Top Down vs Bottom Up
When you look at the history of most successful franchises, they almost always are the evolution of a very successful independent business that chose to grow through franchising rather than through opening and remotely managing corporate owned locations around the country or globe. This is what we refer to as a bottom up franchise. A bottom up franchise is in fact a proven business model, even to the very first franchisee that enters the system. As a young franchisor they may still have things to learn about selling and supporting franchisees, national vendor contracts, national marketing efforts, etc. but they have been striving to perfect the core business model for years before offering it as an investment to a new franchisee. Look at McDonalds, KFC, Subway and the countless other brands that are among today’s largest franchise systems… They all started as small independent businesses that operated and thrived long before moving into franchising and offering their brand and business model to other investors.
On the other hand we have what I call “top down” franchises that grow their business in an almost opposite fashion. Top down franchises are usually franchise opportunities started by franchising experts who identify hot markets or trends in franchising and jump in the race with their own invented brand, despite having little or no actual experience owning and operating the actual business which they are franchising. They know the industry is hot, they know how to sell and support franchisees, but for lack of a better word they are using their new franchisees as guinea pigs or beta testers to learn how to own, operate and succeed with the core business model. While there have been cases of top down franchises becoming very successful for both franchisor and franchisee, more times than not these are recipes for failure. After all, when you buy a franchise you are supposed to be buying a proven business model from an organization that can lead you from inception to success. If a franchisor has no actual experience building and operating the core business then where is the proof of a successful business model? Who is going to teach you to be successful if they themselves have never actually been successful with this business?
When looking at a particular franchise opportunity one key factor I look at right away is when the business was founded vs when the business was franchised. I like to see the business founded no less than 3 years before it was franchised which means it had at least 3 years to focus on the core business model before offering the opportunity to other investors. Some experts believe this period should be no less than 5 years. When researching a franchise you always want to know the history of the business before it was a franchise. Obviously the longer a franchise has been in offering it’s opportunity, provided its franchisees are successful the less this may matter, but so many of today’s hottest franchises are less than 10 years old and are not the mega brand opportunities most think of when they think franchising. One should never discount a franchise because they are young or don’t have hundreds of franchisees, after all, at some point the giants like McDonalds and Subway also were young and had only a handful of franchisees, but when exploring a young franchise take careful consideration of whether or not it’s a top down or a bottom up franchise system. This alone could be a big determining factor of your chances of success or failure with your next franchise!