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Sunday , March 2, 2014

Is it “safer” to buy into a large franchise network?

Buying into a small franchise network, i.e. under 100 units, poses risks that buying into a large franchise network, i.e. 250-plus units, can avoid. The reasons include money, experience, and, well, more money!

People who know little about franchising often say it’s too expensive for the new franchisee, but it’s even more expensive for the franchisor. Royalty flow doesn’t amount to much cash flow in the early stages of franchising.

Will your franchisor scramble?

The most vulnerable franchisors are the small-network franchisors. Many of them are constantly scrambling just to meet their corporate payrolls — that could mean there’s no money to properly train and support their franchisees, or to help their franchisees market and promote the brand.

But before I lead you to decide that buying into a large franchise network is a better idea, or that it ensures longevity, there are some other points to consider.

Does franchising make sense for you?

Frankly, unless you’re cut out to be a franchisee, it won’t matter which size network you join. Chances are pretty good you will not survive. In addition, unless you’ve got sufficient capital (larger network fees are usually more expensive), and possibly experience, the large network franchisors may not be interested in you.

Small franchise networks are often more willing to take chances, which partly explains why many of the franchisors and franchisees in this niche fail. Franchising, by its definition, isn’t about taking chances!

Safety isn’t a matter of size

On the other hand, every large franchise network started out small, so safety in franchising isn’t necessarily a matter of size. It is more a matter of how well the franchisor is prepared to be a franchisor, and how well the franchisee is prepared to be a franchisee. I can’t emphasize enough the importance of being a fit for franchising.

So let’s say you are a good fit for franchising and that you have the financial ability to buy into any network of your choice. Would I push you toward a large-network franchise? Maybe, and here’s why:

But size still matters

  • Money. Large network franchisors at least have the ability (but not always the desire or knowhow) to cater to their franchisees, which effectively accelerates the new franchisee’s performance and leads the franchisee to profits and satisfaction.
  • Experience. History repeats itself, even in franchising, and the large-network franchisors can do a better job of guiding a franchisee’s decision making process, which protects the franchisee from failure. Plus, the larger franchisors are not inclined to take chances because they’ve already invented their wheel. They stopped experimenting when they were a small franchise network.
  • More money. There’s no end to what a franchisor with money can do for its franchise network. Here are three ways large franchise networks use money to help franchisees:

Three big advantages

  1. They hire real staff, and not just members of the franchisor’s family, who work for free. Larger franchisors hire experts in training, marketing, brand development, franchisee support, research and development, HR, legal, accounting, etc. In the small franchise network, it’s not unusual for the founder to fulfill several of those key roles.
  2. They offer training programs regionally as well as nationally so that more franchisees can participate in them, and when necessary, they spend time in the field working one-on-one with franchisees in need. They help franchisees better understand how to operate the business and they re-train franchisees when necessary.
  3. They contribute (or possibly loan) money to the franchise advertising fund to better promote the brand and drive more customers or sales opportunities to the franchisees. A franchise network that’s strapped for money must rely on the franchisees to promote the brand, but how effective is that if the franchisees are also strapped for money? Large franchise networks bring resources to their franchisees’ advertising and promotion campaigns.

Small franchise networks pray for the day when they break the size barrier because, as Ayn Rand told us, “All sins are forgiven once you start making a lot of money.” Of course, large franchise networks don’t just concentrate on making a lot of money; they focus on meeting the needs of their franchisees, and that makes franchising safer.

Full Disclosure: I am an affiliate of the Franchise Navigator and may benefit financially if you complete an assessment tool that helps you decide if it makes sense for you to invest in specific franchises. 

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Disclosure of Material Connection: Some of the links in the post above are “ affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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