Investing in small versus big franchise brands

There are three fundamental differences for potential franchisees investing in new, lesser-known franchise brands compared to larger household names which serve essentially the same market.

In this regard, comparing a new lawn mowing franchise to an established restaurant franchise is pointless, but comparing new versus established restaurant brands (for example) will highlight the importance of these three key differences.

The first is that the entry cost will usually be lower for the new and lesser-known brands as these franchisors will be less likely to charge as much for access to their brand, intellectual property and training.

However, savings achieved in these intangible elements of the franchise offer may be partially offset by higher equipment or store fit-out costs compared to established brands, who may have greater buying power or construction efficiencies to keep overall store opening costs down.

Additionally, new brands keen to establish themselves in the market will position their franchise offer as a viable alternative to that of established operators, and may seek this differentiation based on investment price, among other things.

The second fundamental difference is that there is generally a higher level of risk in newer franchises than established brands. Newer franchises may still be developing parts of their operating systems, and often have fewer resources to allocate to franchisee training, ongoing support, marketing and quality control, all of which are key to the long-term success of the brand and its franchisees.

The third fundamental difference is that there is often much greater scope for innovation and opportunity for growth by franchisees in a new system than in an established system. The old “ground floor” cliché may prove true for early adopters who take on a franchise brand.

Through their operational knowledge and growing business skills, they may be able to create and capitalise on opportunities to grow their number of franchised outlets, introduce change and innovation to the system, or even become franchisors themselves. (There are numerous examples where diligent franchisees have seen more opportunity in the franchise system than the franchisor, and have bought out the franchisor and taken the brand to a new level of performance.)

Growth into additional outlets will often be possible in established brands as well, however the capacity to influence the overall direction of the franchise, or the possibility of buying out the franchisor is diminished in large and established systems.

In determining whether to invest in a relatively new franchise, compared to a long-established brand, potential franchisees must assess themselves, their appetite for risk and their ability to capitalise on opportunities.

While franchising is often seen as a safer investment option than independent small business, there is no such thing as a safe bet in business. Potential franchisees must always do everything possible to inform themselves about the pros and cons of any investment decision, and first-time business owners in particular must spend an extraordinary amount of time up-front to do this.

As a rule of thumb, first-time business owners are encouraged to spend one hour of due diligence and research for each $1,000 to be invested in the business. This might require hundreds of hours up front, depending on the cost of the investment, but if a potential franchisee is thorough in their assessment of a franchise offer, they will vastly increase their chances of making a success of it.

If, however, a potential franchisee squibs on their due diligence, they may quickly find that no matter how attractive the investment cost, the expected opportunities may fail to materialise and the risks increase exponentially.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.