Investing in a new franchise concept, early.
When most people think of a “franchise,” they tend to picture established brands like McDonald’s, Subway, or Marriott, which have built significant brand equity over decades. This brand equity is a key reason why franchising is seen as a sound investment. However, it’s important to recognize that all successful franchises started somewhere, and a lack of long-standing history doesn’t mean a brand can’t become a powerful force in the market.
Many of today’s most successful franchises are relatively young. For example, Five Guys, which now boasts over 1,400 locations, began offering franchises in 2003. Similarly, Firehouse Subs, launched by firefighter brothers Chris and Robin Sorensen, started franchising in 2005 and has since grown to over 1,000 locations. Nonetheless, not all emerging franchises thrive; some fail due to a lack of market resonance or inadequate franchise system development and support.
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The right concept can lead to rapid franchise growth, especially when it caters to a new or expanding consumer market. A brand’s brief history doesn’t necessarily imply a slow ascent to regional or national recognition. On the contrary, joining a successful franchise system at its inception can be both exhilarating and financially rewarding. However, it’s crucial to be aware of the risks associated with emerging brands before committing to a new franchise system.
How ‘New’ is a ‘New’ franchise concept (franchisor)?
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A franchise system is generally considered "new" if it has been in operation for less than two years and hasn’t established multiple locations across various markets. There are no legal stipulations on the number of franchises an emerging franchisor should have before they start franchising or how many new franchises they should open within the first two years.
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Typically, emerging franchisors might award anywhere from one or two franchises to as many as fifteen or twenty in their initial years. Conservative franchisors may opt for slower growth, allowing them to learn the nuances of being a franchisor while building an internal infrastructure capable of supporting franchisees and managing growth. For many emerging franchisors, becoming a franchisor is a new venture, and they must learn to manage a franchise system just as they did their original concept.
On the other hand, some emerging franchisors may already have several company-owned locations and an established infrastructure that allows for faster growth. The franchisor’s capabilities and goals significantly impact the pros and cons of investing in a new franchise system. However, franchisors that capture public interest must be cautious not to outpace their ability to support growth, as overextension can be a significant risk for both the franchisor and their franchisees.
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Intelligent geographic growth is essential for ensuring brand consistency and providing adequate support in a cost-effective manner.
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Advantages of Investing in an Emerging Franchisor
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Being an early franchisee in an emerging franchise system has its advantages. Like any new franchisee investing their life savings into a business, a new franchisor is likely doing the same, which motivates them to prepare their franchise organization for success. When working with emerging franchisor clients, FranchiseAnalyst.com advises conducting a Threshold Analysis (also known as a feasibility analysis) before structuring the franchise system. This analysis determines whether the management and underlying concept can support the franchise system’s growth and manage it effectively. It also assesses whether the brand can compete with established franchises and whether the financial relationship between the franchisor and franchisee will be viable for long-term success. Only after this preliminary evaluation can the franchisor proceed with designing and developing their brand.
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While a new franchise system may not have the resources of a more mature system, it is crucial that its earliest franchisees achieve success. Exciting concepts can initially attract new franchisees, and if the offering is structured well, recruitment is relatively straightforward. Once early adopters have been recruited and their businesses are operational, the future of the franchise system depends on these franchisees’ ability to validate the system for potential future franchisees. Smart franchisors ensure that their franchisees receive the necessary time, effort, and resources to succeed, especially in an emerging system where the ability to attract new franchisees hinges on the validation provided by the initial franchisees.
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Level of Support from the Franchisor
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Franchise systems are governed by the Franchise Agreement, which might suggest that all franchisees should receive equal treatment. However, successful franchise systems recognize that not all franchisees need or should receive the same level of support. Well-managed franchisors often provide support beyond what is stipulated in the franchise agreements, offering what is required within reason.
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This is particularly true for well-managed emerging franchisors, where support often comes directly from the founders, as the system may not yet have the resources to hire a large specialized staff. For many early franchisees, direct support from the system’s founders is a major advantage. Franchisors need to provide the necessary support to help franchisees get off to a successful start and continue offering guidance throughout the franchise relationship. However, it’s important to remember that the ultimate success of the business lies in the hands of the franchisee, even with the best support from the franchisor.
Availability of Markets
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A new franchise system can offer several other advantages. Since the franchisor hasn’t yet grown significantly, most markets a new franchisee might be interested in will likely be available. This presents a greater opportunity to select desirable territories. A multi-unit developer, for instance, might have the chance to acquire entire regions or larger areas than what might be available to future franchisees. As franchisors expand into new territories, they often look to their earliest franchisees to develop these areas, giving them more time to establish larger territories than future franchisees may be allotted.
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Negotiability of the Franchise Agreement
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One of the most significant advantages for prospective franchisees considering an emerging franchisor is the potential to negotiate certain terms in the Franchise Agreement. Emerging franchisors may be more open to negotiating some terms, especially since potential franchisees might perceive their offer as riskier than that of more established brands.
Today, many franchisees are more sophisticated than in the past, with access to abundant information. Some of the best candidates for emerging franchisors may already own locations in other franchise systems. As a result, emerging franchisors seeking to attract top-tier franchisees might be more willing to negotiate the Franchise Agreement’s terms than mature franchisors.
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While franchising is fundamentally about standardization, it’s not unusual for a new franchisor to consider changes to a Franchise Agreement, especially if those changes don’t impact other franchisees. Negotiations commonly occur around the initial franchise fee, royalties, territorial rights, training, and the terms of the development agreement, among other areas. Although not all new franchisors are willing to negotiate major terms, it’s wise not to assume they won’t. FranchiseAnalyst.com advises emerging franchisors to limit changes for any franchisee. However, negotiations depend on what the franchisee brings in experience, resources, and growth potential. In modern franchising, each candidate is considered individually, but careful consideration is necessary as negotiated changes must often be disclosed in future franchise offering documents, potentially setting a precedent for future franchisees.
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In most new franchise systems, there is a sense of camaraderie between the franchisor and early franchisees. Although a franchise system is not a “partnership,” there is often a shared trust and experience between new franchisors and their initial franchisees, owing to the additional risk and history they share as the brand develops. This sense of growing together can lead to strong, long-lasting business and personal relationships. For instance, a franchisor’s first company convention might be a casual gathering of the first few franchisees at the franchisor’s original corporate location or even at their home. The idea of getting in on the “ground floor” is thrilling and can be highly rewarding. However, it’s crucial to understand both the benefits and risks involved.
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Disadvantages of Joining a New Franchise System
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Emerging brands are exciting and can be more agile than larger, more mature brands. However, there are several risks to consider before investing in a new franchise system.
The first risk is the brand’s lack of existing brand equity or cultural awareness that you can leverage for success. As a franchisee in a new system, you will be contributing to building the brand’s equity through the success of your own business. Established franchises offer the benefit of a proven track record, public awareness, and the financial performance of existing locations. Much of this success is based on well-established operating procedures, methods, and resources. Believing that a new franchisor will be able to establish these elements requires a leap of faith. Therefore, it’s crucial to evaluate the emerging brand carefully, considering both the offering and the potential long-term demand for its products or services, as well as the management’s history of success and the franchisor’s resources to support the system during its growth phase. Don’t assume that because a franchisor has been approved by state regulators, it indicates the franchisor is experienced, adequately capitalized, or has the necessary attributes for success.
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The second risk is the potential difficulty in securing funding. Lenders often base their decisions partly on the performance of existing franchisees within a system. Without a proven track record, it can be challenging for some franchisees, particularly those without prior business experience, to obtain necessary funding from lenders.
Thirdly, because the brand may not be well-known in your area, it may take longer to establish a presence in your market. This is not uncommon and may mean a longer path to achieving the revenue levels seen in areas where the brand is more recognized. New franchisees in new markets with emerging franchisors often need to be more patient in their journey to financial success.
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Do Your Research!
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Assessing the viability of a new franchise system is more challenging because it’s ‘new.’ Even if there are existing franchisees to consult, they likely haven’t been in business long and may still be optimistic about their potential despite not yet achieving success. These hurdles, however, can be overcome.
Examine the personal history of the franchisor’s management team to see if they have a history of success or failure in previous ventures. Section 2 of the Franchise Disclosure Document (FDD) lists the executives of the franchise system and details their business experience, while Sections 3 and 4 provide information on litigation and bankruptcy. Research the franchise management’s previous business history online, and interview the franchisor about their qualifications and history just as thoroughly as they evaluate yours.
FranchiseAnalyst.com offers a publication called Making the Franchise Decision, which is an essential tool for evaluating any franchise system. Consulting an experienced franchise attorney is also recommended to help you evaluate and negotiate possible changes to the franchise offering.
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Investing in a new franchise system can be risky, but it can also be highly rewarding. Conduct thorough due diligence and choose a franchise system you trust and believe in.
Many people express regret at not being the first franchisee of McDonald’s, Five Guys, or other successful systems. Yet, new franchise systems emerge daily, and some will undoubtedly become the next big success. Emerging brands carry risks, but with careful selection, they can be some of the best investments available in franchising.
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Working with Franchise Analyst is your best bet when investing in ANY franchise opportunity
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Investing in a new franchise system can be both exciting and risky. Jonathan D. Anderson from FranchiseAnalyst.com emphasizes the importance of thorough research and strategic planning. Emerging franchises, while lacking established brand equity, can offer unique growth opportunities. However, potential franchisees must carefully assess the franchisor’s experience, financial stability, and support infrastructure.
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FranchiseAnalyst.com provides essential tools like the Franchise Disclosure Document (FDD) guide and expert consultations to help navigate these complexities, ensuring informed decisions and minimizing risks. By leveraging Jonathan’s expertise, you can confidently evaluate and select promising new franchises​​​.
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It's not too late to be EARLY! Do you Due-Diligence..
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Jonathan D. Anderson
419-297-7367
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