Franchisees make a big commitment via the franchisee investment when buying a franchise. Franchises range in value from circa $20,000 to what can often be more than $400,000. In some situations franchisees will invest close to or even more than $1 million – depending on the type of business, structure and situation involved.
Franchisees that invest will inevitably be taking a quite a risk – albeit hopefully a highly calculated, high conviction one. Pretty much always the level of franchisee investment is a big deal for franchisees and whether it’s $20,000 or $200,000 the figure normally represents a large dollar amount for the franchisee. Furthermore, we all know that franchisees invariably need external sources of funding to make up the full costs of establishment and early trading.
For a range of reasons we believe that it is important to take note, and frankly sometimes better note, of the total franchise investment and the fact franchisees are choosing to do this within a ‘particular’ franchise system. Moreover franchisees, whether totally consciously or not, are putting faith and conviction along with their investment into a particular franchise system and offering. That’s a big thing and it must be respected – and as indicated, in some cases more than currently is.
There are a number of reasons why we believe the level of franchisee investment should be respected:
- The franchisee could have got / kept a job and invested any savings elsewhere at lower risk. No question an alternative investment might lack the potential upside, but there sure will be an alternative offering with a higher probability for capital preservation.
- The franchisee could have invested in a diversified portfolio of potential wealth and income building assets aside from the particular franchise. There are more ways than one for being involved in business. That could mean a mix of business equities or fixed income securities, or more direct investment in several ‘others’ – no matter how small the stake.
- By investing in a franchise the franchisee is often seriously concentrating risk into one investment and again that is tied to a particular franchise system. That’s a big deal. It is also often a good investment, but not always – hence the risk, which must be calculated.
- The franchisee investment is often, in dollar terms, substantially more than some franchisors may have invested in franchising their business. This in our view is an important thing to consider because the quantum speaks to the quality of the franchise system in part. If a franchisee is investing and contemplating a concentrated franchise investment then it follows they would expect it to be in a good thing. They need to make sure they understand the quality of the opportunity in its fullest form.
- Many franchisors do not operate their own company outlets. Therefore their entire network is based upon the investment and vision of their franchisees and associated capital allocation. Thus, the franchisee investment must be respected – for without franchisees there could be no franchise system and many chains would not exist.
The Franchisee Bottom Line
Bottom line we believe that franchisees need to be seriously respected for what they do and, importantly, a franchisor has a duty to do all that they practicably can to make sure that they have a great business model, associated franchise system, and, management and leadership of that franchise system.
We see many franchisors and franchise systems that provide great leadership and franchisees with an excellent investment opportunity. We also see many franchisees who tell us of the wonderful opportunity their franchise has afforded them. However this is not always the case, and frankly some are terrible. Consequently, prospective franchisees do need to ensure they take all practicable steps to understand the quality of a franchise opportunity before investing.
For prospective franchisees we strongly recommend pre-purchase education followed by strong legal, accounting and franchise consulting advice.
In New Zealand, prospective franchisees should complete the Franchise Association of New Zealand’s Free Online Pre-Entry Programme for Prospective Franchisees in association with Massey University. With education (and in this case free education), the prospective franchisee will understand more and be armed with a myriad of frankly simple questions that go a long way toward identifying the good opportunities.