Lots of factors influence the decision on buying the right franchise. What type of industry appeals to you most? What type of lifestyle? How much financing is needed? Are market conditions right for success? What about the competition’s standing and plans for your area?There are so many options to examine and questions to answer in order to make the correct choice. (See Guide to Buying a Franchise for more in-depth discussion on these issues.)
One major consideration stands out though, and it determines your investment and risks levels as well as long run profitability. Should you go with an established franchise “mega-star” like a McDonald’s restaurant or AAMCO automotive services? Or is it smarter to partner with a rising star with less name recognition but more growth opportunity. There are pros-and-cons for both, and one’s temperament and finances are key to deciding which is the best path to franchise success.
The big name franchise obviously has the advantage of name recognition. The nationally known brand comes with a built-in customer base independent of its local reputation or advertising. It is already a success, with proven operational procedures already in place. And as a famous name with loyal customers and solid revenue, the franchise superstar brand gets supplies at cheaper cost due to volume buying. Operating costs are lower due to reliance on tried-and-tested systems and preferential treatment from vendors who want to keep high-volume business customers.
The popular established franchise represents a lower risk because of its established record. You definitely won’t have to reinvent any wheels to run this business. In fact, the parent franchisor will probably discourage, even forbid, any deviation from its standard operational procedures. But there’s a flip side to these factors too. A famous franchise is going to cost more because any investment with a low risk is typically is more expensive than a higher risk venture. The more risk you assume, the less you can expect to pay. You have to figure out how far you are willing to stretch your financial resources vs. how much risk you are willing to assume. Only you and your accountant can work out those numbers and compare your required investment to the potential rewards.
If you’re not willing to totally go by book, in this case the Operations Manual, then the big name brand is probably not for you. The reason the franchise achieved such success is through consistency, and that will have to be maintained. Those who want more flexibility and better terms than stipulated in the UFOC and Franchise Agreement are better off looking to smaller, lesser known franchises eager to expand. And that could be to your advantage. In fact, you can probably engage in some pretty hard line negotiations about the terms and systems because you are taking a bigger risk on a lesser known name. Risk is the operative word here!
Another advantage of up-and-coming franchises is a less crowded field competing for customers. It may be a new industry entirely – such as “green cleaning” services or specialized products and care for pets – that is just gaining popularity and customers. The growth opportunity could be tremendous, but the one down side of fads is that they do fade away. You can probably expect some new industries to take root, like the aforementioned “green” services for which demand will only grow. However, the crowds queuing up today for spicy deep-fried sushi may disappear tomorrow. You must carefully carry out the due diligence about the market potential and competition; and scrutinize the franchisor’s capitalization and revenue statements with your accountant.
Basically choosing a mega-star or start-up franchise comes down to comparing the investment risk and reward along with your own temperament for towing the line and strictly sticking to established rules. The big franchise name equals big bucks, both in terms of investment and probable pay back. With the rising new franchise star, you invest less while taking a bigger chance – it could be a flop or, like a hot stock, take off like a meteor into the profit stratosphere.