🍟 5/31/2022 – Why You Should Buy An Emerging Franchise
Why Buy An Emerging Franchise?
If you haven’t noticed, the “Franchise of the Day” section of this newsletter pretty much exclusively covers franchises with at most 250 locations open.
I do this intentionally, because my goal is to expose you to franchises that aren’t national brands yet. Based on my experience in franchise development, buying into an emerging brand provides the most upside as a franchisee. Why?
Two Big Reasons
1. Territory Availability
This one is simple. The more locations a brand has, the less territory that’s available for you as a new owner. Good luck buying into a franchise with 1,000+ locations!
At that scale, your market is likely taken. And if you’re looking to acquire an existing franchise in your area, it could be difficult, as many franchises try to keep their acquisitions internal (i.e. bigger franchisees buy the smaller ones to expand).
2. Negotiating Leverage
This one may not be as obvious, but when a franchise is just starting out and trying to grow, they’re more willing to cut some deals. Meaning…
If a brand has started franchising in the last few years, they’re going to want to show prospective franchisees that they’re growing.
Otherwise, potential new buyers evaluating the brand will start asking questions such as “why hasn’t anyone bought into your brand yet?”. Rightly or wrongly, lack of growth for a franchise starts to look like a red flag.
So to help build a narrative of growth, the sales teams at franchises are usually willing to entice early franchisees by offering larger territories for less upfront fees.
Pros & Cons
Assuming you can find an emerging franchise with a viable business model, being granted the rights to multiple counties to build franchises can be a life changing opportunity.
But like anything else, this decision has positives and negatives:
As I’ve already mentioned, 2 of the biggest benefits of this strategy is territory availability and negotiating leverage.
Beyond those reasons, early franchisees typically have a closer relationship with the franchisor.
Good franchisors know the long-term success of their brand depends on the first franchisees performing well, so they’ll be very invested in making sure your business is thriving. Think of it from the zors perspective:
If the first 1-50 franchisee owned locations aren’t performing well, that becomes a BIG red flag to prospective new buyers.
To mitigate that risk, good zors will be busting their asses to make you as a franchisee happy, and to offer validation to new buyers that current owners are making an attractive return on investment.
The biggest drawback of this strategy is the lack of “proof of concept” it comes with.
Many people want to buy into franchises because it’s a proven model with minimal risk. But the earlier you buy into a brand, it’s inherently less proven than if you were to wait for more locations to open.
The reality is that every franchise in the world (even McDonald’s), started with just 1 location.
Thus, as a standalone data point, less locations isn’t an indicator of the quality of a brand. But it does mean that franchisee #1 will take on more risk than franchisee #10, 20, 100, etc.
That leaves you with 2 choices for emerging brands:
1) Wait until more data is available and risk losing the territory you’re interested in
2) Buy into an emerging brand by securing a large territory, and “roll the dice” so to speak
In next week’s deep dive, I’ll discuss how to best evaluate an emerging brand, so that you can take an educated approach to buying early-stage franchises!
The Rise of Wellness Franchises
Wellness franchises are booming. Restore Hyper Wellness has ~130 locations open, QC Kinetix has boomed to 75+ locations after being founded in 2017, and OrangeTheory legend Jamie Weeks is launching his own wellness franchise called Sweathouz.
Despite being limited by the FDA in what they can claim the benefits of their products and services are, the buy-in from both franchisees and customer demand is clearly there for these businesses!
Cannabis franchises are coming – and two brands in particular – Unity Rd. and Curio Wellness – are already expanding via franchising. Both brands are selectively entering states where recreational marijuana use has been legalized.
Cannabis is an evolving industry, but as legalization increases, it will lead to national franchises built around cannabis sales and/or experiences.
Note: If you’re interested in the cannabis industry, checkout my colleague’s amazing coverage of the industry via The Green Paper.
Jamba Juice Franchisee Acquires The Big Salad
The Big Salad, an emerging fast-casual salad franchise with 9 locations, was acquired by North Carolina entrepreneur Brent Sheena. From his experience with Jamba Juice, Sheena has plans to expand to 50 additional franchises in new markets by 2025.
In sports, great players can make for great coaches. Similarly, I’m a big believer in franchisees that become franchisor – they know what it’s like buy into a system, pay royalties, etc. Excited to watch Brent grow this brand!
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