Did you know that almost 42 percent of the nation’s 3,400+ franchisors have fewer than 10 units? Over 2,300 franchises have less than 50 units, a staggering 68 percent of the franchise industry. These franchises are classified as “emerging” regardless of how old they are because they have not grown beyond that point and are more than likely not at royalty self-sufficiency, meaning their royalty stream doesn’t cover their expense structure.
While every franchise needs to start somewhere, the best course of action for the prospective franchise candidate is to master the research process and educate oneself on whether you have found a great opportunity by being a part of the early-stage growth of an emerging brand or if the concept has stagnated and requires more redevelopment.
Franchise Chatter (FC): If one is looking into emerging brands, what should interested parties be looking for?
Steve Murphy (SM): There are a few key things that someone looking into an emerging franchise should research and do their due diligence on. Namely, differentiation of the service or product, does the franchisor have money to reinvest, is there a demand in the market, and is it a sustainable business model.
FC: Can you dig deeper into all four of those?
SM: Of course.
What is their differentiation factor?
Differentiation is one way to tell if an emerging concept has what it takes to stand out within its category. During your research, it’s important to evaluate what exactly sets the brand apart from the rest. Is it the product, service, or solution?
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Another factor to consider is the strength of the barriers the company has in place to protect future competitors from entering the specific market and industry. These can include strong patents or trademarks, proprietary technology, exclusive access to suppliers and/or distribution channels, product differentiation, and more. If the emerging concept you chose shows promising growth, it’s inevitable that additional companies will enter the space or try to outdo the current key player.
Does the franchisor have money to re-invest?
Every franchisor publishes their financial statements in their Franchise Disclosure Document (FDD). As a franchise candidate, you should always look to the P&L to see if the franchisor is making a profit and growing the Balance Sheet to ensure that they are keeping their money in the business and showing a willingness to re-invest dollars back into the system.
Ask questions about the line items on their P&L, where they invest their profits, and what represents current costs versus future investments. In your due diligence with franchisees, ask if the company is constantly reinvesting in technology, training, marketing, and operational efficiencies.
If you see large distributions of earnings, where money is taken out of the company by the owners or shareholders, proceed cautiously as that is a warning sign that the money is being generated more for short-term personal wealth than long-term brand growth.
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Is there a demand across markets?
There are a variety of scalable businesses out there but one major thing that can be overlooked is will the concept work in the market you’re looking to open? Does the concept have national appeal or is the attraction niche and regional? These are the questions you have to ask if you’re looking to open multiple locations in different areas.
Compare and contrast your market to the best markets in the franchise system to ensure that you share common attributes with the more successful markets and operators.
Is it a sustainable business model?
Many concepts come and go due to industry trends but it’s important to analyze if the concept has long-term viability. Ask the franchisor if you can see any of their reports on the competitive landscape and market demographics that can influence the consumer demand, and to see their customer profiles.
Whether you’re doing your own research or seeking counsel from a franchise consultant, it’s vital to learn any factors that can pivot the consumer demand for the business such as regulatory changes, technology changes, and consumer preferences. Since your plan is to be in the business long term, be especially careful in food and fitness, as both industries tend to have short-term appeal and may be challenged to last long term.
FC: If the franchise currently has no or only a few franchisees, how can you vet the franchisor’s support?
SM: Solid franchisors have created a threshold for unit economics by which current and future franchisees can expect to generate a return on investment. This can be difficult to measure with less people to speak with, shadow, and validate information with. However, speak to the franchisees they have in their system and see if they have a strong return on investment. Even if they only have one franchise at the time, their opinion will speak volumes.
You can additionally connect with managers and employees at any corporate location to gauge their opinion. Analyze their track record for any corporate-run stores as well, if there are few franchisees to connect with. Speak to the franchisor and ask how much they are involved in operations or how large their corporate support team is.
The bottom line is you want to know what resources they have in place for you, how extensive training is, how they will help you with marketing, etc.
FC: Can you elaborate on the importance of corporate support? How do you measure it?
SM: A concept is only as strong as its network of franchisees. If they don’t feel fully equipped and confident in the business or their ability to successfully operate it, then things will start to fall through the cracks.
A durable training program and operations manual should include both classroom-based sessions and on-site learning that gives new franchisees a real understanding of what support they can find in the following areas: brand training, real estate and construction, local marketing strategies, operational procedures, financing and budgets, business plans, supply chain management, and inventory management.
The real measure is whether or not a prospective franchisee feels confident in the business plan and the franchisor’s guidance to execute the vision for the business. The corporate support, on-going training, and other resources available should point the entire franchise network in the same direction, so that no matter where a unit is located, the business plan is being scaled.
FC: Tell us about your professional background and expertise in the franchise space.
SM: I have been President of Franchising for Winmark Corporation since October 2006. Previously, I held various management positions including Vice President of Franchise Management and Director of Play It Again Sports.
Before joining Winmark Corporation and Winmark Franchise Partners, I served in a number of roles in marketing, ecommerce, and business development, bringing extensive experience in day-to-day franchise operations, franchise financing, and infrastructure development and support.
It’s been very rewarding growing Winmark Corporation’s franchise brands to more than 1,200 locations and over $1 billion in system-wide sales over the past 17 years.