The Franchise Times recently published a list of its “Breakout Brands” in franchising. The list highlights a handful of concepts that are “[b]eginning their journey up the annual Franchise Times [Top 400] ranking” after they “turned in notable performances in 2022.” If you are thinking about buying a franchise, should you put a “breakout” concept on your list? Here are some key considerations from national franchise attorney Jeffrey M. Goldstein.
Factors to Consider Before Buying a “Breakout” Franchise
Buying a “breakout” franchise can seem like a good idea for lots of reasons. Not only is the franchise being recognized for its success, but this recognition also helps to boost the brand’s value. If the franchise system is doing well as a whole, this must mean that individual franchisees are doing well, too. The brand must be attracting new customers, and this must mean that now is a good time to buy.
Maybe. But, there are some additional factors to consider. First, consider that the Franchise Times Top 400 only ranks “the largest brands in franchising.” As a result, if you are only considering franchise concepts on this list, you are already limiting your options significantly. Then, there is the fact that franchisors must submit themselves for inclusion on the Top 400 list. Additionally, to qualify for the list, the franchisor must be based in the United States or have at least 10 percent of its units on U.S. soil.
This means that there are both significant limitations and promotional aspects to the list. This isn’t unique to the Franchise Times Top 400—the same is true of most other franchise rankings as well, and many rankings are pay-to-play. While there isn’t anything wrong with being ranked, the simple fact is that franchise rankings should only play a very small role (at the most) in your buying decision.
Here are some additional factors to consider if you are thinking about buying a “breakout” franchise:
1. Why is the Franchise Breaking Out Now?
When a franchise is suddenly getting a lot of attention, it is important to ask why. Why is the franchise breaking out now? Is it a new concept that is shaking up the industry? Has it recently undergone a change of ownership or experienced significant growth? Is the franchisor executing an aggressive marketing and PR campaign?
Any time you are thinking about buying a franchise, it is important to make sure you understand the concept’s long-term potential. Many franchise systems come and go. While a “breakout” concept might have staying power, it also might not.
2. Are You Interested in Owning and Operating This Type of Business?
For most prospective franchisees, it is important to focus on more than just finding a good business opportunity. You also need to find a franchise concept that interests you on a personal level. You will be working in or on your franchise every single day. If you aren’t interested in the business, it will be a long and difficult ride.
For example, one of the Franchise Times’ “breakout”” franchises is a mobile pet grooming studio. Maybe you like dogs, but do you want to spend your days driving, grooming, and trying to find new customers? If you don’t, then even though you like dogs, a mobile pet grooming studio might not be the right franchise for you.
3. What is the Competitive Landscape?
If a franchise concept is experiencing breakout growth, then either (i) at least some of its competitors are likely experiencing breakout growth as well, or (ii) the market will suddenly become much more competitive as other franchisors enter the marketplace. There is also a very good chance that both of these could be true. As a franchisee, you are responsible for your own success, and this means that you need to have a strategic plan (and the necessary funding) to stay ahead of the competition.
Trends come and go. Even when they don’t fade into obscurity completely, trend-based franchise concepts will often experience a substantial decline in sales and revenue once their novelty wears off. As a franchisee, you will be bound to your franchise for the full term of your franchise agreement—even if your customers have moved on.
4. How Much Experienced Do the Franchisor and Its Executives Have?
By definition, many “breakout” franchise concepts are new to the world of franchising. Most franchisors start by operating a successful outlet, and then they engage a team of lawyers and consultants to help them establish a franchise system.
Operating a franchise system is very different from operating a retail business. Lack of experience in franchising is one of the main reasons why new franchisors fail. As a result, when considering a “breakout” franchise, it is especially important to consider the franchisor’s history and make sure you are confident in its executives’ ability to continue growing the system over the long term.
5. What Are the Terms of the Franchise Agreement?
Finally, while you may be excited to start the process and get to work building your franchise, you need to take a cautious and diligent approach to the buying process. Among other things, this means reading—and hiring a franchise attorney to review—the franchise agreement.
The franchise agreement almost certainly has numerous unfavorable one-sided terms, and if you go into your franchise blindly, you could put yourself in a legally and financially precarious situation. Along with advising you regarding the franchise agreement’s key terms, your attorney can negotiate on your behalf, and then you can decide if you are comfortable moving forward based on everything you’ve learned during the buying process.
Request a Free Initial Consultation with Franchise Attorney Jeffrey M. Goldstein
If you are thinking about buying a “breakout” franchise, we encourage you to contact us to learn about our flat-fee franchise agreement review and negotiation services. To request a free initial consultation with national franchise attorney Jeffrey M. Goldstein, please call 202-293-3947 or tell us how we can reach you online today.