Entrepreneur.com recently released its 2024 Top New & Emerging Franchises Ranking. As the online publication explains, this is its list of the “top companies that have been franchising for five years or less.” If you are thinking about buying a franchise, should you consider an “emerging” brand? National franchise attorney Jeffrey M. Goldstein shares his thoughts.
5 Important Considerations for Buying an “Emerging” Franchise
When you are considering franchise ownership, the amount of time that a franchisor has been selling franchises is certainly a relevant factor to consider. This is especially true when you are thinking about buying a franchise from an early-stage franchisor. Many businesses start franchising after finding success at the unit level, and running a retail business is very different from building and managing a franchise system. As a result, some new franchisors simply aren’t prepared—and it takes time to find their footing if they are able to find their footing at all.
What does this mean for you if you are thinking about buying an “emerging” franchise? Here are some factors you will want to consider:
1. An “Emerging” Franchisor Might Be Past the Difficult Initial Stages
If a franchisor has made Entrepreneur.com’s 2024 Top New & Emerging Franchise Ranking, this might mean that the franchisor is past the difficult initial stages of establishing the foundation of a viable franchise system. But, of course, there are no guarantees.
As Entpreneur.com explains, its ranking is based on “more than 150 data points in the areas of costs and fees, size and growth, franchisee support, brand strength, and financial strength and stability.” While this provides some detail, it is still fairly vague. As a prospective franchisee, you can (and should) review sources of information like Items 2 (Business Experience), 13 (Trademarks) and 21 (Financial Statements) of the Franchise Disclosure Document (FDD) to form your own opinion, and you should make the most of your discovery day as well.
2. Franchisors Must Choose to Participate in the “Emerging” Franchisor Ranking
It is also worth noting that Entrepreneur.com’s 2024 Top New & Emerging Franchise Ranking is not a comprehensive list of all franchisors meeting the criteria for inclusion. Rather, as the publication explains, franchisors must self-select for consideration. Thus, there is an inherent promotional aspect to the list, and the list excludes the smallest emerging franchisors (those with less than 10 units), as these franchisors were ineligible to participate.
3. An “Emerging” Franchisor Might Be More Likely to Make Changes Over Time
With many well-established brands in virtually all industry segments, why is it worth considering an “emerging” franchise at all? For many prospective franchisees, one of the draws is the opportunity to join the system on (or near) the ground floor. Early-stage franchisors may offer lower fees than their more established competitors as well, and franchisors that are in growth mode may also be willing to do more to help their new franchisees find success. Ultimately it is up to you to decide what types of franchise opportunities you are willing to consider—keeping in mind there are no guarantees that a franchisor will offer any more (or less) opportunity for success based solely on its years of franchising.
Why wouldn’t you want to consider an emerging franchise? One concern is that the franchisor might be more likely to make changes over time. As the franchisor finds its way and begins to understand the competitive landscape, it may make changes to both its system or growth targets. Franchisees will be required to adapt to system changes at their expense, and if a franchisor changes its geographic focus, this could mean that existing franchisees in certain areas will either: (i) face additional intra-brand competition that they weren’t anticipating; or, (ii) find that they are no longer receiving the marketing and operational support that they once were.
4. Early Success Doesn’t Necessarily Equate to Long-Term Stability
While early success might mean that a franchisor is well-positioned for long-term stability, this isn’t necessarily the case. Is the franchisor burning through cash upfront while facing a debt-laden future? Is the franchisor doing so well that it is attracting interest from investors who lack the same passion for the brand as its current owners? These are real possibilities—and they bring into sharp focus the fact that, as a franchisee, you are not completely in control of your own destiny.
As a prospective franchisee, you can (and should) ask about these types of concerns when performing your due diligence. However, you should also accept that you may not receive complete or straightforward answers. The key is to make as informed of a decision as possible—and to be willing to consider other options if you have concerns about your first (or second) choice.
5. It is Worth Considering All of Your Options
This brings us to our final point: If you are considering an “emerging” franchise, it is worth considering all of your options. Why wouldn’t you? Buying a franchise is a significant and long-term investment, and you need to be confident that you are giving yourself a reasonable chance of success. If you are looking at an “emerging” franchise concept, look at its competitors too.
How do the franchisors’ leadership teams compare? How do their financials compare? What benefits does one franchise system offer that the other doesn’t? What do their current (and former) franchisees have to say? Answering these types of questions will help you make an informed decision that isn’t based solely on a visceral or emotional attraction to a particular brand.
Schedule a Free Initial Consultation with Franchise Attorney Jeffrey M. Goldstein
Franchise attorney Jeffrey M. Goldstein has well over 30 years of experience representing prospective and active franchisees across the United States. If you are thinking about investing in an “emerging” franchise, Mr. Goldstein can help you make an informed buying decision. To learn more about our franchise business review services, give us a call at 202-293-3947 or request a free initial consultation online today.
