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The Danger of Being Franchisee No. 1

The Danger of Being Franchisee No. 1Is it wise to become one of the first franchisees in a new franchise system?

Sure, it's a thrilling proposition to get in on the ground floor of what is hopefully a superstar concept. And it might be particularly lucrative if startup costs (compared with that of long-established franchises) are low.

But of course, the downside is that some new franchises don't survive the journey and are buried in unmarked graves along the way.

Before buying into a young or unproven system, it's important to weigh the pros and cons. Most people think of young franchises as small startups, but there are typically three types of businesses in this category, including established companies that have finally decided to franchise. The common denominator is that each is asking you to invest when there's little or no proven results from other franchisees who have gone before you.

Here's a look at the most common types of new franchise opportunities – and the questions you should ask before signing up:

1. The mature company that is new to franchising. In this situation, the company typically has many years of experience and has opened a number of company-owned units. The people at the top know the business inside out and have worked out the bugs in the operating methods. The only transition the company needs to make is learning how to work effectively with franchisees rather than employees (and yes – there is a big difference between the two). This is typically the least risky young franchise to invest in, though it can still be a challenge to deal with growing pains.

Questions to ask: How do your training programs for new franchisees differ from the previous training programs for new employees? What support systems do you have in place for franchisees, such as manuals, DVDs or online intranets? Are you willing to treat franchisees as business owners?

Related: What to Consider Before Buying a Franchise

2. The experienced franchise company that is changing its traditional operating model to something new. Let's face it, most companies don't change their business model unless they are in trouble. We're seeing a lot of this in today's market, especially with retail and discretionary-service operations, as the continuing recession has hammered franchisees' results. Though the company may have a big name in the marketplace and substantial operating experience, there is little assurance that the "new" operating model will be a success until a group of new franchisees have put it to the test. You really need to consider the risk carefully, because an unproven model is just that.

Questions to ask: What research and testing supports the proposition that this new model will work better than the old one? How many units of the previous model have failed in the past two years? How many do you expect to lose in the next two years? What changes have been made to your marketing programs to support the new model, and how will you allocate marketing support and dollars in the future between the new and old models?

Related: Three Franchise Industries to Watch

3. The fairly young company that's new to franchising. You've got to admire the bravado of entrepreneurs who have the confidence to start a company and then begin franchising with little or no practical experience. That's how most of the big franchise companies got started -- Ray Kroc of McDonald's or Fred DeLuca of Subway are just two examples. That said, this is by far the riskiest venture to invest in. For every one success story, there are dozens of others that did not succeed. As a new franchisee in a young system, you'll have to suffer not only through your own learning curve, but the franchisor's as well. In fact, you may wish to find a different franchise with a proven track record or else to wait a year or two to see if the young company can create a reliable success pattern with other new franchisees.

If you decide to take the risk anyway, the rewards for being a pioneer – namely, better economic terms and intimate relationships with top executives – can be great if the business succeeds.

Questions to ask: Do the company executives have previous experience growing a franchise company, or are they working with advisors who do? Does the company have sufficient cash reserves to weather any storms during its initial rampup period? How many training and support people does the company have and what is their background and experience? What kind of discounts on fees and other expenses are you offering to the initial group of pioneer franchisees?

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.

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