Currently, one of the most frequently used franchise buzz words is Emerging Franchise. Depending upon the source, an Emerging Franchisor can refer to franchisors with a system size ranging from 100 to 25 units or less to a startup franchise. My most recent experience with the subject, includes a paper I wrote entitled an analysis of Emerging Franchises from 2007 to 2017. The results indicated that currently 71% of franchise systems in the United States have 100 or less franchise locations. Moreover, after 10 years in operation 52.4% have 50 or less locations and after four years 30.6% of franchises had 0 to one locations. On the positive side, 20% had 100 or more locations after eight years, while 42.2% had 26 locations after five years. Clearly, these statistics represent various results that impact the entire franchise industry. Finally, many so-called Emerging Franchises are in reality startup franchises, that never got a proper launch or shouldn’t have franchised in the first place.
Various entities including the International Franchise Association and franchise consulting firms offer workshops and other resources to Emerging Franchises, that have difficulty growing their systems to a successful size. Although, system size is not the only measure of success. A 50 location franchise of high-end restaurants can be more operationally and financial successful that a 300 unit QSR franchise. However, in the majority of cases franchise systems require a minimum number of locations in order to achieve success for both franchisor and its franchisees. Its important to begin by identifying those truly Emerging Franchise systems, which exhibit the indicators of potential success.
Analyze the Emerging Franchise
When establishing a program for an Emerging Franchise, the process has to begin with an objective analysis of the entire franchise operation.
- How long has it been in operation? If three years or more with one or zero franchise units its a startup. For example, a startup franchise that started four years ago with three franchise locations may be flawed and shouldn’t have been franchised in the first place. Are they under performing due to poor leadership, lack of capital, unprofitable franchisees or other reasons?
- Does franchisor staff exhibit the experience and competency to lead and develop the new franchise? If not it may be necessary to insert new management.
- How does the franchise compare to competitors? Important items include fees, franchise term, investment, litigation, franchisee turnover, Item 19, etc. An FDD assessment is a effective way to make comparisons to competing franchises.
- How long has the franchise been in operation?
- Capital invested to date and remaining investment capital available for franchise.
- Franchisee satisfaction level identified by third parties or franchisor surveys.
- Franchise Development strategy using internal staff, brokers? Drill down into lead generation sources, conversion rates. Discovery Days that didn’t result in a close? Why?
To gain added perspective on evaluating Emerging Franchise I spoke with Sabrina Wall, CEO of the Franchise Brokers Association. She gave me five areas that she considers key to her evaluation process for a startup and Emerging Franchise:
- Amount of financial transparency provided in the FDD should be extensive. This would include corporate data and franchisee location results. Corporate locations should be doing well enough to support a franchise royalty and reasonable ROI
- Where is the franchisee growth coming from? Regional growth provides a better opportunity to build brand recognition versus granting franchises throughout the country. A franchise development strategy without borders can be problematic
- Franchise Training manual and instructions should consist of helpful training rather than a manual that meets the requirements of the FDD.
- Franchisor leadership should provide the support and assistance that new franchisees require especially during the first 90 days of operation.
- Brand appeal should be impressive. Some new franchises have a logo and location design that fails to elicit excitement and impress prospective franchisees. Avoid bland or boring branding.
After completing an objective analysis of the franchise operation the next step is to prioritize those areas that indicate a weakness in the franchise operation and require attention. This can be done using a franchise consultant, franchise research firm or combination of internal and third party resources. The important objective is to establish an objective profile of the franchise. When completed you’re in a position to consider various options.
- Revamp or tweak the franchise program
- Apply or obtain additional capital
- Add franchise management staff
- Implement new lead generation programs
- Change franchise development process
- Survey existing franchisees
- Sell the franchise component of the company
- Terminate the franchise program
- Merge the franchise program with a complementary or non-competitive franchise
Many Emerging Franchises have great potential but realizing this potential requires an objective analysis, an effective operational strategy, a sound franchise development strategy and proper execution.