Getting in on the Ground Floor with an Emerging Franchise Company

In the United States over twenty-five percent of franchise opportunities have less than twenty-five franchisees (franchised units in operation). In addition, approximately 150 new franchises started operations in 2010. Based upon industry reports of 1,500 franchises in the United States, about 400 franchises are either small or brand new. I refer to this group collectively as Emerging Franchise Companies. Emerging Franchises can provide significant upside potential; however, anyone considering an investment in an Emerging Franchise concept needs to take a particular approach when evaluating these companies compared to the larger and more established franchises.

Be wary about franchises that have been in operation for at least five years with less than twenty-five units [check out franchise start dates and unit counts in FranchiseHelp.com's franchise opportunity directory]. This could be a red flag that the franchise program is flawed or that the franchisor has neither the desire nor resources to grow.

Here are some advantages to be gained from purchasing a franchise from an Emerging Franchise Company:

• The initial franchise fee and on-going royalties can be lower and more reasonable.
• A new franchise concept can attract interest and generate strong appeal. This can be a plus for the first wave of franchises.
• The franchisor may take a nurturing and supportive role with their franchisees. They want to avoid franchisee failures as much as possible and could be willing to provide assistance above and beyond what is required.
• There can be an opportunity to negotiate more favorable terms in the franchise agreement. In general, franchisors that are starting up or at an early stage of their growth want to build a foundation of new franchisees.
• There will be a much better selection of territories because it’s an Emerging Franchise.
• There may be some financing available. In some cases the franchisor may be willing to finance a portion of the initial franchise fee.

There can be disadvantages in purchasing a franchise from an Emerging Franchise:

• There will be a limited number of franchisees to provide feedback.
• Since the franchise network is small there will be limited brand recognition.
• There will be limited franchisee operating results by which the franchise can be evaluated.
• The franchisor may lack the capital needed to fund and continue new growth.

Tips on Evaluating the Emerging Franchise Company

In addition to the due diligence that should be performed, be sure that you and your advisors focus attention on:

• Market analysis and competitive review

Does the franchisor have a detailed market analysis? There should be data that will demonstrate there is a market for the franchise's products or services. If you and your advisors need to rely upon lots of talk and little substance, you could be headed for trouble. You’ll also need some information regarding competition: some competition can be a positive sign, whereas no competitors could mean there is limited demand in the market.

• Consider the industry sector the franchise is in

There are certain franchise industry sectors that offer significant opportunities for growth. These sectors include: homecare & senior care services, children’s services, wellness and fitness concepts and health food franchises.

• Franchise capitalization

Your accountant should review the financial information in the FDD (franchise disclosure document) to confirm that the franchisor has sufficient working capital to operate and grow the franchise. Too little capital can lead to aggressive franchise selling in order to obtain franchise fees. Limited capitalization could prevent the franchisor from providing services and support to new franchisees

• Franchisor staff experience

Since an Emerging Franchise Company will have limited staff, it’s important to conduct a thorough appraisal of franchisor staff. Someone at the franchisor level with franchise experience will be a plus. At this stage quality of staff is more important than quantity.

• Franchisee feedback

If the franchisees are new with a limited track record, zero in on the quality of franchisor training, support and responsiveness. Be sure to focus on financial results. Are the franchisees on target or are they behind their financial projections?

An Emerging Franchise Company can offer the prospective franchisee a significant opportunity. However, as is the case with any business venture, there are risks. Your job as a prospective franchisee is to educate yourself on the key advantages and disadvantages of any opportunity by performing proper franchise due diligence, in order to ensure you are making an informed and intelligent investment decision.

About the Author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. He has spoken on the subject of franchising throughout the world. Ed operates FranchiseKnowHow which provides information and advice to prospective and existing franchisees and franchisors.