Choosing an established or emerging franchise

A prospective franchisee in Australia today has a smorgasbord of opportunities. With very few exceptions each of Australia's 1100 franchise systems is in the market for franchisees. A range of factors; entry cost, industry sector, past experience, skill set, geographic availability, personal preference and other considerations will narrow the field but an extensive range will probably remain. From the viable opportunities left for consideration it would not be surprising if there were not both established and emerging systems on the shortlist.

A recent online poll conducted by Franchising magazine to determine whether people were more likely to acquire an established franchise or an emerging brand in the current economic climate perhaps surprisingly saw a vote of confidence in emerging systems. This is an interesting and perhaps unexpected finding which is worth some consideration.

Let's go back to first principles. The undoubted success of franchising is built on the cloning of proven concepts, brands, systems, training and support. The qualifier proven is of course very significant. Franchising is not a miracle cure or a magic formula. Its success is built not on the fact that it is franchising but that it is good and responsible franchising. This demands that all the elements of the franchise package have been proven.

This would seem to give the edge to established systems because of their significant track record. The concept, brand, system, training and support have been repeatedly proven through the outlets in the network. However an emerging system can also establish its credentials, albeit at an earlier evolutionary stage. A franchise system can be small yet perfectly formed. It is hardly profound to point out that every large system was in a previous life a small business at the start of its franchising journey. Even the 31,000 plus McDonald's system was, 60 years ago, a single outlet in San Bernadino, California.

While the franchise sector has been built on the shoulders of the established systems its growth is driven by emerging systems servicing niche markets. These systems replenish the gene pool. Because they are small and entrepreneurial they bring new ideas and new concepts - they introduce diversity, innovation and excitement. Substantial change is not easy in mature systems. New systems have the advantage of being able to respond and adapt to opportunities and changing lifestyles more adroitly.

It is therefore not really surprising that emerging systems are attractive to prospective franchisees; new concepts, lower entry costs generally, wider location choice and the opportunity to broker a deal that may not be possible with the established system. Franchisees who pick the winners and grow with them are in a good place. The key is the 'p' word; has the emerging system done enough to be able to make an informed assessment that it is proven? Is there critical mass in an important related concept?

The downside of our boast that we have more franchise systems per head than any other country in the world is that not all these systems will achieve critical mass and therefore cannot deliver to franchisees those ongoing services and support as well as system development necessary for a successful franchising relationship.

There is of course a big difference between emerging and embryonic. A prospective franchisee should be extremely cautious if the opportunity is to be the first outlet beyond the franchisor's own prototype business. All that is proven in this case is that the prospective franchisor has a good business, not that the business concept will be successful in another location with a different operator. Franchising is essentially the replication or cloning of entire business systems and until the prototype business has expanded through pilot operations it is merely hopes, dreams and aspirations. Franchisees should not be the guinea pigs through which the system is refined and documented and fine tuned. Similar considerations apply to a successful overseas system commencing operations in Australia. Success in Main Street, USA does not necessarily translate into success in Main Street, Australia.

By Andrew Terry, Special Counsel to Deacons Lawyers

This article appears courtesy of Franchising Magazine