Joel Libava
I get asked about new franchise opportunities all the time. I also get asked if I think they’re risky. My answer:
It depends on how you define “risky.”
Maybe a better question is this one:
“Are new franchises riskier than more mature franchises?
There we go. That’s better. Now let’s take a closer look at this question.
New Franchise Opportunities Defined
In my eyes, a new franchise opportunity is one that’s been around 2-3 years or less.
So based on that, Bubbly Paws and Pure Green are new franchise businesses.
Conversely, that means that this top senior care franchise and this fast-food chicken franchise are not new. Let’s call them seasoned. Or mature. With me so far?
Let’s continue.
Where Do You Want To Get In?
Part of your due diligence on a franchise needs to include timing. As in, when do you want to get in? Here are some examples of what I mean.
- “I like the idea of buying into a young franchise opportunity. That way I can be the first one in my area to own it.”
- “I like the idea of owning a franchise business that has an established name…a well-known brand.”
With that in mind, which “idea” would you lean towards, and why? Let me take a stab at it.
If you’re leaning more towards #2, my thinking is that the thought of being the first one in your area to own a specific franchise makes you nervous. Why?
Because you feel it’s probably “riskier” to be the franchise owner of a young franchise concept. At least riskier than buying a franchise that’s more established (seasoned). But is it?
And if you’re leaning towards #1, you’re obviously someone who wants to be in on the ground floor, and because of that, you’re willing to take on more risk.
Am I right?
On Franchising
There is no doubt that franchising offers a lot of benefits.
For one, the franchise model provides a blueprint…a business system. Hopefully one that’s proven.
Secondly, franchising has been around a long time. Thank you Mr. Singer.
Finally, if you’re taking a serious look at buying a franchise, you already feel that going with a franchise business is less risky. Whoops. It’s not.
But it can be, if you:
- Choose the right franchise for you
- Stay well within your budget
- Do your research the right way
- Use a franchise lawyer to look over your documents
- Are looking at franchise ownership as a long-term investment
Bottom line?
Franchising is an excellent way for small businesses to grow quickly. But there are no guarantees. You can lose your money.
New Franchise Opportunity Risk: How High Is It?
When I’m working 1-on-1 with a client who’s interesting in a young franchise concept, I always tell him that new franchises tend to be riskier. But why?
For one, all the kinks may not be worked out of the system.
More specifically, things like inventory control, staffing peculiarities, and the current technology solutions being used may not be up to snuff. Yet.
Secondly, there is no brand. Again, “yet.”
Thirdly, the funds estimated to be needed to keep your new business up and running until it catches on may be too low.
That being said, none of those (except maybe the money part) should be game-changers. In other words, they shouldn’t cause your franchise business to close.
But the problems I mentioned may force you to change your business plan.
However, there are exceptions to every rule.
When New Franchise Opportunities Take Off
Sometimes, it pays to invest in a young brand.
Take what Greg George is doing with The Peach Cobbler Factory. As he would say, “Shi_ is blowing up!”
As of this writing, 11 locations are up and running, with 45+ franchise locations spoken for. Not bad for a food concept that just started franchising.
Wait. “Not bad” is weak.
The Peach Cobbler Factory franchise development team is crushing it! And I’m happy for Greg and the creators of this yummy-sounding franchise opportunity. But I need to tell you something.
In franchising, new players on the block who grow fast can run into problems.
Note: I’m not saying The Peach Cobbler Factory will have growth problems. Not at all, as they seem to be in good hands.
What I am saying is I’ve seen new franchise opportunities grow fast-and not able to handle the growth.
One I’m particularly concerned about is Exponential Fitness. Maybe I’ll share my thoughts about that fitness franchisor with you another day. But for now, it’s a nice segue into the next section.
Both Franchise Development And Franchise Support Are Needed
It’s one thing to sell franchises. It’s quite another to support all of the new franchisees coming onboard.
For proof, all you need to do is look what happened to Quiznos. Here’s a snapshot of what happened to the Denver-based chain.
At the peak of their super-fast growth, Quiznos was selling franchises faster than a speeding bullet. But there was a problem (several actually).
The real estate department couldn’t find locations fast enough to keep up with the demand.
By “demand,” I mean the super-fast sales of new franchises.
For instance, if the Quiznos franchise development team happened to sell 40 franchises in a month, that meant 40 new business locations needed to be secured. All over the country.
And when 35-45 more franchises were sold the next month…well, you guessed it. It gets worse.
Not only could the folks at Quiznos headquarters not find enough satisfactory locations, they refused to give back the initial franchisee fees that hundreds of would-be Quiznos franchisees paid. Can you guess what happened next? This. But it didn’t end there.
Quiznos was sued again. And again. The Quiznos debacle was talked about for years.
Admittedly, it’s an extreme example. One that has nothing to do with The Peach Cobbler Factory, or any other legitimate fast-growing franchise business concept.
But young, fast-growing franchisors do need to be careful.
They need to have the ability to find suitable locations for new franchisees. And then they need to invest the time and money necessary to support them.
On Risk
Investing in something that’s not a sure thing is inherently risky.
For example, stocks, bonds, mutual funds, and real estate all have risk. So do franchises.
But are new franchise opportunities risky?
Yes and no.
Yes, because anything “new” carries risk.
But is a new franchise opportunity riskier than a seasoned franchise opportunity?
Yes…sometimes. It depends on the concept and the team behind it.
To be sure, I’ve seen a number of franchisees who’ve owned mature franchise brands go out of business. For various reasons.
My point?
Both new franchise concepts and mature franchise concepts have risks associated with them.
That said, the good news is that it’s easier than ever to get the information you need to make a smart, fact-based decision on a franchise to own. Just make sure you match your personal risk quotient with the franchise opportunity you buy.
Finally, as to getting factual franchise information, you need to know where to look for it and how to use it.
Do you?
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