This lesson is part of our free Franchise 101 course.
When you’re picking a franchise to work with, one of the factors you have to take into account is your own risk tolerance.
Proven Versus Potential Value
Profitable franchises generally fit into one of two groups, each with a different risk balance.
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First, there are franchises that have built up a solid performance record and strong brand identity over many years and thousands of locations. These are the famous brands, the household names, and probably the ones that made you aware of franchising’s potential.
Then there are the up-and-coming franchises. These are fairly new but show a lot of promise and appear to be on a strong growth trajectory. They have fewer branches and a lower public profile, but show sound business practices in their disclosure documents.
Why Pick a Newer Business?
If you can accept the uncertainty of a brand that hasn’t completely proven itself, then you might want to consider a newer franchise brand. Because they’re not so widespread yet, you’ll be more likely to have your pick of territories. There’s the potential for strong growth, as the excitement of having something new in an area can grab customers’ attention. And as someone getting in early on, your profit potential is greater if the business takes off.
This potential is coupled with risk. Many businesses fail without reaching greatness, and even those that survive sometimes stall into mediocrity. You can’t be certain that a newer brand will reach the potential its creators see in it.
Why Stick with the Old?
If you’re a low-risk kind of person, you may want the security of an established brand name. This brings lower risk and greater certainty. You know what you’re getting into. Your staff know what they’re getting into. Your customers know what they’re buying, and how often they’re likely to buy it. Everything is more predictable.
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The downside is lower opportunities. Finding an available territory will be more difficult, as lots of people have already bought into the franchise. The company running it will know the value of its brand and set both fees and expectations at a level that profits the big corporation above its franchisees. Any growth is likely to be steady rather than dramatic.
Look at those two options and ask yourself, which one appeals the most?
If you’d rather be safe, then you should stick with the established, lower risk brands. You’ll be more comfortable with the way they work.
If you’re willing to take a risk, then try something newer. You won’t face the pre-emptive disappointment of limiting your potential for growth, and you’ll be more likely to throw yourself into the shifting potential, high risks and high rewards of a new business, or even a new industry.
Whichever you choose, make sure that it’s a business that suits you, because where you fit psychologically is where you’ll do your best work.