When buying a franchise, you need to make a number of important decisions. One of these decisions is: Should you buy into a well-established franchise system; or, should you get in on the ground floor of an up-and-coming franchised brand?
Both options offer potential benefits. While buying into a well-known franchise can offer instant brand recognition, buying into a new franchise system can reduce the risk of territorial encroachment and intra-brand competition. Established franchisors offer experience, while new franchisors may offer fresh ideas and a more-contemporary approach to doing business.
Should You Buy into an Up-and-Coming Franchise?
But, both options come with potential drawbacks as well. Here are five risks associated with choosing a new franchise system:
1. Lack of Franchising Experience
Franchising is a unique business model, and not everyone who succeeds in building a retail brand will be successful operating as a franchisor. When you are relying on a franchisor for guidance and operational support, it can be challenging to work with executives and personnel who are not experienced in managing a franchise system.
2. Lack of Brand Recognition
In most cases, one of the primary benefits of buying a franchise is to benefit from the franchisor’s brand recognition. Instead of promoting a new brand that no one has ever heard of, you get to benefit instantly from the goodwill that the franchisor has cultivated over years of consistent marketing and providing quality service to its clients or customers. But, if you will be the first franchisee in your region, this benefit could be lost entirely.
3. Lack of System Testing and Validation
Another benefit of buying a franchise is the opportunity to rely on a proven business system backed by extensive market testing and validation. But, if you buy into a new franchise, you may find that you are the test subject for the development of system standards that will be passed down to future franchisees. While this may mean that you have the opportunity to provide meaningful input into the direction of the system’s development, it could also mean that you see limited value from your franchise investment.
4. Potential for Constant Modifications and “Upgrades”
Along with the potential for ongoing system testing and validation, if you buy into a new franchise system, you may find that you are subject to constant modifications and “upgrades.” Since your franchise agreement will almost certainly state that you are obligated to comply with any changes at your own expense, this could prove to be a costly and frustrating stage of your franchise ownership.
5. Limited Franchisor Capital and Revenue
Finally, with many new franchise systems, the franchisor’s financial stability can be a very real concern. You can review the franchisor’s financial statements in Item 21 of the Franchise Disclosure Document (FDD) to gather some initial information, but you will likely want to go farther in your due diligence as well.
Request a Flat-Fee Franchise Business Review
Buying a franchise is a long-term investment; and, when considering a franchise opportunity, it is critical to make an informed decision. To learn about our flat-fee franchise business review services for prospective franchisees, call (202) 293-3947 or contact us online to speak with franchise attorney Jeffrey M. Goldstein.
