Should I invest in a new franchise?

If you’re thinking about buying a franchise, one of the first decisions you’ll face is whether to invest in a newly launched system or join an established network

The choice can significantly affect your risk, opportunities and the level of influence you have on the business. We spoke to franchise experts to break down what you need to know.

Are there benefits to being the first franchisee in a network?

Being the first franchisee – or a “pilot franchisee” – can offer some unique advantages. Brian Duckett, former chairman of The Franchising Centre, explains: “The first potential benefit is that the majority of the costs of testing franchising should be borne by the franchisor.

“However, the testing needs to be done by someone with ‘skin in the game’, otherwise it is not a test of how an independent operator will perform.”

He adds that pilot franchisees may enjoy reduced or even waived upfront fees. “If all goes well, at the end of the piloting period the first franchisee will be granted a full franchise agreement without having paid the upfront fee.”

Beyond financial perks, early franchisees can also influence the development of the franchise system. Duckett notes: “Becoming a pilot franchisee is inevitably more risky. However, it may present opportunities to guide the future development of the network. Early franchisees often form a bond with the franchisor that brings mutual benefits throughout their relationship.”

What are the risks of going with a first-time franchisor?

The flip side is that new franchises come with higher uncertainty. Shelley Nadler, legal director at Bird & Bird, warns: “All potential franchisees need to check out the franchisor of a franchise system very carefully. However, this can be more difficult with a new system. This is because there is no trading history for the franchise and no existing franchisees you can talk to about their experiences.”

She emphasises the importance of pilot testing. “You need to know the amount of pilot testing the franchisor has carried out and details of the financial performance of pilot operations.

“You’ll want to establish that the franchisor has shown the system works. Can it be successfully replicated by franchisees?”

Nadler also points out financial considerations. “For a young franchisor, it is important to consider if it has sufficient capital to finance its operations. If there is a shortage of capital, the franchisor may seek to remedy this by rapidly recruiting franchisees. The franchisor may not have the infrastructure in place to support these franchisees.”

John Pratt, senior partner at specialist franchise firm Hamilton Pratt, provides a crucial perspective: “Franchising is not about licensing an idea. What it is about is licensing a proven business system.”

The only way a new franchisor can prove its system can be replicated successfully is through pilot operations. This is where one or more franchisees have taken the system and been successful.”

Does the idea have staying power?

A new or young franchise system can have the advantage of bringing to the marketplace a novel idea. However, Shelley Nadler cautions, “you need to consider if the novel area of activity is going to be a flash in the pan or if it will have staying power.”

Conclusion

Our experts agree that buying a new franchise is a balancing act between risk and reward. Being an early franchisee can allow you to shape a business, enjoy close contact with the franchisor and negotiate favourable terms.

At the same time, new systems carry uncertainties around financial stability and replicability.

As Brian Duckett summarises: “One person’s benefit is another person’s disadvantage. It will depend very much on your attitude to risk.”

Careful due diligence, expert advice, and realistic expectations are essential before taking the plunge into your chosen franchise opportunity.