New franchises: Boom or bust?

By Gareth Parry

One of the more frequently asked questions from franchisees is, “What makes a good franchise?”

Is it better to go large or small? International or domestic? Initial costs versus return on initial investment?

With the growth of the franchise industry, another comparative question also keeps coming up: “Should I invest in a new franchise or an established system?”

This question is more complicated than it first appears, as there are many ways to analyze this important scenario. To do so, one must look at how new franchises are perceived and discuss whether they are a great opportunity, or more of a risk.

Focusing on the positives

Every franchise must start somewhere, and typically they are born after many years of operation at the parent business. The company’s growth, success, and ambition have led them to a crossroads.

They begin to wonder, “Do we grow organically? Do we sell? Or do we franchise our business?”

This is where franchise consultants normally get involved, to determine the feasibility of franchising potential and subsequent franchise development programs. This process is becoming a regular trend across the country, and the industry is starting to see an acceleration in the development of homegrown
franchise brands.

However, what happens when it is time to “go to market?” Do potential franchisees see new franchise brands as a bona fide opportunity, or are they more comfortable putting their trust into what they deem to be a safe and established franchise?

The benefits of an emerging franchise are quite easy to understand. The franchisor is motivated to grow; dialled into the success of each franchisee; equipped with a shiny, new—and hopefully best practice—franchise system; and often, bringing something new and exciting to the market. This can be motivating for an investor, who can also benefit from a much more fluid and available list of new territories, as opposed to the saturated market common with a lot of older brands. New franchisors can also be more flexible in their approach to the franchise relationship, even including incentives for those who join early.

Sometimes, the franchisor may actually be very experienced as both an operator and in franchising, and simply launching a new concept—which can also make it attractive. I remember helping a burrito brand start their journey into franchising, even though I was cautious about their niche and their actual time in business. However, they had tremendous industry and management operating experience, and now they have almost 80 locations. Franchising can work well when you take a chance on a great new base concept.

Considering your options

As with everything in business, there are also some potential downsides to going with a new brand against an established franchise. Firstly, older and larger brands may have a more proven real estate strategy, stronger intellectual property, more positive cashflow and access to funds, higher brand equity, stronger marketing power, a more sound supply chain, a more sophisticated online platform, a larger base of franchisees, and a tried-and-tested system.

This all sounds good, but here is where it gets interesting. An increasing number of new franchisors are also sophisticated, have great platforms, have strong financial backing, and of course, tend to have years of strong operations and success, which led them to franchise in the first place.

An example of this type of franchisor is Ontario-based waste collection rental company Gorilla Bins. They have many years of success behind them, along with a great operating system, a committed financial investor, and wide-open territories for a business which has grown exponentially—even during a pandemic. Are they a risk or is the risk-reward in favour of the franchisee?

Potential franchisees may consider a larger franchise system to be a positive. However, in addition to the size or age of a franchise, they should also look at its rate of growth. Ultra-fast growth of “sold” units can indicate underlying problems or even a “house of cards” scenario. Massive growth can lead to support shortfalls. Larger franchises can also have higher rates of franchisee attrition or turnover, which is often overlooked and can signal serious problems.

Doing your due diligence

Whether they are pursuing new or established franchises, potential franchisees need to do their homework. Franchise disclosure documents often tell an interesting story. What seems shiny on the outside may not tell the real truth about a franchise. Brand equity often shadows internal problems and detailed proof of profitability can be elusive. In my experience, new franchisors are much happier to discuss their financial performance, even though regulation and legal experts encourage otherwise.

When comparing new versus old, franchisees still need to compare independent versus franchised businesses. Most people are aware of the perceived positive success rates of franchising, but does this hold true for new franchises? In essence, it does. According to the International Franchise Association (IFA), franchisees are still more likely to be in business after five years than if they started an independent business in the same industry.

Although it may be a little more difficult to assess a newer franchise system, especially if they have only a few or even no franchisees, this can be overcome by speaking with store or location managers, or even general staff. A well-structured new franchise will have gone through a change management exercise, so most, if not all, staff are aware of the company’s franchising program. New or old, potential franchisees still need to self-assess and determine their own suitability for a particular franchise brand, as well as seek professional advice and guidance prior to investing.

Conclusion

As someone who helps companies franchise their own businesses, I can speak to the potential of new franchises, at least to some degree. They still need to prove themselves in the long term, but they should in no way be discounted and can offer tremendous opportunities. After all, someone once took a chance on McDonald’s, Tim Hortons, and Pizza Hut. Sometimes, the grass is just as green with a new franchise.

Gareth Parry is president of InnoFran, an independent franchise consultancy and advisory based in Stouffville, Ont. He has worked with some of the biggest brands in the franchise market. For more information, Parry can be contacted at info@innofran.com.