When most people think of a franchise, they envision McDonald’s, Tim Horton’s, or Marriott. Brands with long, established histories. This history and brand equity is a major factor in why becoming a franchisee can be a smart investment.
However, brands need to start somewhere, and lacking an established history doesn’t mean a concept won’t develop into a strong franchise. Many of today’s most successful systems are less than twenty years old. Orangetheory Fitness started franchising in 2010, and by 2022 the system had over 1,400 studios internationally. Firehouse Subs started franchising in 2005 and today has over 1,200 locations and recently sold for over one billion dollars.
With the right concept, franchise growth can be quick, particularly when satisfying a developing consumer market. Getting into a successful franchise on the “ground floor” can be extremely exciting and valuable, though carrying certain inherent risks. The phrase “emerging brand” typically refers to a brand in its first few years of franchising, with under 20 total locations.
Advantages
Franchisor commitment
Just like many new franchisees, an emerging franchisor has often invested their life savings into developing their business. Because of that, they’re motivated to make their system and franchisees successful. The success of early franchisees often dictates the fate of the entire brand, so emerging franchisors will do whatever they can to ensure the success of those early adopters. This initial group serves as both “proof of concept” and the most important franchisee recruitment tool, validating the system for future candidates.
Enhanced franchisee support
Great franchise systems recognize that not every franchisee needs the same level of support. Well-run franchisors will often exceed the level of support provided for in franchise agreements, especially for that first batch of franchisees. This is particularly true for well-managed emerging franchisors where support often comes right from the founders. This direct interaction commonly creates a special relationship with initial franchisees throughout their time in the system, with an increased sense of ownership and greater influence in the brand’s growth.
Availability of markets
By the nature of having just started their journey as a franchisor, emerging brands have more available markets than established brands with lots of locations. There may be greater opportunity to select specific territories that are more desirable, and multi-unit developers may acquire entire regions or larger geographic areas than in more established systems. As franchisors move into new territories, they often look to their earliest franchisees to develop those areas and provide them with more time than future franchisees may receive.
Negotiability of the franchise agreement
As they begin to offer franchises, emerging franchisors may be less averse to negotiating some terms of their franchise agreement simply because potential franchisees will see their offering as somewhat more risky than established brands. In modern franchising each candidate is considered individually, but care still needs to be taken with negotiated changes, as some will need to be disclosed in future FDDs (franchise disclosure documents) and often become the floor for future discussions.
Don’t expect every new franchisor to negotiate major terms, but don’t assume they won’t. In advising emerging franchisors, we counsel them to treat similarly situated franchisees similarly, which often means offering early franchisees various discounts and incentives to be the first to commit to the brand.
Potential risks
Limited brand equity
The brand you’re investing in has little existing brand equity or cultural awareness to leverage for success. You’ll contribute to building brand equity through your own business, which may mean it takes longer to become established in your market and achieve expected revenue levels. New franchisees in new markets with emerging franchisors need patience for financial success.
Funding challenges
Without an established business record, obtaining proper funding can be harder. Lenders typically base decisions partly on how well existing franchisees have performed. While many lending sources are available, without a success record it can be difficult for some franchisees—particularly those with no prior business record—to obtain necessary funding directly from traditional lenders.
Franchisor inexperience
While an emerging franchisor likely has significant experience in the specific industry in which the brand operates, they likely have little experience as a franchisor—specifically in effectively supporting franchisees and identifying paths to success. Make sure the management team can fully explain what they do to help their franchisee network succeed, and whether they’re relying on experts (like consultants or experienced mentors) to ensure they know how to be a successful franchisor.
Andrew Seid, CFE
Senior Consultant
MSA Worldwide
aseid@msaworldwide.com