Business is risky. Getting in on the ground floor can be a riskier entrance, but with the proper research and analysis, the sky truly could be the limit. We have all been told there is a direct correlation between risk and reward. Most of the highly successful business people in history have been able to accept the risk and confidently challenge the market.
Buying an established franchise is generally accepted as a great way to mitigate risk. I typically advise my clients to target franchises that have been franchising for more than 10 years and have more than 50 franchises. Lately I have been working with some emerging brands and I am now questioning if established brands are always the better bet. There are advantages to both.
While there may be better brand recognition, a more verifiable history and a track record to validate with established brands, emerging brands can offer more available territory and the untapped potential of new industries with no dominant, established players.
Emerging franchises may also be targeting different personality types than established brands. Emerging brands are typically looking for more entrepreneurial types and great communicators for their foundational franchisee group, while the more established brands with many franchises are looking for more process oriented franchisees.
There also may be a tendency for more flexibility in Franchise Agreements and Multi-Unit Development Agreements with emerging brands. Franchise agreements are largely non-negotiable instruments and as systems grow and mature the natural evolution of the agreements more and more addresses the negotiations of the early adopters and systems become more codified.
The more I engage with emerging brands the more comfortable I am in presenting them. It just takes a little more research.
Rather than shy away from new concepts, try to quantify the market to determine opportunity. Look at the market potential through an analysis of the competition;
- How large is the market potential?
- How many players are there already?
- What makes one brand more competitive than another?
- Is there an obvious competitive differentiator being overlooked, why?
It also requires a deeper analysis of the franchisor;
- Are they properly funded or relying on franchise fees to fund operations?
- Huge red flag as I am not aware of any franchisors that make a profit on the franchise fee
- Have they invested in the future?
- Do they have the resources in place now to support the anticipated growth
- What are the existing franchisees saying about the franchisor?
- Has the franchisor lived up to their promise
New franchisees depend on the strength of the franchisor to get started on the path to success and it is inherent in the agreement that the franchisor will be providing support to the system for the life of the agreement.
There is risk on both sides. While established brands offer the stability of brand recognition and historical validation, is this brand still an industry leader or close to running its course? An emerging brand may offer the uncapped promise of opportunity, but does it have staying power? Business is risky.