For several years now, the franchise model has been growing in popularity as a way for established businesses to expand into new markets. With Franchise Times publishing a list of the “Top 200 Franchise Systems,” there are many, many more franchise systems out there – with hundreds, if not thousands, of franchise systems registered in various states nationwide.
You know some of the most-established franchise systems well: Subway, McDonald’s, 7-Eleven and Dunkin’ Donuts are perennially among the largest franchise chains in existence. Then, there are national chains, regional chains, local chains, all the way down to the independently-owned business with one location that is seeking to sell its first franchise opportunity.
So, if you are thinking about purchasing a franchise, which way should you go? Should you buy into a big franchise system where you will be one of hundreds (or thousands) of franchisees; or, should you join the ride for a fledgling system that is seeking to expand?
Three Factors Affecting Your Choice of Franchise Opportunity
1. Brand Recognition
When it comes to choosing between different sizes of franchise systems, one of the most important factors can be brand recognition. The ability to instantly benefit from a known brand is a key benefit for many new franchisees, and this benefit will generally be stronger with a larger, more-established franchise system.
On the other hand, maybe a beloved, local business has decided to franchise. In this scenario, you could still benefit from brand recognition without being perceived as a part of a large, national chain—even as the first franchisee. Ultimately, the question (and importance) of brand value will need to be determined on a case-by-case basis.
2. Franchisor Support
Will you get more support from a franchisor that has been working with franchisees for many years and has an established team of dedicated support personnel in place? Or, will you receive more attention as an early-stage franchisee, where your success or failure may have a much greater impact on the franchise system as a whole? The answers to these questions may ultimately depend on the specific franchisor involved. Some franchisees in large systems praise their franchisors for providing helpful guidance when needed, while others complain (often publicly) about how they feel like they have been put out to pasture.
Here, performing your due diligence is key. Talk to the franchisor’s representatives as well as current and former franchisees to get multiple perspectives on the issue.
3. Franchisor Financials
Item 21 of the Franchise Disclosure Document (FDD) contains the franchisor’s financial statements. As part of your due diligence, you should carefully review the franchisor’s financials, with the help of an experienced accountant or advisor if necessary. When evaluating a new franchise system, one important issue to consider is whether the franchisor has the capital to support the system long-term. Of course, established franchisors can (and do) struggle financially as well.
Jeffrey M. Goldstein | National Franchise Attorney with 30+ Years’ Experience
With more than 30 years’ experience exclusively representing franchisees and dealers, attorney Jeffrey M. Goldstein assists prospective franchisees in evaluating new franchise opportunities nationwide. To get started with a free, confidential consultation, call (202) 293-3947 or contact the Goldstein Law Firm online today.