Franchise Gator is excited to present this guest article from Lori Kiser-Block, a long-time associate of Franchise Gator. Recently, Lori founded The Decide Group which provides assistance to emerging franchise brands. We asked Lori for this contribution, as her insight is perfectly aligned with Franchise Gator’s efforts, specifically the yearly Emerging Franchise Brands rankings.
So you’re considering an emerging franchise. Or maybe you aren’t even sure what one is, but now you’re intrigued. No problem. Here’s what we mean by emerging franchise: As opposed to “established” franchise systems, emerging franchises may be newer concepts and are typically smaller in terms of the number of units, but have the capacity to scale up.
Not all emerging franchises are new on the scene. Many emerging brands have been in operation for five years or more, but all up-and- coming brands are in the early growing stages. Investing in a smaller concept can present great opportunities for prospective franchisees by letting them get in on the ground floor, however, the investment does not come without risk. It’s important to be aware of the challenges and what questions to ask when considering an emerging franchise.
Most franchise systems start as one- or two- unit small businesses. At some point during the early years the owners realize that their business has the ability to scale and can be replicated in more than just their current market. Those two words — scale and replication — are key when investigating a newer franchise model.
First, let’s look at scale. If the business meets a specific consumer demand and is as desired in Dubuque, Iowa as it is in Dallas, Texas, the growth opportunities are vast. Hence, there is opportunity for scale and potential for growth. Some questions to ask regarding scale are:
- How does the franchisor obtain and use consumer intelligence data (to gauge local consumer need)?
- What are the projections for consumer demand in the next 5 -10 years (which is about the time that it takes for most franchise systems to grow beyond 100 units)?
Then there’s replication, which essentially means the ability of the franchisor to bring a brand to life in more than their own backyard. This is paramount to you as a prospective franchisee. The question to ask here is:
- What is the franchisor’s experience and how well have they mastered the challenge of opening, guiding, and managing additional units?
Starting a new business takes guts and patience
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.
Ask yourself if you have the patience to grow with an emerging franchise concept. Starting any new business is really hard work, but after you make it past the first few years, the fruits of your labor should really start to pay off. Be patient and don’t give up easily.
Points to consider when exploring an emerging franchise
Ensuring you are partnering with the right franchisor is key when exploring emerging franchises.Those with the best potential should have already developed a strong operating system which you can identify from their paperwork. Below are a few key areas to consider as you begin to review franchises:
1. Unit economics
If you’re in discussions with an up-and- coming franchise, your first question should be, “How have they proved the concept has the ability to provide healthy and profit-building returns to the franchisee?”
Do your research. Start with the Franchise Disclosure Document (FDD) and the Financial Performance Review, Item 19. (Note, because of the newness of the franchise system, these numbers may be hard to validate outside of company-owned stores.) If you’re uncomfortable with this reality – you probably aren’t a good candidate for a newer franchise brand. In addition, you should ask existing franchisees about unit economics. If existing franchisees won’t talk real numbers, that’s a red flag. For an emerging franchisor to succeed, it needs franchisees that truly partner.
2. Financial position of the franchisor
Take particular notice of Item 21 in the FDD. The franchise system needs to 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 severely compromised.
3. 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 or not the campaigns have been tested and what kind of returns operating units are seeing.
4. Operational processes and manuals
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 of the questions to ask when considering an emerging franchise. Getting in on the ground floor of a growing concept can be thrilling and rewarding, but you must do your due diligence. And in the world of emerging brands it’s important to remember that the biggest and best sales tool is YOU! Ask yourself (and be very honest about your answer), can I see myself standing in front of a customer — who on any given day might be my mother, neighbor, best friend, dentist, child care provider, etc. — and ask them to buy from me? Choosing a concept you can completely invest yourself in both financially and mentally is key.