Emerging Franchise Brands – A Franchisee’s Guide to Assessing the Business Opportunity

Just because a franchise brand is new to franchising doesn’t mean that their business is new. To franchise a business, there must be a proven business model that has worked and that can be replicated. These emerging franchise brands may have perfected their operations and business model, but they will typically not have experience as franchisors unless they have been employed in sophisticated franchise brands before. This means they will be learning as they go — this is good and bad. Good because they will work with you, and together, you can grow the brand and there may be more flexibility than in a more established franchise brand. It could be bad because they haven’t done it before, and running a franchise system is very different from running the business that got them to franchise. There is a unique skill set required to be a franchisor and not everyone can do it.

There are several factors to consider with an emerging franchise: the brand, consumer preferences, support, experience and profitability.

What is the brand?

What does it stand for?

Do consumers have that product or service in their consideration set?

How competitive is the market?

How are they perceived in the market? (More on this in the branding chapter of this book, but often, emerging franchise brands have less awareness to consumers than more established brands.)

Do customers like or need the product or service on offer?

What research has the franchisor done on market demand in the area that you are considering?

I know this is a different example, but I remember when we took an Australian brand to America in 2003 and failed, the reason it failed other than the obvious of not doing adequate research was to do with the product we had. In Australia, 70% of our business was done before 11 am with that product in shopping centres, and in the USA, the shopping centres didn’t open until 10 am and closed at 10 pm, and our product did not suit that market or daypart.

Also, consider the support aspect:

Who is in the franchisor support team?

How are they going to support you especially if you are situated a distance from the support office?

Do they have their supply chain set up in other territories? (So you can deliver the same products.)

What experience does the franchisor and their support team have in franchising and growing and supporting a franchise? (Often, newer franchise concepts will see early adopter franchisees receive significantly more support because the franchisor needs them to be successful to grant/sell more franchises.)

The key question to be answered is the financial aspect of the new business, especially if it has not been franchised before so you don’t have access to the financials of other franchisees. Sometimes, the franchisor can run a more profitable business unit because they have perfected that, and some new franchisees may find it harder to achieve the results that the franchisor has achieved, you also need to understand the impact that franchise fees have on the overall profitability as these are often not shown in the franchisor corporate model.

Starting a new business takes guts and patience at any time, but trusting an unproven franchise model can be even riskier than a franchise model that’s been around for a while because you just don’t have the track record of performance to compare to.

Investing in any business is a true measure of your intestinal fortitude and patience, but this may even ring truer when considering an emerging franchise. The first 36 months of a new business takes perseverance, a willingness to work harder than you’ve ever worked before (likely for less money), a true belief in yourself and a lot of confidence in yourself and the brand. With an up-and-coming franchise, you are riding out the growth of a new brand in addition to the growth of a new business which can present a whole new set of growing pains. Because these franchise systems are typically smaller and there isn’t as much history, there are more unknowns. But that may not necessarily be a bad thing and may even be the reason a franchisee is drawn to a new concept in the first place.

It’s important to remember that just because a brand has existed longer, that doesn’t necessarily mean it’s better. Getting in on the ground floor with a newer concept offers benefits that may not be available with a more established brand, such as the opportunity to secure larger territories and more locations, paying lower startup fees and being able to take part in shaping the brand as it grows.

Newer franchise brands tend to be a little more relevant to the current market than a brand that may have been around for a long time. Sometimes legacy brands are difficult to change operationally and even more so in the minds of the consumer.

Below are listed the critical things to review when considering an emerging franchise. Make sure they have invested in the development of their systems and that the business blueprint is well documented so that you can pick it up and run with it.

Business Model

Make sure you fully understand how the franchisor is going to help you and how is their business model designed to ensure an optimum chance of success. This is covered in a lot of detail in the next chapter. This is the ‘how to’ make money and a fair return on your investment.

Ask to see their financial reports and review the disclosure document to see how they are performing. The challenge with an emerging brand is that they do not have to include their financials for the first two years of operating the franchise.

If there are other franchisees in the network, you should ask them about the business model, the KPIs and the financial performance of the business. If existing franchisees doesn’t disclose the numbers, that could be a red flag.

Financial Position of the Franchisor

The franchise system needs to be well capitalised (beyond royalty collection) to fund the growth of the system long term. In the same way that you need a healthy cash reserve to get through lean days, so should the franchisor. Lack of capital usually means a younger brand’s ability to grow quickly may be severely compromised.

Advertising and Marketing

A franchisor’s ability to bring the brand to life involves much more than trademarks and taglines. It’s important that the franchisor is committed to building their new brand through professional advertising and marketing campaigns. You’ll want to find out what types of campaigns have been deployed and ensure that the materials are being professionally developed. Ask whether the campaigns have been tested and what kind of returns operating units are seeing. This is covered in a lot more detail in the brand chapter of this book.

Operational Processes and Manuals

Ask to see the operational manuals as part of your due diligence, the details and the way they presented will tell you a lot about the franchisor and the systems that they have developed. Manuals may look good, but ask how they are used and ask other franchisees about them if there are franchisee in the network already. The training and support documentation needs to be comprehensive; after all, that’s the reason, you are thinking about joining a franchise.

So, the short answer to the question ‘Does size matter?’ is ‘Hell no’. It’s what you do with it that counts!

Learn more about assessing franchise brands in Doug Downer’s Book Invested, Get your copy here