Franchising has long been a pathway to entrepreneurial success, offering individuals the opportunity to run a business with a proven model and established brand. While well-known franchises often dominate discussions, emerging franchises present another avenue into the industry for potential franchisees. Evaluating these opportunities requires a nuanced approach and careful consideration of various factors to mitigate risks and maximize potential returns.
Understanding emerging franchises
Emerging franchises are businesses that are relatively new to the local franchising scene or are rapidly expanding their franchise network. These may be either arriving in the Canadian marketplace from another country as a result of an expansion plan, or a new brand altogether. Unlike established giants, they may not have a long track record of success or widespread local brand recognition. This aspect can both attract and deter prospective franchisees, as they offer the allure of entering a potentially lucrative market early but also pose higher risks.
Key considerations for potential franchisees
- Market potential and trends
Assessing the market potential is crucial for analyzing an emerging franchise. Understanding industry trends, customer demographics, and the competitive landscape can provide insights into the franchise’s growth prospects. Conducting thorough market research helps you to evaluate whether the franchise concept aligns with current consumer preferences and if there is adequate demand to sustain the business. - Financial stability and performance
Unlike established franchises, emerging ones may not have a proven financial track record. Potential franchisees should meticulously review the franchisor’s financial health, including audited financial statements and performance metrics of existing franchise units. This may be a challenge, especially for new franchise systems that have to rely heavily on a corporate location with proven success. - Franchisee support and training
A robust support system is critical for franchise success, especially in emerging franchises where operational processes may still be evolving. One major red flag is if the owner of the franchise system is exclusively involved in the day-to-day operations of the business (or even worse, is still working another day job) and lacks a support team, including outsourced support. It’s critical to have someone to answer the call when you need business support or franchisor guidance, day or night. Evaluate the training programs, operational support, marketing initiatives, and ongoing assistance provided by the franchisor. Strong franchisor support can mitigate risks and enhance the chances of achieving profitability within the early stages of the franchise. - Legal considerations and contracts
Franchise agreements are legally binding documents that outline the rights, obligations, and responsibilities of both the franchisor and franchisee. Prospective franchisees should seek legal counsel to review the franchise disclosure document (FDD) thoroughly and understand the terms of the agreement, including territorial rights, renewal conditions, and exit strategies. Clarifying any ambiguities upfront can prevent potential disputes in the future and can go on to become standard practice for future franchisees as the system develops. - Brand reputation and growth strategy
Assessing the franchisor’s reputation and long-term growth strategy is crucial. Investigate the brand and its leadership team’s reputation among consumers and within the industry. Review the franchisor’s expansion plans, market penetration strategy, and commitment to innovation. A clear vision and proactive approach to market challenges indicate a franchisor’s ability to sustain growth and support franchisee success.
Mitigating risks in emerging franchises
While the potential rewards of investing in an emerging franchise can be enticing, mitigating risks is paramount. Consider these additional strategies to safeguard your investment.
- Speak with existing franchisees. Directly contacting current franchisees provides first-hand insights into their experiences, challenges, and satisfaction with the franchisor’s support.
- Conduct due diligence. Beyond financial documents, you should conduct site visits, observe operations, and speak with local stakeholders to gauge community perception and market potential.
- Evaluate innovation and adaptability. Emerging franchises should demonstrate agility and innovation in response to market changes. Evaluate the franchisor’s ability to adapt and capitalize on emerging trends.
- Evaluate the founder’s success path. Your franchisor should have a vision, purpose, and guiding mission for their system and be clear as to what they wish their franchise to accomplish. It’s okay to interview your franchisor and ask questions surrounding this and other important topics such as their long-term goals and purpose statement.
Entering the world of franchising with an emerging franchise requires a balanced approach of optimism and caution. Potential franchisees must conduct thorough due diligence, assess market potential, evaluate financial stability, and scrutinize the franchisor’s support and growth strategies. While the risks are higher compared to established franchises, the potential rewards for early market entry can make it a compelling opportunity for aspiring entrepreneurs. By carefully evaluating all aspects of an emerging franchise, potential franchisees can position themselves for success in a dynamic and competitive market landscape.
Angelee Brown
Founder and CEO
FranOvation
angelee@franovation.com