This post continues in a series of posts I am writing on franchise investing. The series of posts initiated with an article I read outlining what private equity investors like about franchising. Today, I want to touch on the  fourth “ingredient” of the Secret Sauce which is whether the franchise has sufficiently long operating history.

Now, it may sound simple on its face to say a franchise must have a sufficiently long operating history. But, I work with many people who are either a) just starting a franchise, or b) looking for the newest idea or trend to get in on the ground floor. So, should you invest in a new franchise? I would say it is definitely a possibility (how about that). But there are some important things to keep in mind:

  1. All things being equal it may be best for a franchisee to invest in an established franchise. But even the most stable franchises get stale. So this isn’t as easy as just picking a franchise that has a sufficiently long operating history.
  2. Even if the business is new to franchising look to see whether the new franchise has a sufficient operating history of multiple corporate locations. In my opinion, if a franchisor has not operated multiple corporate locations, I would be hesitant to invest my capital, whether you are starting the franchise itself or purchasing as a franchisee. A franchisor should prove it has the ability to manage and deal with multiple locations. Having multiple locations brings many complexities for a business owner. You don’t want to be the test case.
  3. For a new idea or concept, what have you done to determine that concept has long-term appeal? Will it have universal appeal across geographies? Is the concept sustainably on trend? Is it a simple concept and something that can be easily replicated?

A new franchise can be a dynamic opportunity under the right circumstances. But do your homework!