The Sure Thing

Are existing franchise systems always a better bet than startups?

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?

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.

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