New Franchise Brands Make Bad Investments

I am not a fan of new franchise brands. The early franchisees that invest their money and time into these brands do not get properly compensated for the extra risk they assume.

I liken investment in early franchise brands to high risk venture capital, where you make 10 plays to get 1 or 2 big winners. But, do not forget that 5-6 are complete busts.

Are you willing to lose all your money and time invested in a new franchise 50-60% of the time? Most investors will only make one investment in franchising in their lifetime, so do your homework and be wary of the new and shiny franchise business.

Every year there are many new franchise brands that seem attractive. And 5 years later, 75% of those new brands will be dead or on the edge of death.

The best new brands will build out several corporate units in multiple cities over 2-5 years to prove the concept before franchising to third party investors. The worst brands will start franchising to third party investors with only 1-2 corporate units run by the original founders with little to no experience in franchising.

Franchising is at its best when a franchise brand is near its tipping point and has achieved “reasonable” critical mass. Nothing mitigates risk better than the successful replication of the franchise business “recipe” over 3+ years with 20+ franchisees.

Yes, there are many large franchisors where the value proposition for the franchisee has depreciated greatly. So, size alone is not a good reason to jump on board. But let’s look at some related benefits of successful franchise brands that have reached the tipping point.

  • Value proposition solid, it was not a passing fad
  • Ability to validate that franchisees are making good money
  • Higher brand awareness
  • Better understanding of the profile of the ideal owner and their role
  • Stronger regional and national client accounts
  • Better purchasing power
  • Stronger R&D, training and support
  • Larger mentor and peer networks
  • Failure risk of franchisor extremely low

There is some science to choosing the right franchise brand. And “new” in almost all cases is a negative.

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