Purchasing a Start-Up Franchise? Here are some Advantages and Disadvantages
by Ed Teixeira
Hundreds of new franchises start up every year. Some of these new
franchises can represent a good opportunity for prospective franchisees however;
these individuals need to understand the pros and cons of investing in a brand
new franchise. Here are some of the important considerations to look for.
According to industry sources there are approximately 300 new franchise
concepts that start-up every year. That amounts to almost one new franchise
company each business day. These new franchises arise from an existing business
or a unique concept that lends itself to franchising. It can be enticing to
become a part of a new and unique franchise; however, donít expect to be
investing in the next KFC or McDonalds.
There can be a number of benefits from getting in on the ground floor of a
brand new franchise, but there are also risks.
The Advantages of Investing in a Start-Up Franchise
- With few exceptions there will be a large selection of
available territories. Also, because itís a new franchise there
may be an opportunity to obtain a first right of refusal for
additional franchises or territory.
- The uniqueness of new franchise concept can attract interest
and generate strong appeal. Depending upon the industry and type
of franchise, some new franchises start off very fast. This can
be a plus for the first wave of franchises.
- Opportunity to negotiate more favorable terms in the
franchise agreement. In general franchisors that are starting up
want to build a foundation of new franchisees. This means that
some franchisors are more willing to concede some items that
they would not when the network is larger.
- Initial franchise fee and on-going royalties are often lower
for a start-up. Because itís a new franchise, the fees should be
a bit lower since there is no proven track record. As a tip, if
the fees are comparable to or higher than an established
franchise in the same industry segment, than you may wish to
- There may be some financing available. In some cases a
start-up franchisor may be willing to finance a portion of the
initial franchise fee.
- Most franchisor take a more nurturing and supportive role
with the first group of franchisees. A new franchisor wants to
avoid franchisee failures as much as possible and will be
willing to provide assistance above and beyond what is required.
Despite these advantages there are also disadvantages in purchasing a start-up
franchise. Itís often a case of high risk/ high reward.
The Disadvantages of Investing in a Start-Up Franchise
Apart from the business that spawned the new franchise there is no track
record of a franchise that can be evaluated. This factor makes it virtually
impossible to measure any franchisor performance.
- There are no franchisees to provide validation or feedback.
- There will be little brand recognition pertaining to the
products and services offered by the franchise. A brand new
franchisor needs significant capital to promote the brand and
- Most new franchisors will have little or no experience
operating a franchise system. If the franchisor doesnít recruit
staff with franchise industry experience, it can dilute the
effectiveness of the program.
- The value and quality of the franchisor training program can
be suspect. Since itís a new franchise program the training
programs are somewhat untested. It can take several training
sessions of new franchisees and quality feedback to establish
effective franchisee training.
- Many start-up franchisors lack the amount of capital
necessary to fund new growth and employ qualified staff. This
can lead to a franchisor being overly dependent upon initial
fees as a source of working capital, which can result in selling
franchises to unqualified individuals.
Purchasing a start-up franchise can offer the prospective franchisee a
significant opportunity. However, since itís a start-up there are risks as is
the case with any business start-up. Be aware of the advantages and
disadvantages of investing your capital in a new franchise where the
disadvantages outweigh the advantages. In my next newsletter Iíll provide some
tips for evaluating a start-up franchise program.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC.
He can be reached at