New or Tried and Tested?

Navigating the pros and cons of emerging and well-established franchise opportunities

By Grant Bullington and Gary Prenevost

There are four generally accepted levels of maturity in the franchise industry. Keith Gerson, president of franchise operations for FranConnect, describes the levels as follows:

1. Micro-emerging: zero to 10 franchisees
2. Emerging: 11 to 75 franchisees
3. Midmarket or Mainstream: 76 to 200 franchisees
4. Mature: 200+ franchisees

Since Canada is a much smaller market, let’s adjust these levels as follows:

1. Micro-emerging: zero to 10 franchisees
2. Emerging: 11 to 50 franchisees
3. Midmarket: 50 to 150 franchisees
4. Mature: 150+ franchisees

When selecting a franchise, a prospective franchisee must balance wants and needs with other factors like budget, risk, and opportunity. Let’s compare some of the potential upsides and downsides of partnering with a newer franchise system against partnering with a well-established franchise system.

Pros, cons, and considerations for emerging franchise opportunities

The term “emerging franchise opportunities” started appearing several years back and serves to highlight this ever-growing cohort of relatively new systems. There isn’t one single definition of “emerging,” so be prepared to see the term used loosely.

PROS

1. Wide-open availability. Franchisees joining a franchise early benefit from the wide availability of territories or locations. As a system grows, the most desirable locations or territories can get snapped up first, so if you want a prime territory, you’ll need to get in there before the rest.
2. Lower franchise fees and multiple locations. Franchisors can increase their franchise fees over time, so the earliest franchisees benefit from the lowest fees. Once a franchisor has a better understanding of the ideal territory size, they usually shrink the territory size, relative to franchise fee. For brick-and-mortar businesses, franchisors usually realize that a market can support a greater density of locations. Early adopters can benefit from the lower upfront fees or an opportunity to secure the location rights to future locations in a given market, and sometimes the entire area or region.
3. More opportunity for input. As one of few franchisees in an emerging system, franchisees effectively have a bigger opportunity to contribute to the development of the systems.

CONS

1. It’s a leap of faith. Your decision will be based much more on speculation and assumption, as you have a very limited number of franchisees to gather facts from during your research. Assuming they’re all new franchisees, none of them will have significant experience or history in the franchise. This is a bigger, bolder leap of faith when compared to working with a more mature franchise.
2. Prepare for a bumpy ride in the short term. The franchisor’s system is still in the rapid evolution phase, and may still need adjustments, as it’s being prototyped on the fly. What worked before it was a franchise may no longer work, and what worked for seven franchisees is old news when there are 25 owners. What if the franchise explodes with popularity? Technology, systems, and procedures will undoubtedly struggle to keep pace, and can be a frequent source of frustration. This isn’t necessarily a bad thing, as long as you’re ready for these bumps in the road.
3. Be prepared for outside influence. Founder(s) will be omnipresent in most areas of the business, until they start to engage in higher-level operations. Corporate offices have been known to add to their team to fill the gaps, only to have new gaps open as the growth continues. Adding support staff is one thing, but bringing on a COO (chief operating officer) will have a major impact on the organization and direction. Assuming a high degree of interaction with the franchise founding team is essential; it’s important to determine that you like them and are aligned with their core values and motives.

Other considerations

In the early days, a franchisor is still trying to develop the criteria for their ideal franchisee. Until a franchisor knows exactly what they’re looking for, anyone who wants to join can automatically qualify. You’ll need to be critical in looking out for your best interests and not be entirely reliant on their franchisee qualification or approval.

Does the franchisor have enough capital, or are they likely to deplete the funds that should be used to support you and your fellow pioneering franchisees during the growth stage? It’s one thing if the franchisor bootstraps its headquarters with second-hand furniture. It’s an entirely different situation if there aren’t resources for franchisee support staff or customer relationship management software.

There can be some significant upsides to getting into the right franchise system in its early days. There’s always risk when you invest in any franchise, and you’ll face a unique balance of risk and reward when evaluating emerging and micro-emerging franchise opportunities. Fortunately, if you can’t reconcile the associated risk, there are always more established options that might be a better match for you.

Let’s look at some of the benefits and drawbacks of franchising with a well-established brand.

Pros, cons, and considerations for well-established franchise opportunities

PROS

1. Proven systems and processes. By the time a franchisor reaches a base of 50 franchisees, they will have developed sound business systems and processes that enable new franchisees to compress the timeframe from launch to break-even, and from break-even to “full stride,” where the business is consistently operating at a level that enables franchisees to meet and exceed their financial and lifestyle goals. “Systems” includes things like marketing and customer generation, supply chain and production, delivery fulfillment, accounting, and technology.
2. Experienced leadership team. Unlike micro-emerging and younger emerging franchisors, these more mature franchisors have built a multi-disciplinary leadership team, with experienced leaders overseeing each critical division. This structure enables the franchisor to be more efficient in ensuring consistent delivery of the brand promise, while also being more strategic in assessing opportunities and threats.
3. Strong franchisee support methodologies. It is often said that franchising is being in business for yourself, not by yourself. This is where franchisee support becomes essential, because the franchisor is able to develop a good support system. Further, because the solid base of existing franchisees is able to produce a consistent royalty income stream, the franchisor can afford talented people with experience in training, coaching, and supporting franchisees through the various growth stages of their business. This is a huge competitive advantage.
4. Brand potency. Brand potency is when the brand becomes easily recognizable and, ideally, top-of-mind in the target consumer’s head. It takes many years and many franchise locations to achieve brand potency, and it’s not just about branding; it’s also about the ability of the franchisee base to deliver a consistently good experience. The loop back to proven systems and processes is important. For a new franchisee to benefit from the brand potency, they have to learn to follow the systems and deliver on the brand promise.
5. Strong franchisee community. This is perhaps the most underestimated benefit of buying into a franchise system. Imagine having access to a brain trust of dozens to hundreds of franchisees who are running the same business as you, every day. The ability to validate ideas with several of these existing franchisees is critical in your evaluation of the strength of the business opportunity, and the franchisor’s ability to support their existing franchisees.

CONS

1. Limited location availability. As the franchise system grows, the available market opportunity for prospective franchisees shrinks. While the appeal of buying a big-brand franchise is seductive, the reality is that a prospective franchisee must be willing to buy a franchise that may require a longer daily commute, or even a move to a different region where some opportunity exists.
2. Existing franchisees might get priority on acquiring new locations. When multi-unit ownership is common within a brand, experienced franchisees often have priority when it comes to new locations, over prospective owners with untested operating capability.
3. Stagnation risk. As a business matures, it can become stuck in its ways. If the franchise leadership team and the existing franchisee base aren’t attentive to shifting market trends and consumer behaviour, the risk of stagnation accelerates. We can easily think of strong brands that faded into irrelevance because they failed to adjust to shifting consumer appetites.

Other considerations

The appeal of a strong brand is logical on many levels; the likelihood of success is stronger than with emerging franchisor brands for many reasons. If you’re completely set on buying a well-known brand, then you need to be very patient, as it can take several years before a location becomes available, or before your name comes up on the franchisor’s waiting list, or both.

One strategy to get the best of both worlds (a franchisor with proven systems, and good market availability) is to research Canadian regional brands or brands from the U.S. that are looking to expand into your market. While you sacrifice brand potency, you retain all of the other benefits, and you’re likely to get a location that’s close to home.

If you can’t deliver the franchisor’s brand promise, it doesn’t matter how strong the brand is, so your focus should be on finding a business where your core skills and strengths are well-suited to the work it takes to run the franchise, and where there are good systems and support mechanisms to help you do so. With this focus, you may be surprised at the range of franchise opportunities that are a good fit for you, regardless of the franchisor’s maturity level.

Grant Bullington is the president of FranNet of Western Canada. He and his team have been helping serious prospective franchisees find and research opportunities since 2009. Grant is also the host of the Franchise Scout podcast.

Gary Prenevost is one of Canada’s leading franchise experts; he and his team have helped over 2,000 people search for their optimum franchise. Gary’s book, The Unstoppable Franchisee: 7 Drivers of Next-Level Growth, is coming soon.