The difference between starting a new franchise versus an established one

Author: Ned Levitt

Date: DEC 5th, 2014

Topic: Industry Experts

There are so many good reasons to buy a franchise: lower costs for inventory through group buying power, the use of a recognized brand, expert knowledge and support for operating the business, advertising muscle and market expertise are some of the benefits prospective franchisees expect when buying a franchise.

However, newer franchise systems can present advantages. For example, the prospective franchisee will have many more locations and territories to choose from in a newer franchise system. Also, the initial costs may be lower and the system rules less restrictive, which may be appealing for the more entrepreneurial franchisee. There may even be reasonable name recognition, if the location of the franchised unit is close to existing franchisor units.

In all successful franchise systems, the franchisor is expert in the core business and in the business of franchising. The new franchisor may have a well-developed business model, but it will be impossible for the prospective franchisee to know how the franchisor will handle the franchise issues as the system grows. With the older systems, there are many ways a prospective franchisee can investigate the franchisor’s franchise expertise, before making the purchase.

One of the best investigative tools is to enquire with as many existing franchisees as possible about how the franchisor responds to the needs of its franchisees. In the newer systems, the number of existing franchisees is small and the ones that do exist may be far to new themselves to be able to give a clear picture of the franchisor’s strengths and weaknesses. A thorough review of the franchisor’s disclosure document will provide valuable insights about the franchise, whether or not the system is new or mature, as all franchisors in Alberta, Ontario, Prince Edward Island, Manitoba and New Brunswick must deliver a comprehensive franchise disclosure document to prospective franchisees.

Many franchise systems operate in the retail sector, making the location of the store critical to the franchisee’s success. The more advanced the franchise system, the more likely landlords will deal with franchisees in the system and the more likely the franchisee will be able to acquire desirable locations on more favourable terms. When it comes to lease negotiations, the mature franchisor will benefit its franchisees by providing greater leasing expertise and superior market knowledge.

Then what can be done to make the investment in a newer franchise system a little safer? While it is an accepted fact of life that franchise agreements of mature franchisors are non-negotiable, this is not necessarily the case with the new franchisors. In fact, there are important changes that should be made to the franchise agreements of newer franchisors, for the very purpose of reducing the risks. The new franchisor, anxious to start expanding its system and wise enough to know that quality franchisees are particularly important at the start, will be amenable to changes to its franchise documentation that would not be tolerated by a mature franchisor. Control of the location by the franchisee, reduction or elimination of the franchisor’s discretionary powers, freedom to purchase inventories and supplies anywhere, more limited post-termination obligations of the franchisee, are but a few of the areas of possible and valuable change.

It is not just how large a franchise system is that matters, but how quickly the franchise system has grown. A large number of franchises sold over a very short period of time, may, in fact, indicate a troubled system, as rapid growth without attention to growing the franchisor support structure and the system culture may create problems for every franchisee in the system.

While purchasing a franchise in the “best” system may be a worthy objective, what is “best” for one franchisee, may not be “best” for another. The wise approach is take stalk of yourself first, assess your tolerance for risk, determine what industries you find most fitting, then investigate, investigate and investigate some more.

Learn more about franchise business opportunities in Canada at Be The Boss.