Categories of Franchisors in Franchising

In practice, you will come across three main categories of franchisors:

  • The established franchisor
  • The new franchisor
  • Franchisors to be avoided

1. The Established Franchisor

This represents the least risky type of franchise opportunity.

The business format will have been fully tested in a number of locations and has evolved into a blueprint for business success.
During the initial stage in your investigation, you can approach established franchisees within the network, observe them in action and ask for feedback. Once you have joined the network, you have, in addition to a well-developed support infrastructure operated by the franchisor, a group of peers you can use as a sounding board.

It is reasonable to assume that the longer the brand has been in operation, the better its reputation in the market place will be.

This offers various advantages:

  • Enhanced effectiveness of advertising campaigns
  • Strong bulk purchasing power
  • Potential for reaching breakeven more quickly

Although the initial investment you will be asked to make may be higher than if you would join a relatively unknown venture, this proposition will be highly attractive to anyone for whom security is important.

2. The New Franchisor

There is nothing intrinsically wrong with joining a new franchise- everyone has to start at some point. You need to be careful, however, to ensure that you do not invest in an opportunity that is not sufficiently developed, and end up as a guinea pig.

Things to watch out for include:

  • Has the franchisor operated the core business for a reasonable period and is it demonstrably successful?
  • Is it likely to appeal to customers/users in other parts of the country?
  • Has the concept been fine-tuned to ensure that business efficiencies are maximised?
  • Does a comprehensive operations and procedures manual exist?
  • Is the franchisor soundly funded? During the start-up phase, the franchisor is vulnerable to financial problems if franchises cannot be sold quickly enough. Unless the franchisor has adequate financial reserves, more effort is likely to go into selling franchises than providing support to franchisees.

These obvious risks must be assessed against the potential for higher returns. Cases are on record where franchisees who joined a network during the take-off phase have achieved phenomenal returns on their investment.

This will be the case if, for example:

  • The product or service is outstanding in some way and market acceptance has been established yet competition is limited or non-existent.
  • A larger territory can be negotiated, or you could secure options for additional territories.
  • Early entrants stand a better chance of co-determining the strategic direction the network will take than franchisees who join a well-established network with an entrenched management structure.

At the end of the day, it depends on your appetite for risk. This type of franchise may be attractive, or be one you should avoid at all costs. Should you come across a self-styled franchisor whose concept impresses you, but the franchise infrastructure has not yet been adequately developed, you may want to consider a joint venture. This would give you a bigger say in the direction the business takes, and if your hunch pays off, you would own in a stake in the franchisor company rather than in just one unit.

3. Franchisors to be Avoided

These come in various disguises, for example:

The incompetent franchisor – Such a franchisor does not offer franchises to perpetrate fraud but is simply incompetent. The basic business may be unsound, the franchise may be hopelessly under-resourced or the franchisor is inept.

A business is unsound if the product or service on which it is based lacks the potential for profitable sales. A competent franchisor will test the business concept both through market research and by operating a pilot outlet before offering franchise opportunities for sale. An incompetent franchisor is unlikely to do either of these things.

In addition, it is expensive to become an ethical and competent franchisor. If the business format is tested thoroughly, the franchisor will need to carry the establishment costs for up to two years before seeing returns. An under-resourced franchisor will be unable to sustain this period. Start-up assistance and operating manuals will be of poor quality and the franchisor is unlikely to have the infrastructure in place to provide a high standard of ongoing support.

This can be particularly important if you are considering a franchise opportunity where your outlet will be located far away from head office, with no other franchisees operating in the vicinity. Under this scenario, the cost of providing support will weigh heavily on the franchisor.

The inept franchisor – means well but has little understanding of how and why the system works, or how the product or service will be brought to market. This type of franchisor is perhaps the most dangerous of all. His enthusiasm is infectious and this can cause untold harm to gullible franchisees. They will be persuaded to invest their hard-earned cash into a poorly developed venture with no real prospect of earning adequate returns.

The unethical franchisor – This type of franchisors has no real intention of entering into a long-term support relationship with the franchisee. Rather, he sees franchising as a way to make quick money by convincing starry-eyed would-be franchisees of the potential to earn riches for themselves.

This is done by setting up a shell franchise – lots on offer (on paper) but nothing to back it up in reality. The “franchisor” attracts investments from hapless individuals who are so taken in by his smoke and mirror approach that they fail to make a thorough appraisal of the business on offer. At the end of the day, these are the same people who, once their investment has evaporated in thin air, will be quick to blame the concept of franchising for their misfortune.

Your best protection against falling victim to this type of “franchisor” is to take time to learn all you can about franchising, and investigate different opportunities. Joining a franchised network demands an investment of such magnitude that you simply cannot afford to learn from your mistakes.

Important pointer

You need to recognise that the franchise is a long-term relationship, and things can change along the way. It is best not to rely on the promises of one individual, or a given set of circumstances, but to step back and take a look at the overall direction the network is likely to take. Ask yourself: How likely is it that the franchisor company will change direction, for instance, if it is taken over by another company, or if it moves into international markets, and how will this affect me?