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What the Sale of New Franchises May Reveal About a Franchise Program

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For as long as Iíve been in the franchise industry, evaluations of a franchise program typically include the growth of new franchise sales. Quite often, fast growth franchise programs may be considered a predicator of a successful program. Some published franchise rankings go so far as to place added weight on the number of new franchises sold. Itís not unreasonable to use new franchise sales as an indicator of success. If prospective franchisees exercise proper due diligence, which should include validating the franchise program by interviewing existing franchises, one can then assume that the sale of new franchises is a valid measurement.

Many successful franchises have grown to thousands of locations. This growth included periods of time when hundreds of new franchises were sold in a single year. However, the number of franchise companies with these results represents a small percentage of the total number of franchises in operation. There are many highly successful franchise programs that by design have grown on a limited basis and to a specific size. When considering a franchise opportunity, itís important to evaluate the franchise program and the franchisor in a number of different areas and avoid being swayed by fast growth alone.

Here are some reasons why a franchisor may be selling a high number of franchises:

  • New franchise sales generate initial franchise fees, which is an immediate source of cash flow for the franchisor.
  • The franchisor has focused its attention on adding new franchisees at a rapid pace.
  • The corporate culture or profile of the franchisor is biased towards selling as many franchises as possible.
  • The franchisor business strategy is based upon selling a minimum number of franchises every month. There is pressure placed on the sales staff to sell, which can lead to the next point.
  • The demand for new franchises is so great, the franchisor canít say no.

If the franchisor can manage the growth of new franchises then there are some benefits that the franchisor can realize.

Key advantages from selling a large number of franchises include:

  • Faster and greater brand recognition for the franchise.
  • The ability to rapidly gain additional market share.
  • Greater value for franchisees that started during the early stages.
  • Franchisor can have greater financial resources to promote, support and build the franchise program.

As previously stated, the impact from fast system growth will depend upon the ability of the franchisor to manage this growth. There are numerous examples of franchisors that were not able to digest and administer a large number of new franchisees. If youíre evaluating a franchise that has been growing at a fast rate there are certain areas that you should pay attention to.

Focus on the following areas if the franchise fits the fast-track profile:

  • Be sure to thoroughly evaluate the franchisor training program. Existing franchisees are your best source of feedback. Identify if the quality and results of the training program have met the expectations of those franchisees who attended. Shoddy training can be a signal that the franchisor canít keep up with the fast growth of new franchises.
  • Carefully evaluate the FDD for litigation activity. Your franchise attorney can identify any red flags. Determine from franchisee interviews if there is a level of dissatisfaction with the franchisor.
  • A satisfactory level of franchisor support and timely responses to franchisee requests would indicate that the franchisor is in control.
  • Are franchise territories defined in a way that limits franchisee growth? Are new franchisees being placed so close to each other preventing them from a successful start-up?

There is no doubt that the sale of new franchises can be a reliable indicator of future franchise success. However, if a franchisor sells more franchises then it can handle the program could be headed for trouble? All new franchise programs have some hiccups during the early years of development. Selling too many franchises during this period can turn the hiccups into problems.

When evaluating a franchise opportunity donít be overly impressed by a large number of franchise sales but rather perform your detailed due diligence and confirm that the franchisor can digest this growth

© 2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com 

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