattering – and perhaps cloud their judgement as to whether this is a good long term fit or not.

The problem here is that the wrong initial franchisees can ruin the system before it has gotten off the ground properly. Either a poor performer (some people are brilliant rocket scientists or school teachers, but totally unsuitable for running their own business) or someone who is disruptive and thinks they know more about the business than the franchisor, and wants to let everyone know about it – can mean the franchisor gets caught up helping a weak business, or dealing with the politics that disruptive people love to wallow in.

It should be mandatory that as you look at the franchise, that you are given the opportunity to meet and spend time with some or all of the existing franchisees to make your own mind up on this. How your franchisor deals with your application, if they’re too quick to accept you, without due diligence of you personally, should also be a warning sign.

 

9. The franchisor may run out of money before the franchise is established.

Murphy’s Law applies here. Getting a new business off the ground usually takes twice as long, and costs twice as much as planned. Not every franchisor has enough capital to come through the start-up unscathed, and so may be more worried about their own survival than yours. A franchisor who is under financial pressure, may not have the wherewithal to keep going as your business becomes established, and may have to focus their time on paying their own bills, instead of helping develop your business. They may also end up making poor quality decisions, which won’t be in your interest. 

No different than your franchisor checking you out at the beginning, I like to see prospective franchisees checking us out also, by asking probing questions, and getting acceptable answers.

 

10. The franchise may be vulnerable to a better funded, larger competitor, who may try and put you out of business.

When companies like Sixt Rent a Car or McDonalds set up, they didn’t have a lot of competition. That meant they were able to become established and build a brand name without having to be in a dogfight with a competitor from the getgo. It doesn’t mean that getting involved in a new Pizza or Hamburger franchise is doomed from the start, it can just be much harder. If the established business decides to bloody your nose, your new franchise may not have the financial firepower to withstand it.

 

In Summary

I hope you found these common sense matters helpful for you in your search for the right franchise relationship. Always dig, dig, dig, and do your research before jumping on the first opportunity that promises you fortune and fame within fifteen months.

If I was leaving you with a good tip from these pointers, it would be to recognise that if you really like the new franchise, if you feel incredibly drawn to it (and you should obviously feel passionate about it), then recognise that these are emotions, and emotional only decisions about business are generally not good.

Put your unemotional business hat on, and do a proper due diligence on your franchisor, and the people behind it, while you still have the time, and definitely before you make an irrevocable commitment to the new venture. That’s what we’ve encouraged all of our franchisees to do, and it’s contributed greatly to their long term satisfaction working with Camile. 

Good luck and stay safe,

 

Brody

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