Purchasing a Start-Up Franchise? Here are some Advantages and Disadvantages

Hundreds of new franchises start up every year. Some of these new franchises can represent a good opportunity for prospective franchisees however; these individuals need to understand the pros and cons of investing in a brand new franchise. Here are some of the important considerations to look for.

According to industry sources there are approximately 300 new franchise concepts that start-up every year. That amounts to almost one new franchise company each business day. These new franchises arise from an existing business or a unique concept that lends itself to franchising. It can be enticing to become a part of a new and unique franchise; however, don’t expect to be investing in the next KFC or McDonalds.

There can be a number of benefits from getting in on the ground floor of a brand new franchise, but there are also risks.

The Advantages of Investing in a Start-Up Franchise

• With few exceptions there will be a large selection of available territories. Also, because it’s a new franchise there may be an opportunity to obtain a first right of refusal for additional franchises or territory.
• The uniqueness of new franchise concept can attract interest and generate strong appeal. Depending upon the industry and type of franchise, some new franchises start off very fast. This can be a plus for the first wave of franchises.
• Opportunity to negotiate more favorable terms in the franchise agreement. In general franchisors that are starting up want to build a foundation of new franchisees. This means that some franchisors are more willing to concede some items that they would not when the network is larger.
• Initial franchise fee and on-going royalties are often lower for a start-up. Because it’s a new franchise, the fees should be a bit lower since there is no proven track record. As a tip, if the fees are comparable to or higher than an established franchise in the same industry segment, than you may wish to look elsewhere.
• There may be some financing available. In some cases a start-up franchisor may be willing to finance a portion of the initial franchise fee.
• Most franchisor take a more nurturing and supportive role with the first group of franchisees. A new franchisor wants to avoid franchisee failures as much as possible and will be willing to provide assistance above and beyond what is required.

Despite these advantages there are also disadvantages in purchasing a start-up franchise. It’s often a case of high risk/ high reward.

The Disadvantages of Investing in a Start-Up Franchise

• Apart from the business that spawned the new franchise there is no track record of a franchise that can be evaluated. This factor makes it virtually impossible to measure any franchisor performance.
• There are no franchisees to provide validation or feedback.
• There will be little brand recognition pertaining to the products and services offered by the franchise. A brand new franchisor needs significant capital to promote the brand and sustain growth.
• Most new franchisors will have little or no experience operating a franchise system. If the franchisor doesn’t recruit staff with franchise industry experience, it can dilute the effectiveness of the program.
• The value and quality of the franchisor training program can be suspect. Since it’s a new franchise program the training programs are somewhat untested. It can take several training sessions of new franchisees and quality feedback to establish effective franchisee training.
• Many start-up franchisors lack the amount of capital necessary to fund new growth and employ qualified staff. This can lead to a franchisor being overly dependent upon initial fees as a source of working capital, which can result in selling franchises to unqualified individuals.

Purchasing a start-up franchise can offer the prospective franchisee a significant opportunity. However, since it’s a start-up there are risks as is the case with any business start-up.  Be aware of the advantages and disadvantages of investing your capital in a new franchise where the disadvantages outweigh the advantages. In my next newsletter I’ll provide some tips for evaluating a start-up franchise program.

 About the Author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. Ed operates FranchiseKnowHow  which provides information and advice to prospective and existing franchisees and franchisors. He publishes newsletters for the franchise community.