What the Sale of New Franchises May Reveal About a Franchise Program
by Ed Teixeira
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
- 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
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
Focus on the following areas if the franchise fits the fast-track
- 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