Is it “safer” to buy into a large franchise network?
March 2, 2014 2:46 am 8 CommentsBuying 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
- 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.
- 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.
- 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.
Tags: large network franchises, small network franchisesCategorised in: Blog Articles, business ideas, Buy a Franchise, Franchise Compatibility, Franchise due diligence, franchise information, Questions to ask to buy a franchise
This post was written by Dr. John Hayes
8 Comments
I consider that a small franchise can also hire real staff. It all depends on that franchise capital. And also I agree with the fact it is possible for franchises to lend money but unless they care very much about their brand they will not do it.
Sure, a small franchise can hire “real” staff but it’s more difficult. People tend to think franchisors have plenty of money. They don’t. They’re often just average folks who have chosen franchising as a model for expansion. They’re not wealthy and they often rely on family and friends to help them get started. In many cases my small-network clients had family members working for them who were unqualified in HR or accounting or franchise training, etc., but they worked for no or little money. So yes, you are right, it depends on the capital — and most times there’s not much of it.
On the point about franchises (franchisors) caring about their brand or they won’t lend money — I don’t agree at all. I never knew a franchisor NOT to care about his/her brand. But if they don’t have money to lend, how would they do it? Most do not have money to lend, especially in the small networks. Even if they have money to lend, a lending policy has nothing to do with how much a franchisor “cares”. Many franchisors purposely will not lend money to franchisees out of fear that it won’t be paid back. In spite of how convincing they may be about the “value” of their franchise when they’re trying to sell one, many franchisors will not loan money to even a qualified prospect for fear they won’t get the money back. That raises a whole ‘mother discussion which I’ll write about in the future, thanks to you!
I don’t agree with you entirely. I think at the end of the day it is not the size of the franchise that matters but the ethos of the franchise. I am sure that there are some small franchises that can offer the same kind of value as the big franchises.Sometimes there is a tendency to get lost in the crowd when with the big guys whereas the small franchise can possibly offer a more hands on approach and support.
Interesting point . . . the ethos of the franchise. Tell me, how do you define that specifically and more importantly, how do you measure it? How will you know when you have found a franchisor with “the ethos” that will work in your favor?
It is true that not just some but many franchisors can offer the same kind of value as the big franchises. Finding them is difficult, although most of the small franchisors that I worked with through the years offered value. Sometimes value isn’t enough. Sometimes a franchisee needs guidance that a small franchisor cannot provide. So much depends on the abilities of the franchisee and the abilities of the franchisor, so it’s not a cookie cutter decision.
It is VERY true that the small franchisor can often offer a hands-on approach . . . and big franchisors have sometimes forgotten how to do that!
Getting lost in the crowd — yea, I suppose that’s an issue, but I don’t think it’s all that great of an issue.
Thanks for reading and commenting!
Going with a large franchise might provide more initial support, but with a smaller franchise, don’t you think they would be more willing to help you out (not necessarily monetarily…) in order to push for their growth and success?
Alex, this is a difficult question to answer. Every situation in franchising is different. I have had small-network franchise clients who would bend over backwards to help a franchisee even at the franchisor’s expense. I’ve worked with some amazing franchisors — some of them helped franchisees even when the franchisees were not helping themselves! I have also worked with franchisors who took a very business-like view of franchising — “we provided the training, if it didn’t stick with the franchisee, let them come to training again at their own expense.” So I can’t say “yes” or “no” to your question. Franchisors are not all created equally.
I work as an employee at a major franchise (Macdonald’s), but if, some day I would have the means and the will to be a franchisee, I would prefer to join major franchise network.
Although is true, as you wrote, that smaller franchises are more willing to invest in a person that is just starting, major Companies support their franchisees in a way smaller ones can’t, and not only money-wise, but experience, support in the various aspects of the business, and many more. + being part, as a franchisee, of a brand that is well recognizible around the world, brings more costumers and more revenue which it’s better for all people involved in that franchise location, from crew members to managers and owner of the franchise location.
Although I previosly worked in a smaller franchise network (and I was a “real” staff, not a family member from the owner of that location!), I see at Macdonald’s where I work now, a more complex structure and support from the Company that I didn’t see in that small franchise chain I previously worked.
This article makes a great point. I see also where Tebutebu might feel that the smaller companies may have more time to spend on you and you could get lost in the shuffle with a big corporation. But, from my own experience, the big franchisors really want to get their franchisees up and making a profit as quickly as possible so they don’t get discouraged (can get a taste of success right away) and they can then relax and focus elsewhere kind of like you initially give a plant a lot of water, but, once it starts to get rooted, you let it grow and let you know when it needs more water. All things considered, I’m fairly certain I’d chose a big network. That’s why it’s a “calculated” risk. You can’t be 100% sure.