A recent article on Franchise Direct discusses the potential benefits of purchasing an “unconventional” franchise. It acknowledges the fact that new franchisees are increasingly becoming less interested in traditional brick-and-mortar storefront businesses, and it notes that alternate franchise opportunities “often work with lower overhead, meet specific market needs, and provide a fresh perspective on what it means to be a business owner.” But is it a good idea to choose an unconventional franchise? National franchise attorney Jeffrey M. Goldstein shares his thoughts:
What Qualifies as an “Unconventional” Franchise?
Before we can talk about whether it is a good idea to consider an unconventional franchise, we first need to address what it means for a franchise opportunity to be “unconventional.” While the Franchise Direct article begins by talking about the potential benefits of investing in an unconventional franchise, it then goes on to list several fairly conventional franchise opportunities. These include:
- Automotive franchises
- Business services franchises
- Employment and staffing franchises
- Financial services franchises
- Home services franchises
- Moving and storage franchises
- Senior care franchises
- Training and coaching franchises
Franchising has played a major role in each of these sectors for decades. Within each of these sectors, there are several well-established franchised brands, and these sectors account for a significant portion of the total number of franchises operating today.
As a result, it is hard to justify calling these unconventional franchises in today’s market.
What, then, is an example of an unconventional franchise? While there isn’t a precise definition of an unconventional franchise, some examples of emerging franchise markets include:
- Digital-first franchises
- Specialty food franchises
- Specialty and high-end pet franchises
- Sustainability-focused franchises
Due to the explosion of the popularity of franchising in recent years, there are now franchise opportunities in nearly all (if not all) major market sectors, and truly unique franchise opportunities are becoming increasingly harder to find. With that said, there are some out there—and this brings us back to our original question: Is it a good idea to choose an unconventional franchise opportunity?
7 Important Considerations for Choosing an Unconventional Franchise
If you are considering an unconventional franchise opportunity, there are several factors you will need to consider in order to make an informed buying decision. Along with the factors involved in evaluating franchise opportunities generally, these include special considerations such as:
1. Is the Franchise Too Unconventional?
One of the first factors you need to consider is whether the franchise is too unconventional. While having a unique value proposition can be critical for success, if your franchise’s value proposition is too unique, you could struggle to build the customer or client base you need—especially if your territory is fairly limited.
2. Does the Franchise Have Staying Power?
Another key factor you will need to consider is whether the franchise has staying power. Is the franchise unconventional because the franchisor is on the leading edge of a new long-term market opportunity? Or, is the franchise seeking to latch onto a fad that might not be relevant in two or three years’ time?
3. Does the Franchisor Have a Reliable System and Reputation?
When you buy a franchise, there are two main factors that drive the value of your investment: (i) your ability to use the franchisor’s business strategy and marketing methods (the “system”); and (ii) your ability to use the franchisor’s brand. If you are considering buying an unconventional franchise from a relatively new franchisor, it is worth asking whether you will truly benefit from your investment.
4. Where is the Franchisor Focused on Growing the Brand?
Good franchisors use their resources to support their franchisees, and this necessarily means that they are limited in where they can focus their efforts. With this in mind, when choosing an unconventional franchise in particular, you will want to make sure you know where the franchisor is focused on growing the brand.
If your franchise will be located in one of the franchisor’s target markets, this could help increase your chances of success. Conversely, if you submit a cold inquiry for a location that falls outside of the franchisor’s current geographic priorities, you may find that the franchisor is willing to sell you a franchise (and collect your initial franchise fee) only to then leave you largely on your own.
5. Are the Costs Reasonable?
Some franchisors will claim that the unique nature of their franchise opportunity warrants a premium price. But, if you will be buying into a new franchise system with an unproven system and an unrecognizable brand, this claim is hard to justify. When buying a franchise, it is important to consider whether the costs (including the initial franchise fee, advertising fee and royalty fee) are reasonable based on what you will be receiving for your investment.
6. Will You Have Time to Become Profitable?
If your unconventional franchise targets a niche market, becoming profitable during the initial term of your franchise agreement could prove challenging regardless of the reasonableness of your franchisor’s fees. With this in mind, you should prepare a realistic pro forma based on the initial term as part of your due diligence—as there is no guarantee that the franchisor will approve a renewal.
7. What Are the Risks if Your Franchise Fails?
Finally, even if you are confident in your ability to succeed as a franchisee, you still need to consider the risks if your franchise fails. For example, will you be liable for lost future royalties if you close before the end of your initial term? This is just one of numerous financial and legal risks you will need to consider.
Request a Free Consultation with National Franchise Attorney Jeffrey M. Goldstein
Are you considering an unconventional franchise opportunity? If so, national franchise attorney Jeffrey M. Goldstein can help you understand the financial and legal risks involved and help you make an informed buying decision. To get started with a free consultation, please call 202-293-3947 or request an appointment online today.
