Don't Mind the Hype: Avoid Getting Burned by a “Hot” Franchise

Business.com / Funding / Last Modified: February 22, 2017

Don't get fooled by the next big thing. Here are some tips regarding how to explore “hot” franchise opportunities without getting burned.

I’m often asked what the new “hot” opportunities are in franchising.

People are always interested in the latest concepts and trendy products or services. Funny thing is, franchising’s success is based on business models and systems that have been successfully executed time and time again. That’s not to say that you shouldn’t invest in a newer franchise concept—after all, it may truly be the next Subway or Two Men and a Truck.

But, keep in mind that a newer, unproven franchise opportunity comes with greater risk and often have processes and systems that are still being tweaked. Here are some tips regarding how to explore “hot” franchise opportunities without getting burned. 

Related Article: Real Talk: Is Franchising As Profitable As You Think?

All Hype and No Bite?

Before joining the frenzy over a “hot” franchise, it’s important to determine if the hype is warranted. Kick the tires of the business as a customer first. Test out the product or service—if possible, at several different franchise locations on different days and at different times. Is the business providing a consistent customer experience? Are employees well trained and professional? Are they delivering on the brand promise?

If the company passes your initial “test,” the next step is to take a good, hard look at yourself. Are you a big risk taker or more risk adverse? “Hot” brands, unlike more established concepts, don’t have proven, long-term track records. You need to make sure that you are comfortable with a higher level of risk. If you are, then it’s time to take a look under the hood of the franchise by investing time to research it as well as your local marketplace. 

While “hot” concepts are often too new to be able to look at typical long-term indicators of a franchise’s health, there are many things you can and should investigate prior to signing on the dotted line, including:

Want vs. Need: Is the product or service that the franchise provides a “want” or a “need?”  A need is preferable since people cannot do without it even during economic downturns. 

Management: Who are the executives behind it? Do they have franchise experience and/or specific industry experience? Have they grown a similar business or franchise before? Do they have the financial resources to build a successful franchise company?

Growing Pains: How prepared is the company to support the explosive growth it is experiencing? 

Innovation: The product or service may be “hot” now, but does it have the wherewithal to maintain its luster over time? How does the franchisor plan to keep the brand fresh and business growing?

Selectivity: Find out what the criteria is to become a franchisee, and how strictly it is adhered to. If the franchisor is recruiting only the most qualified people to become franchisees, it helps to ensure that its system will remain strong as it grows. If at any time during your research of the company you feel more like you’re being “sold” vs. recruited, consider other franchise options.

Market Customization: Can you customize the franchise’s offerings to your marketplace to ensure a sustainable revenue stream?

Customer Retention: It costs far more to attract a new customer than it does to keep the ones you have. What does the franchise do to keep customers coming back? Does it analyze customer feedback in order to improve business operations and correct shortcomings. How does the business deliver a great customer experience? 

Training & Support: Does the franchise have the technology and staff to support an expanding number of franchisees? What training and support will you be provided? Strong training and support programs will be crucial for your success and help ensure the brand stays strong.

Territories: How are territories defined? Are you protected from cannibalization by a fellow franchisee or a corporate-owned location? If you choose to expand, do you have right-of-first-refusal on nearby markets?

Franchisee Satisfaction: Take advantage of the knowledge current franchisees have regarding the system by speaking with at least a dozen. Once a franchisor has determined you are a qualified candidate, you’ll be provided with a complete list of all franchisees and their contact information in the Franchise Disclosure Document (FDD). Another good resource to refer to is Franchise Business Review’s annual Top Emerging Franchises report, which is available for free at FranchiseBusinessReview.com. This report features only new franchises companies whose franchisees rated them highly. 

Related Article: Reporting for Duty: Why Franchises are Courting Veterans

In addition to finding out the answers to the questions above, it is crucial that you review the FDD in detail, and fully understand the terms of the Franchise Agreement, which outlines everything you are legally obligated to do and not do as a franchisee.

I strongly suggest hiring an experienced franchise lawyer who can explain the details of each and alert you to any red flags. They can also see if there are any points it may be beneficial to negotiate. An in-depth breakdown of the FDD, presented as on-demand video segments, is featured in FranchiseBusinessReview.com’s Franchise Buyer’s Toolkit.

Investing in a franchise is probably the largest expenditure you’ll make after the purchase of your home, so it is crucial to identify one that is likely to meet your personal and business objectives.  In the end, the best way to avoid getting burned simply boils down to doing your homework. If you choose an opportunity with a viable business model that you are truly passionate about and work really hard, your odds of success are high.

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