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Franchisees discuss the perks of being first
Being a brand’s test case requires a leap of faith. Here’s why some entrepreneurs are willing, and even standing in line, to go first. This story appears in the April 2022 issue of Entrepreneur.
The beauty of buying a franchise is that you can bank on other people’s experiences. If a brand already has 50 or 100 units up and running, then there are 50 or 100 examples to gauge the way that company works with its franchises, what monthly costs to expect, how day-to-day operations will look, and where the profits are likely to stand.
But if you’re franchisee number one — or even number two or three — the metrics of past performance are nonexistent. So why would anyone go first?
Obviously someone has to, and those who do believe there are opportunities and benefits worth grabbing. In fact, as we emerge from the pandemic with a new understanding about what it means to be financially resilient, more and more people are trying to snag the first franchises. They have many reasons. But here’s the big picture: They’re seeing franchising more as a modern way to be an entrepreneur.
“Some of the realities with the older brands [are] that the territories aren’t available, or the brand has antiquated technology, or maybe the food isn’t healthy,” says Rick Grossmann, who does franchise executive coaching and brand development through his company, Franchise Bible Coach. “Younger franchisees are less worried about being an early adopter and are more excited about being tech-enabled, flexible, and different.”
Is There a “Number One’ Type?
When he thinks about franchise buyers, Grossmann sees two categories: early adopters and proof-of-concept types. People have a different tolerance for risk, and that tends to determine which group they fall into.
“An early adopter is excited about being in on the ground floor, about being a part of the group as the company continues to form. They usually have more direct access to the team, and they understand there’s going to be some hiccups and some edges to smooth out,” he says.
“The proof-of-concept buyers,” he adds, “are everybody else.”
Another way to think about the difference is that entrepreneurs buy emerging franchises, while investors purchase seasoned ones, says Hossein Kasmai, who has founded successful franchises like Combo Kitchen and Guard-A-Kid as well as Franchise Creator, which helps companies expand through franchising.
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“When you buy into a Subway or a McDonald’s, you know what your investment is and what you’re going to make,” Kasmai says. “But when you buy into an emerging franchise, you’re an entrepreneur. You’re taking a risk. These people want to turn around and say to their friends, “I was franchisee number five of this company that now has 2,000 franchisees.’ They take great pride in that.”
If entrepreneur-style franchisees were few and far between in the past, the pandemic has shifted the mix. Since COVID hit, we’ve seen a burst of new entrepreneurs, with a 53% jump in Americans starting their own businesses last year compared with 2019. That surge includes franchising. H&H Bagels, which has been a beloved brand in New York City since 1972 — so much so that it became a plotline in a Seinfeld episode — has had a line of would-be franchisees out the door since it announced a nationwide program in September 2021. And that’s despite its steep requirements: $1 million net worth, $350,000 in liquid capital, and the ability to begin development within three to six months. And two-thirds of the early interest is from entrepreneurs who will run the franchises themselves, says CEO Jay Rushin.
A First Franchisee Says…
In 2018, Eric Wilkening became franchisee No. 1 of New Again Houses, which flips homes — buying, renovating, and then renting or selling them. He’d been working for the company in Bristol, Tennessee, and agreed to “be the guinea pig” to see if the business would transfer to other markets. No money exchanged hands.
What did you think of the deal?
It was a fair trade. The first couple houses, I didn’t make any money, [but] they learned a lot. We were able to pick out what went wrong.
What happened after you went full-on franchisee?
The first two years were much rougher than I thought they’d be, but I think year four is going to be better. I think we just signed up our 28th location.
Would you recommend being first?
It’s been a good marriage of personal ambition and having those guardrails and guidance there when I need it. Starting a business is lonely enough. But having a person to call and say, “Hey, what’s your wisdom about this?” — it really helps.
Can You Get a Better Deal?
The least amount you will ever invest is with these new franchise systems,” says Jerry Clum, founder of the franchises Hommati and Comfort Keepers. That’s because as franchisors sell more territories, they need to start making national advertising buys. “The franchise fee has to continue to go up. And typically, it’s because the cost of advertising keeps increasing.”
On top of buying in for less, early adopters get the pick of the litter in terms of territories. If you’re the thousandth franchisee, it’s likely that most of the major, desirable territories are taken. But when you set up the first unit, you can snag whatever location promises the greatest opportunity.
Related: The 10 Commandments of Franchise Ownership
“If you’re successful,” Kasmai says, “within a year, you can buy a second or third or fourth one and continue to expand. A lot of these franchisors are willing to entertain the idea of a right of first refusal on adjacent territories.” Many No. 1s have done that. Pete Harman, who was KFC‘s first franchisee in 1952, for example, owned more than 300 stores before he passed away, according to the Deseret News. And Richard Hassur, who opened Pizza Hut‘s first franchise in 1959, amassed 150 stores in 20 years across the U.S., Canada, and Mexico — businesses that were worth around $3 billion in today’s currency.
Now, some early adopters want to snatch up multiple territories immediately. Since H&H Bagels announced its franchise program, for example, Rushin has seen more requests for multiunit purchases than for single ones. “We have a couple groups interested in multiunit development deals — one of which has never owned a franchise in his life, but he grew up on the Upper West Side and loves the brand,” Rushin says. “And then we have some multiunit operators of other franchises that [want to add] this bagel brand to their portfolio.”
Aren’t You Taking a Big Gamble?
The risks of being an early adopter aren’t necessarily as prohibitive as people think they are — and in most cases are still lower than they’d be with starting a business from scratch.
A company that’s deciding to franchise likely has a track record of knowing the consumer demand for its products or services and the best way to meet that demand. “Most brands didn’t come out of nowhere and become franchises. They have gone through potentially hundreds of thousands of dollars of investments and hours and hours of preparation,” says Grossmann. “They’re not just popping up and saying, “Hey, let’s try this.'” H&H Bagels, for example, has been a New York City staple for 50 years. “No matter where we go,” says CEO Rushin, “brand awareness is extremely high, and that certainly helps in a situation like this.”
Related: How Many Franchise Locations Should You Own?
Often, Kasmai says, it’s entrepreneurs themselves asking for the opportunity that makes a brand decide to franchise. “There are companies we have franchised that come to us and say, “We already have multiple people — our customers, our employees — and the minute we are a franchise, these are going to be our first potential franchisees,'” he says.
Kasmai also points out that early adopters get more of a voice in building out the system, which gives them a greater sense of control over risk than they would have with an established franchise that’s set in its ways. Being able to contribute ideas — and having them heard — can mean the difference between some success and huge success for the brand overall. McDonald’s Big Mac and Filet-O-Fish sandwiches both came from early franchisees, as did KFC’s bucket of chicken.
“You never hear that franchisee number 10,000 came up with an idea that’s now on the menu at every McDonald’s,” Kasmai says.
A First Franchisee Says…
Scott Upright was a dentist for more than 20 years, and he eventually needed lower back and neck fusions. “The doctor looked at me and said, “If you want to play with your kids, you can’t do this anymore,'” he recalls. Upright was retired and living in Florida with his wife, Debbie, and bought one of the first Grain & Berry franchises in 2018. Two years later, they opened a second.
What made you take the leap?
Debbie went into the Palm Harbor store, had one of their bowls, and the lightbulb went on.
Are you glad you did it?
Being part of an emerging franchise, it’s not cookie-cutter. I like that I get input from [the franchisors]. They listen to me, and we’re growing together. I think we’re just scratching the surface. I believe there’s a whole new market for this.
Do you still love the food?
I’ve had a bowl probably every day for the past four years. The [one] with berries and a little peanut butter, Nutella, and granola, that’s heaven.
Image Credit: Fran_Kie | Shutterstock
Are There Hidden Benefits?
One of the main attractions of buying franchise number one versus 10,000 is access. In a large, established system, says Kasmai, “you’ll never get to talk to the founder or the CEO. Whereby in an emerging franchise, you most likely can reach them on a Saturday with a text.” Not only are the company owners more likely to listen to your ideas, they’re also much more motivated to invest time in you and offer support. “Everybody on their team knows how important it is to get those first franchises up and running — it’s mission critical,” Grossmann says. “If they get the first few on board and they don’t do well, the whole deal can be for naught. So there’s going to be extra attention.”
Related: Am I a Good Franchise Candidate?
Early franchisees also get to act more like founders. Clum, who has owned 11 franchises, witnessed that firsthand. “When I was a franchisee of a fairly new concept, I had a much bigger voice in the system,” he says. “You can really play a part in creating the vision of the company.” And the opportunity to build that future with the bigger brand — along with the extra support, access to prime territories, and lower entry cost — is why an increasing number of people are jockeying to get to the front of the line as franchise buyers.
Finally, the lack of past performance data can play to your strengths. Without metrics to confine your expectations, it’s easier to open your imagination to what success might look like. “I myself have been an entrepreneur all my life. I’d much rather invest in an emerging franchise than in a seasoned franchise,” Kasmai says. “The sky’s the limit. You have no idea how big it can get.”
A First Franchisee Says…
Lekshmi Nair Kiran spent 16 years in corporate business and IT and then wanted out. Her friends needed help with their business, Wize Computing Academy, which teaches tech skills to kids, so Kiran began overseeing some of the schools.
What made you decide to open Wize Computing Academy’s first franchise in 2019?
After a few months, maybe a year [of working together], they talked about franchising. I thought it was a great idea. I wanted to be more involved.
Looking back, would you do anything differently?
I wish I had done it a little earlier. Owning something, running your own business — you get that monthly income, but you are doing it for a larger reason. We are now in our fourth year and have been doing great. We have a lot of students.
What’s your favorite part of the business so far?
I’ve been able to give jobs to so many people — especially women. This is a very good opportunity for them to make a decent income.
Big Brands, First Franchisee
1. McDonald’s: Neil Fox, oil exec from Phoenix, 1953
2. Taco Bell: Kermit Becky, retired Los Angeles police officer, 1964
3. KFC: Pete Harman, restaurant owner, 1952
4. Pizza Hut: Dick Hassur, pizza store manager, 1959
5. Chick-fil-A: Doris Williams, small business owner, 1967
6. Howard Johnson’s restaurants: Reginald Sprague, yacht captain, 1935
7. Arthur Murray Dance Studios: Doris Travis, Ziegfeld Follies chorus girl, 1938
8. Midas: Hugh Landrum Jr., owner of auto parts and repair shops, 1956
9. Budget Rent A Car: Irwin “Bick’ Bickson, owner of currency exchanges, 1959
10. Sonic: Charles Woodrow Pappe, entrepreneur, 1956