Trial And Error
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Q: I'm looking for information about being the first franchisee with a new company. I need specific information about the pros and cons of being first.
A: In some ways, being the first franchisee is exciting. If you believe in the franchisor's management and concept, you're probably hoping that as the system grows, the value of your investment will also grow. After all, doesn't everybody wish they had been the first franchisee for McDonald's or Wendy's?
A word of caution: While having a Uniform Franchise Offering Circular, the disclosure document required in the United States, makes a franchisor legally able to offer franchises, it's far from being an indication-in a business sense-that the company is qualified to be a franchisor.
Support services you may be expecting from a franchisor-headquarters and field support, cooperative buying, marketing and advertising, among others-may not only be underdeveloped with a new franchisor, they may not even exist. Manuals and training programs may be extremely basic, updates may be infrequent, research and development may be lacking, and a franchisor's personnel may be doing two or three jobs and be too stretched to help you out much. The franchisor may be undercapitalized, lack experience and may even be using the services of a franchise broker to sell franchises rather than selecting franchisees itself. (You want a system that's as careful in selecting franchisees as you are in selecting a franchisor.)
In fact, just about everything the franchisor will know about operating a franchise system will come from working with you. As the first one, you're paying for the privilege of being a guinea pig.
Now, not all start-up franchisors are unprepared for the challenge, and there can be some potential benefits to being the first franchisee. The franchisor will likely be more flexible than more established systems. You'll probably have your pick of locations, and you may be able to negotiate some concessions that subsequent franchisees won't get-an exclusive territory or the ability to expand the size of the one they're being offered, additional training, additional headquarters and field support, more customized marketing and advertising support, and maybe even some reduction or deferment in the franchisor's standard fees. Some new franchisors might even offer financing for your initial investment. They're just as excited about having you come on board as you are about joining them, and they may be willing to do quite a bit to get you to sign that first franchise agreement.
The big question is: Is it worth the risk? We can't answer that for you because it depends on the company, its management, its products and services, how well it's capitalized and whether it has a plan and structure for developing the franchise system. Here's a trick to improve your chances-or at least lessen your downside risk: Let's assume you do your homework about the company, the industry and its future potential and are ready to join. Try to negotiate a prenuptial agreement.
During the courtship, the franchisor has certainly been telling you about the future of the company-its expected growth and why this is the opportunity for you. Put those projections in the contract. Negotiate a walk-away clause that gives you the option to leave the system if the franchisor isn't able to grow the system. What number should you pick? Try the one the franchisor has been predicting for the growth in the size of the system during the next two years. You're basing your investment, at least in part, on how well the franchisor is predicting it will grow the system. Let it back up its predictions.
Being the first franchisee of a new system has some risks, but it certainly has some advantages. You can lessen the risk by doing your homework and negotiating changes in the terms offered to you. Remember, every franchisor started with a single franchisee. But not every franchisor grew up to become McDonald's and Wendy's.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummies and a former member of the International Franchise Association's Board of Directors and Executive Committee. Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
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