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Why Quick Franchise Expansion is Not Always Good for the Franchisees

McDonalds franchise units, Orlando

McDonalds franchise units, Orlando

Visiting franchise expos, I generally pitched with the following, “We have expanded well from X to Y franchise units in 3 years into franchising.”

While expansion, for me, is one of the key indicators of the franchises’ potential, it is often misleading franchisee candidates into thinking that rapid expansion means strong franchise company with great potential.

Quick expansion means more emphasise on quantity and less on quality

Expansion is great, but you must understand that franchises that put expansion into the top priority in their business plan present franchisors and franchisees with a double-edged sword.

In one side, being expansionist presents the franchisor and the franchisees alike an ability to cover large territory fast, cornering competitors and leave them in the dust to quickly become the market leader in the niche. This is an enormous benefit, as being the first entry or a market leader in a region will ‘plant’ the franchise’s brand name into the community, fast and deep.

In the other side, being expansionist could left franchise units fragile and receive lack of support from the franchisor, as resources are prioritised for expansion purposes, thus reducing the profitability and sustainability of the franchise units. When things gone badly (the recession, for instance) franchise units won’t be ready to take them on as they don’t possess a ‘reserved’ resource for this. Commonly, this could mean more work and resource consumption for them to ‘weed’ bad franchise units from the good ones. For an unethical franchisor, this is a way to make money fast, leaving unaware franchisees in the dust, exposed to considerable risk or business failure.

Should you choose franchises with quick expansion or slow ones?

If quick expansion is not desirable, will the slow one desirable? In my opinion, the answer is no.

Slow expansion in franchising also indicates the lack of potential and marketing capability of the franchises. I would still prioritise franchises with quick expansion, rather than the slower counterparts.

A cliché recommendation: The ideal for you and I is to choose franchises that balance expansion with strengthen internally. However, in reality, this balance is hard to achieve.

I strongly suggest you to inquire the franchisors regarding their plan for expansion. If they are giving you the impression that they focus on expansion too much, avoid them. If they explain that their expansion strategy will be revised on regular basis, involving both quality and quantity-focused business strategy, you should explore more about them.

In my case, I particularly interested in franchises that grow exponentially in franchise unit numbers for a couple of years and then slow down in the next years. Why? To me, it’s an indication of changing in direction, from quantity-focused to quality-focused franchises (It could also mean the franchises are weaker – Let’s find out…)

The question, “Why are you slowing down?” will give you colourful answers (some would simply be white lies, some would blame the recession as the culprit), but you would want to investigate more for the real reasons behind the slow down. If the franchisors’ answers involve something like “We raised our bar in accepting new franchisee applicants – We have rejected many applications” or “We are strengthening internally, taking over low-performing franchise units to raise the profitability”- With proofs, of course – I suggest you to note them as candidates to buy franchise units from.

It’s better for you not to buy any franchise in haste, because deciding something quickly involves more emotion and less logic – And you don’t want to lose your money for something you are not being careful and analytical about the franchise opportunities you are interested in.

Ivan Widjaya
Franchise expansion

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