In the franchise industry, the sale of new franchises is often used to measure the strength of a franchise program. Fast growth franchise programs may be considered a predicator of success and some franchises have grown to thousands of locations. However, they represent a small percent of all franchises. This type of fast growth can lead a franchise program into trouble. An indicator of this can be found in the Item 20 category of the FDD, under Sold but not Opened (SBNO).
Before you invest in a franchise, you should investigate the reasons for a high SBNO, such as:
- The new franchise sales generate initial franchise fees, which is an immediate source of cash flow for the franchisor. If a franchisor needs to sell new franchises in order to stay afloat, it’s a recipe for disaster.
- The franchisor focuses too much attention on adding new franchisees at the expense of supporting new franchisee growth.
- The franchisor’s corporate culture or profile is biased towards selling as many franchises as possible.
- The franchisor’s business strategy is based on selling a minimum number of franchises every month. This places pressure on the franchise sales staff to sell.
- The impetus for new franchises is so great that the franchisor encourages new franchisees to buy more franchises. This can lead to all kinds of problems.
The impact from fast franchise growth depends on the ability of the franchisor to manage this growth. There are numerous examples of franchisors not being able to digest and administer to a large number of new franchisees. When a franchisor sells more franchises then they can handle, the program is headed for trouble. All new franchise programs have some hiccups during the early years of development but aggressively selling too many franchises can turn the hiccups into problems.