As with any investment, there are inherent risks and rewards in considering a new or emerging franchise. You have to weigh any potential benefits of being an early adopter against the risks of investing in an unproven business model. Without the extensive track record of a well-established franchise, you’ll need to investigate a little deeper to decide if investing in a new or emerging franchise is right for you.
Should You Invest in a Newer Franchise?
If the franchise is a new or emerging business (which I define as less than 25 operating franchises), you should be prepared for the potential deficits of the brand you are likely to encounter. However, coming in on the ground floor can be a huge advantage if the franchise is ultimately successful. Imagine being an original investor in McDonald’s, Cracker Barrel, or L.A. Fitness!
Often, if you come in early on, you will be awarded larger territories – possibly for less money in franchise fees and/or royalties than the brand will be offering 100 franchise awards later. And one of the greatest benefits, is that you will have input on all kinds of areas of operating your business – from marketing to operations – there will be fewer “rules”. Emerging franchises pay can’t afford to lose their franchisees, and often pay more attention to suggestions for improvement in culture, systems, and efficiency. And because they need you to succeed (so they can sell future franchises) they will bend over backwards to support you. And finally you may be first to market with a cool new product or service in your area.
The downsides of new and emerging franchises can be numerous. Starting with little to no infrastructure of support. Often your support team is the founder. They will likely be on a shoestring budget and therefore will be understaffed. Also there are likely to be all sorts of dynamic systems (read: chaotic) – so you have to have the temperament to treat your business almost as a startup, with some basic structure outlined for you and hopefully an operating manual! But the main risk of buying an emerging franchise, is that without a proven track record of success in similar markets, you’re taking a leap of faith with your investment dollars.
The more risk-averse you are, and the least experienced in business ownership – the more strongly I would recommend that you go with an established franchisor with at least 50 franchises open and operating. Sometimes there are people behind the enterprise with long established track records in a similar business. If that’s the case – your risk goes way down – the principles have done it before and have the infrastructure in place to do it again. If you have enough capital and are comfortable with the risk (and rewards) involved in “first to market” – then sometimes emerging or early stage brands are terrific investments.
Do Your Research
Because emerging brands don’t have many franchisees yet that have been opened long enough to validate any real income figures, you’ll need to get creative when you’re doing your due diligence. If there are relatively few, or no current franchise owners, really examine the following business considerations:
- Is the franchisor professional, well organized, and business savvy?
- What is the track record of the existing business model?
- Is there a clear market differentiator that sets the business apart?
- Is there a demand for the product or service the franchise offers in your market area?
- Does the business model fit your lifestyle and your capability to invest?
Most importantly, meet the founders and operations people eyeball to eyeball. There’s no substitute for sitting across a table from the people you’ll be in business with for the next 10 years (or longer!) and seeing if they pass the gut check for you.
Ultimately, as you ask questions and dig deeper, the franchisor should be able to demonstrate that there is a marketing plan in place that works. Ask for numbers, ask for metrics, and ask for projections of growth based on real numbers and demographics.
Remember, just because a franchise has been around longer, doesn’t necessarily mean it’s better. Once a brand has reached maturity, territories get smaller and scarcer – and it’s much harder to reach income targets you are likely to want to hit without owning multiple units.
If you’re still not sure if a new or emerging franchise is right for you, take our free franchise matching assessment! This comprehensive psychometric assessment takes into consideration all kinds of your identified values sets and helps determine what stage of growth company is a better fit for you. Or contact Jane Stein to set up a free consultation!