Shelley Nadler writes:
If you’re considering taking a new franchise, you need to take particular care in assessing the franchisor. All potential franchisees need to check out a franchisor carefully. However, this can be more difficult with a new system, as there’s no trading history for the franchise and no existing franchisees you can contact to find out what their experience has been.
It’s particularly important with a new system to check out if the pilot testing was adequate. You need to know the amount of pilot testing that’s been carried out and details of the financial performance of pilot operations. You’ll want to establish the franchisor’s shown that the system works and that it can be replicated.
For a young franchisor, it’s important to consider if it has sufficient capital to finance its operations. If there’s a shortage of capital, the franchisor may seek to remedy this by rapidly recruiting franchisees. The franchisor may not have the infrastructure in place to support these franchisees.
However, a new or young franchise system can have the advantage of bringing to the marketplace a novel idea.
It may be that the only way you can establish a business in a certain area is to buy a franchise from a new franchisor. If this is the case, you need to consider if the novel area of activity is going to be a flash in the pan or if it will have staying power.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.