Emerging Franchise Opportunities - Are they Right for You?

Wednesday, August 9, 2017
The tech world can teach you a lot about emerging franchise opportunities and which ones are right for you.

Emerging Franchise Opportunities are like technology rollouts.

When a new technology is released, about 2.5% of the users are “Innovators." They don't mind the risk of a new gadget. These early adopters use technology first.  They take on the risk that it may fail, since it hasn’t really been tested yet. "Laggards" are at the end of the adoption curve. As 16% of users, they typically focus on their comfort with what is known to work. They’re all about sticking to their old devices. They are not likely to buy from a company that they’ve never used before. Laggards are less likely to try a new product from a new company. They’re not willing to risk their time and money. Just because. Believe it or not, becoming a new franchisee is very similar to buying new technology. Because you have mature (proven, battle-tested) franchises that comfort the laggards and emerging (brand new) franchises for those early adopters. Mature franchises are durable. They have a history of success. Think McDonald’s, Subway and Howard Johnson's. On the other hand, an emerging franchise is relatively new. Like a pet grooming business or a new health food smoothie kiosk. Knowing which opportunity is best for you has everything to do with your comfort with risk. If this sounds confusing, hold on and keep reading, it’ll be clearer in a minute... See, taking the plunge to purchase a franchise is not for the faint of heart. You’ll wrestle with the question of whether you should go with an established franchise, or bet the house and try an emerging franchise. No matter which option you choose, there can be convincing pros and cons for either. Emerging franchises offer new business owners a world of growth opportunities.Unlike established franchise systems, they’re newer concepts and are typically smaller - with lots of growth potential. Investing in a smaller (or newer) concept can pay off big when you get in on the ground floor and profit from the chain’s growth. But, it is important to keep in mind that this won’t come without its challenges and risk. I recommend considering these important factors before pursuing an emerging franchise.

Understand the background of the company.

Most franchise systems start as one- or two-unit small businesses. At some point during the early years, the owners realize that their business could scale up and replicate across the market. Those two words — scale and replication — are key when exploring a newer franchise model. You have to consider the potential growth possibilities for the franchise and the ability to replicate its model. Remember, not all fast growing businesses can be replicated, especially if your market is too different from the ideal target market.

Determine how much risk you can handle.

Investing in any business is not for the faint of heart. The first 36 months of any 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 with all of the growing pains that come with it. Because new franchise systems are typically smaller and there isn’t as much history, there are a lot more unknowns. But that may not be a bad thing. It may even be the reason that you chose the franchise in the first place.

Do your own research and do it good.

Start with the Franchise Disclosure Document (FDD). The franchisor must provide this to you during the courtship phase. Review this document carefully as it will give you great insight into the financial health of the current business. (Note, because of the newness of the franchise system, these numbers may be hard to verify outside of company-owned stores.) If you’re uncomfortable with this reality – you probably aren’t a good candidate for a newer franchise brand. As an emerging franchisor, your success will be tied to how well other franchisees do. If existing franchisees won’t talk real money with you, then that’s a major red flag - Watch out!

Follow the money.

Take particular notice of Item 21 in the FDD. The franchise system must be well capitalized (beyond royalty collection) in order to fund 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 less likely to actually happen. A franchisor’s ability to bring the brand to life involves much more than trademarks and taglines. It’s important that the franchisor commits to building their new brand through professional advertising and marketing campaigns. Review past campaigns.  Make sure that the materials are professionally developed. Ask if campaigns are tested and what kind of returns operating units are seeing.

Check out the operational procedures.

As a franchise is in the early growing stages, you’ll want to make sure they have established a process for every segment of running the business including handling the grand opening, hiring and training, processing transactions, balancing the books, dealing with customer service issues, and so on. Make sure these policies are in place and consistent across the franchise system. Consistency is key when developing an up-and-coming brand. These are just a few areas to investigate before considering an emerging franchise. Getting in on the ground floor of a growing concept can be thrilling and rewarding, but should not be taken lightly. So, buyer beware! If you’d like some help with evaluating a franchise opportunity, contact me for a no strings attached consultation.