While franchises offer investors proven concepts and tested
business models, they don't offer guarantees of success. For
further insurance, many prospective franchisees select systems with
known names and reputations, and steer away from newer franchise
concepts. But is older always better?
We spoke with Kevin Lewis, president and CEO of hotel chain
Suburban Franchise Systems Inc., about the pros and cons of joining
new and existing systems. Here's what Lewis had to say.
Is it better for franchisees to join new or established
systems?
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Kevin Lewis: It depends on the product and the market. If
a concept has high barriers to entry and a unique selling
proposition with a lot of upside potential, I may consider [joining
a new system]. However, a lot of franchise systems come into
existence where the barriers to entry are [low], and the value
proposition goes away quickly when the concept is easy to copy or
the market changes. Given that and the amount of the investment, I
would recommend people stick with companies that have a proven
track record, a good balance sheet and [proven] profitability.
[And] you have to really understand the management people involved
and their philosophy, because you're buying into that corporate
culture.
What are some of the benefits of being part of an existing
system?
Lewis: The bugs have been worked out. You've got
critical mass, systems in place, a franchise culture that already
exists. Startup franchises typically come from people who had their
own corporate stores [and] don't [yet] fully understand how to
deal with the relationship side of the franchise business.
Are there any downsides to buying into an existing
system?
Lewis: There's probably less [of an] upside when you
look at opportunity. There's more risk on a startup, but when
you look at some of the hot concepts, [the first franchisees] made
a lot of money. There comes a point in time [when] saturation can
occur and those systems don't do quite as well.
What questions should someone considering a newer system ask
in order to see how stable the company is?
Lewis: I'd like to know their financial status, who
their major competitors are, what the barriers to entry are. Is it
a product that can be easily copied, and is the market moving in
that direction? Does there seem to be demand?
Are there any other advantages to being part of a new
system?
Lewis: The first franchisees typically can get more
favorable terms because the franchise organization will be looking
to make better deals to encourage development. Being a pioneer
isn't all that bad-there is risk, but you're going to gain
some benefit as to prime territories and locations. In a more
mature system, somebody else has already taken that risk and those
locations.
Is there any simple way prospective franchisees can figure
out for themselves whether it would be better to be in a new or an
existing system?
Lewis: Really, I think it all comes down to how much risk
you're willing to take. There are some people who want
something tried-and-true; they don't want to be pioneers. Then
there are those who say "I'm a risk-taker. I like the
concept, and I'll do it."
Excerpted from Entrepreneur's FranchiseZone Magazine.