Does Franchise System Size Matter?
National franchise attorney Jeffrey M. Goldstein discusses the benefits and drawbacks associated with buying into both large and small franchise systems.
How Franchisees Can Benefit from a Large Franchise SystemSome of the most well-known brands in the world are franchises. This, in itself, demonstrates one of the primary benefits of buying into a large franchise system. By legal definition, a franchise involves operating an independent business under a recognized brand. The more recognizable the franchisor's brand, the more benefit franchisees may see from their initial investments and ongoing advertising fund contributions.
Larger franchises can offer a number of other benefits as well. Large franchisors have usually been in business for a long time, and they usually have personnel and systems with proven results under the franchise model.
Potential Drawbacks of Becoming the 500th (or 5,000th) FranchiseeOf course, there are also certain limitations involved in buying into a well-established franchise system. For one, site selection could be a challenge. If there is already an outlet on every street corner or in every strip mall in your geographic area, you may not be able to find a profitable location. It may also be the case that existing franchisees' exclusive territories cover the entire local landscape.
Getting the support you need could also prove difficult. If the franchisor is understaffed or its systems are out of date, you may find yourself feeling isolated despite what you have paid to (and what you were promised by) the franchisor.
How Franchisees Can Benefit from a Smaller Franchise SystemIn smaller franchise systems, franchisees can often benefit from one-on-one interaction with the franchisor's leadership. Smaller franchisors have a greater interest in ensuring the success of each individual franchise, and this often means that franchisees can expect more in terms of personalized attention and support. Individual units in smaller franchise systems can also have more of a "local" feel, which may help to offset the lack of big-brand recognition.
Potential Drawbacks of Becoming a First FranchiseeOne of the most significant potential drawbacks of being an early franchisee is the lack of a proven track record. While the franchisor may have operated successful company-owned outlets before deciding to franchise, being a franchisor is an entirely different business. The franchisor's officers and managers may lack the franchise industry knowledge to help you succeed, and it is entirely possible that the franchisor will not yet be fully committed to the franchise model.
Lack of brand recognition can be a drawback for franchisees in smaller systems as well, and there are unlikely to be any franchisee groups or associations (as are typical in larger franchise systems) to provide additional support and bargaining power.
Where to Find Franchise System Size InformationWhen evaluating a potential franchise opportunity, the place to find information about the size of the franchisor's system is in Item 20 of the Franchise Disclosure Document (FDD). In Item 20, franchisors are required to disclose information such as: (i) outlets open at the start and end of each of the previous three years; (ii) the number of franchise terminations and non-renewals in each of the previous three years; and, (iii) the number of franchise agreements signed for outlets that are yet to open. In addition to providing raw size data, looking at recent historical figures as well as projected future openings can help provide insight into the overall trajectory and stability of the franchise system.