(FS11) Securing Your New Franchise Location in a Brand New Area

This wasn’t talked about too much in Getting Your Franchise Started because you really don’t want to chart into uncharted territory on your first time out. An inexperienced captain (or rather, a deck swabber?) shouldn’t get on the boat for the first time and look for the biggest question mark on the map to go to. That’s a quick way to get lost and starve. Instead, you wanted to find a somewhat charted area with small unknown pockets so you have the support you need around you. Now that you’ve got the experience, you can look into places that your franchisor has not gone yet, brand new territory. This will be the key to becoming a master franchisee.


You’ll want to check on the specific way your franchisor handles new areas as some only like to expand into new areas when they can open more than one store at a time. Some franchisors like to sell only multi-unit franchises in new areas with single-units opened in areas that they’ve already developed.


Advantage to Buying a Franchise in a New Area

One of the advantages of going into new territory is that you lock it in as your own and you can develop multiple locations there with little to fear of other stepping on it. However if you buy one franchise at a time in new areas, you risk getting closed out of parts of your area because of other franchisees or the company opening up new locations in the place you chose.


shutterstock_108327197Consider these points before you strike a deal for area development rights:


  • The number of stores you ultimately want
  • The amount of money you can invest to develop your stores
  • The number of locations the market can support
  • The additional cost and savings you’ll incur
  • Your ability to manage multiple locations


If you’re buying into a new area, be prepared to pay a substantial amount of money upfront. Area development rights usually demand a flat rate fee or a fee per franchise that you commit to develop. Consider that you pay the franchise fee of $50,000 for your first store in full, but you’re planning to open 5 other stores after that. To develop the area, along with your franchise fee, you will have to put a deposit for all those other stores down, that’s say, $15,000 5 times and then the rest is due for each location when you open them.


Defaulting During Development

If you end up in default during your development schedule, you may end up losing your deposits. Check with your franchisor and the rights in your agreement before you make any big moves. The development schedule may have a grace period before it forces you to pay all of the fees. Many franchisors don’t have a set policy and will work with you on an individual basis. You can also be lucky and have a franchisor who offers a lower fee per-unit for each additional unit that you build or promise to build in new areas. That’s due to:


  • Franchisors reducing costs for an individual or company who are purchasing more than one location.
  • Franchisors recognizing that the area developer is making a commitment to the system and is taking a sizable financial risk.


The discount on any fee that a franchisor grants will vary based on:


  • The franchisor
  • The number of locations being committed to
  • Time it will take for units to start runningshutterstock_96365129


Limits on Discounts Offered by Franchisors

You’ll notice that franchisors will limit the discounts to the initial franchising fee and not the annual royalty. This is incredibly important because that fee is something you will be paying every month for your up and running stores. You want to make sure that you can meet the royalty fees appropriately, so from the start make sure your building schedule is reasonable. Also ask your franchisor if he’s flexible for adjustments later down the line if you need them or if you’ll be able to reduce the territories that you’re committing to if something happens and you can no longer commit to all of them. All of this sounds like gambling and it sort of is. Consider yourself a gambler walking up to a blackjack table. 1 franchise equals $1. 5 franchises equal $5s. Your chance of winning or losing is much greater. However you can insure winning by preparing a plan ahead of time and keeping yourself on track with a with. Unlike with casino gambling, with proper planning, opening one or more franchises can be a sure thing and you may turn that $5 into so much more.


Continue Reading the Franchise Series

  • Being the Owner of Multiple Successful Franchises
  • The Good Versus the Bad in Owning Franchises
  • Where Does the Franchise Agreement Fit into Everything?
  • Crunching the Numbers for Your Many Franchises
  • Researching Different Options for Multi-Franchise Ownership