Buying From A New Franchisor

Is there is anything more exciting than a new idea, a great new product, or a unique way of performing a valuable service. Many new franchise opportunities fit this definition. They're new, exciting, and innovative. They're very attractive, and you think that they will be equally attractive to their potential customer base. However, should you spend a significant portion of your life savings to join a young franchise system that is hoping for, and betting on, the ultimate success of its great new idea?

It could be the next McDonald's or locally say the next Snap Printing, or Donut King or autObarn? Wouldn't that be great?

However, it might be simply a shooting star destined to burn intensely for a short while before it fizzles out and dies. Bye-bye life savings, hello unemployment benefits! What should you do?

The first time I was exposed to this question was about 15 years ago when I joined Dial-a-Dino's Pizza as their Financial Controller. I knew little of franchising, and less about my new employer. It turned out to have an outstanding Managing Director, an initial franchise owner group passionate about the business, and home delivery pizza was an idea ripe for its time. It turned out to be a huge success for its owners and almost all of its franchise owners. So how do you choose the good new concepts from those destined to fail?

Like so many things in life, there is no one correct answer. Lets look at the facts:

• Younger franchise systems have a greater risk than a more established franchise system.
• Young systems also offer ground-floor opportunities and the chance to cherry pick locations or territories in your market.
• Young systems, which go on to succeed, ultimately offer a much greater financial return to the original franchise owners.
• You can play an instrumental part in the growth of that system. The Dial-a-Dino's franchise owners certainly played a significant part in the systems development and decision-making. I can remember the great passion from the franchise owners that went into the Coke vs Pepsi argument to this day.

How many people have said they would have liked to become part of McDonald's when it was first starting in Australia? They were already successful in the US, but they were not knocked down in the rush of potential franchise owners beating a path to their door. Those that did buy however are now mostly multimillionaires today. McDonald's has proven enormously successful for many people.

But can you remember Wendies? (It too was a US based burger chain, which started here at much the same time as McDonalds, and quickly disappeared. It went so fast, so long ago, I'm not sure I have even spelt its name correctly.) One became a huge winner, while the other became huge loser. How do you tell the difference before it happens?

A GOOD CONCEPT

When a franchisor starts his new business, he hopes to enter the business battle by identifying a market niche that can be exploited. He needs to find some segment of the marketplace that isn't being served sufficiently, or sufficiently well. The unique way this new franchise company handles its niche will be the deciding factor in its success at least the initial success that will enable it to at least reach the greater challenges that will lie ahead as it matures.

It has to "build a better mousetrap" as the old saying goes. There will have to be a reason why people will choose to utilise the system. You must make sure that any system you consider becoming a part of has this "better mousetrap" as part of it reason for being in business.

Other factors to consider about the quality of the concept include:

• Is the niche to be served by the system large enough so that the concept will have a strong, broadly based attraction?

• Establishing a recognisable brand is both time consuming and expensive, yet it is one of the most important assets that a franchise can have. A young franchise can't have that yet you'll be part of developing the name for them. Are you prepared to put the hard work, from which the franchisor will reap much benefit?

• Another advantage that a franchise should bring you is the buying strength, and just as importantly the buying knowledge, which comes from being part of a larger group --this generally will allow you to buy better products at better prices and to share the cost of developing and running advertising. If your franchise system is still new, you may be one of just a few franchisees, or even all alone for at least a while. Be sure you are comfortable with the extra dollars you may have to spend, and have the capacity to spend them.

• Is there a barrier to others entering your proposed new business? If your franchisor has a great new idea, what is going to keep others from copying it and competing with you? How many lawn mowing business's are there today? How many home delivery pizza shops? Each of these was once a unique idea, but not anymore Exclusive access to new technology creates a great barrier.

• Another barrier is specialised training. This one is tricky, though. Let's say that you are trained for a week or two to make pizzas. Then you go home, open your store and start the business and need an employee. You hire and train a bright young person. Just a few months later the employee starts his own business and competes with you! Unfair, but it happens all the time. Unless your franchise gives you a competitive edge because of brand name, exclusive products, ongoing marketing assistance, and so on, you could wind up competing with someone who last week was your employee.

GOOD SYSTEMS

When you purchase a franchise, you should be buying systems that work and work now. They should be clearly written down in easy to read manuals and taught to you in detail during training so that your business takes off smoothly without you making costly errors.

In the era of cyberspace, you should also look to see whether your franchisor is using up-to-date technology. We all know about the Internet, and your franchisor should almost certainly have a strong Web site. In addition, your franchisor should probably also have an "Intranet," (which is a closed circuit Internet that allows your franchisor to get information, marketing tools, data, etc. to you electronically).

SUCCESSFUL PROTOTYPES LOCATIONS

Before you join a new franchise system, you should be sure that others have already demonstrated that it works. If the franchisor hasn't opened and successfully run at least one prototype (and preferably several prototypes) there is simply no way that you can be certain that the system is proven and that it works. Additionally, these prototypes need to be able to stand the test of time. If they haven't been open and in business for some time, how can you be sure that the concept really works?

Will the market sustain multiple units? If a concept needs very high quality or highly specialised locations to be successful, you may be very limited in terms of availability and future growth.

MONEY

It is generally agreed that the No. 1 reason that businesses fail is they run out of money before they can establish themselves in the marketplace. Your franchisor must be able to tell you (within a range) how much you will need for the equipment, construction, and other hard costs. They should also be able to tell you how much money you will need for working capital until you break even. This will be given to you in a Disclosure Document the format of which is laid down by Federal Government law.

DEDICATED MANAGEMENT TEAM

Many young franchises may fail in their first five years of business. Often, it is because there weren't enough experienced management people in the company to keep the system expanding and meeting the challenges it competitors will throw at them.

The cash flow of a young company is often highly restricted, but the need for highly paid experts is substantial, so there can be some real problems that will occur if the system you become part of doesn't have adequate internal staffing.

It can cost a lot of money to give new franchisees the service they need and not unreasonably expect. The range of expert services required is lengthy here are just a few:

• Real Estate or site selection,
• Construction,
• Operations and franchise owner support,
• Product purchasing and new product development,
• Legal,
• Marketing and promotions
• Accounting and budgeting,
• Training and staff development,
• Franchise sales

These all need to be handled and handled well, and someone has to be there to do the jobs that need to be done. Most wise new franchise groups will use a few generally widely experienced staff and supplement them with consultants for major problems.

SUMMARY

• Do your homework very carefully, and get expert advice if you need it, from your accountant, solicitor, and a franchising expert
• Consider most of all; will you enjoy the challenge of a ground floor opportunity?
• Once you make your mind up to go ahead, give it everything you've got and work closely with your new franchisor to build you new business together.

By Grant Garraway of Which Franchise? Magazine