Erasibo

This is the second article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our first article which sets our tone.

In this article we look at the rare instance of being the first franchisee. In our move into the franchise game we were approached to be the first franchisee of a new concept of stores for an established restaurant chain – the chain we are currently suing. We turned down that deal these are some of our thoughts on being the “ground breaker”

Starting a business is a tall order for most people and even a scary prospect especially for non-entrepreneurs hence the preference of starting with a proven model where the concept, business plan, and operating system are already put together in a franchise package.

However every franchise system has a first franchisee. The groundbreakers or icebreakers if we may call them, are the people who risk it all in pursuit of success and financial excellence.

And as important as success is to the first franchisee, it’s even more important to the franchise company. Their future growth will depend to a great extent on the validation and results of the first franchisee.

These are just some points to consider regarding getting involved with a startup franchise outfit, or an outfit that are expanding into new untested markets.

• Ground breaker: The first franchisee is comparable to being a first child. Being first means getting all the extra attention that normally comes with the position. The challenging thing is that the first child has to break the ice on every little thing. This makes it much easier for the children that come later, but it’s sometimes a real pain for the first child. They have to effectively train the parents to be reasonable and have realistic expectations, and this is often the same dynamic at play between the franchise company and the first franchisee.

• Acceptance of risk: As a first franchisee, you must be much more accepting of risk than a normal investor. Bold and brave, you should also be the type of person who’s willing to deal with a more fluid situation, where changing and adapting to unforeseen circumstances is a welcome part of business development. The first franchisee is usually a true entrepreneur and, much more so than later franchisees, is a partner with the franchise company in the development of the franchise system.

• Comfortable with uncertainty: It’s essential for both you and the franchise company to understand the unique role the first franchisee plays. The first franchisee is a person who’s comfortable with the uncertainty involved in being the groundbreaker for a system. The good news is that you’re undoubtedly going to receive a great deal of extra support from very senior staff of the franchise company. The bad news is that you’re going to represent a learning environment for the franchise, and you need to be accepting of that role.

• Learn by making some mistakes: Have realistic expectations. No matter how well the franchise prototype operations have performed, it’s going to be different running the first franchise unit. You aren’t going to intuitively understand everything about the business, and both you and the franchisor are going to learn by making some mistakes. There must be a fair amount of open and frank communication about what areas of the business are set in stone, and what areas will involve testing and learning as you build your business.

• Fair deal: The reality is that the franchisor is going to be using you as a learning tool. So both sides need to be reasonable about who should pay what in terms of “tuition” for this schooling. Though the support level given to the first franchisee is typically much more significant than for later franchisees, other value factors, such as the system documentation, are probably not going to be nearly as well defined or developed as they’ll be later. When negotiating the franchise agreement and other financial considerations, you should address these factors. Both you and the franchisor must feel the deal is fair and proper.

The following are the pros and cons of being the first franchisee:

Pros

• Availability of open territories: One advantage is the availability of open territories. The market has to be completely open.Today certain markets are closed and gaining entry into them is some what cumbersome however due diligence in research, realization and utilization of open markets can bring huge success to the franchisee. Give an example. I’m not exactly sure what you mean by an open market

• Financially sound franchisor: A financially sound franchisor committed to growing the franchise, and committed to the franchisees can be invaluable to the franchisee. The franchisor’s commitment has to be unquestionable as the first franchisee would rely on their support more so than later franchisees when systems are in place. (rephrase this- and the absence of such would be a tonic for disaster.  )

• Franchisor participation in risk sharing: Your success as a first franchisee is as crucial to you as to the franchisor because not only will you provide a bench mark of proven systems you will also provide a basis for a successful track record. To this regard the franchisors are likely to shoulder a larger risk in the business and operations than they would with later franchisees.

• Investor participation in risk sharing only a private investor would come on board with an unproven concept: Investors like the Industrial Development Corporation (IDC) who come on board as partners until the loan is repaid provide the much needed security for first franchisees considering the unproven systems and franchisor inexperience in dealing with franchisees and the business expansion itself.

Disadvantages

• No proven systems: You can receive a lot of glory and recognition for your part in advancing the franchise system, but there are certainly trade offs. You won’t have other franchisees to consult with that have already traveled the path before you. You’ll have lots of support and assistance, but the support won’t be tested and proven on others, so mistakes are going to be made. You’ll have to make your decision to get involved with the franchise without the benefit or assurance provided by an existing system with a number of successful franchisees, and that increases the risk of getting involved.

• Expandable concept: The biggest thing you want to look for is a concept that is expandable; your best bet today is really researching the franchise opportunity for uniqueness. Does the concept have a niche, or is it a blatant copy of another concept? Can you set yourself apart from your competitors? Unless the concept is expandable, franchisees are not able to extract value out of the transaction. However most people looking to buy into a franchise  don’t consider such a crucial factor hence they buy into already saturated lines of business like the fast food outlets.

• Chances of obtaining finance: The chances of obtaining finance from any institution on an unproven concept are slim if not next to nothing and the prevailing economic conditions have forced the crafting of more stringent criteria for obtaining finance. A business which has less than ten operating outlets is usually not considered a bankable franchise entity hence making it difficult for first franchises.

Perhaps the best approach for expanding the franchise model is to open up these initial franchises as partnerships between franchisor and franchisee. This protects both interests. From a franchisor perspective they get to protect their investment and further expansion of a new model and for a franchisee, you get the support and investment needed to set up and test a new business concept.

The sharing of risk is the safest and fairest approach to expanding a franchise concept model.