This article was originally published on Entrepreneur.com
Anyone who invests in a franchise business is hoping it will lead to riches. And it certainly can be, providing you pick the right franchise brand to partner with. No matter what concept you choose to franchise, the way you make money in franchising is to align with an emerging brand.
Every large brand like Burger King or Taco Bell started with just one store. The earlier you get into a successful chain, the more benefits there are for a franchisee. If you buy an established brand, the multiples are so high it generally takes six to 10 years to get your money back. Emerging brands return an initial investment in one to three years. Savvy franchisees compound those returns by reinvesting that free cash into more locations and building a much bigger, more valuable business on the same investment.
Although an emergent brand comes with a certain amount of risk, the rewards far outweigh it. Emerging brands are less expensive to join, prime territories are available, opening costs are lower, and often better real estate can be secured. But most importantly, new franchise concepts give franchisees a longer runway to make money.
For more than two decades, my company has helped grow brands like Five Guys and The Halal Guys from one-unit emerging concepts into powerhouse international brands. Although you can never be 100 percent certain a new brand will be a runaway success, there are five things you can look for to hedge your bets that you’re backing a winner.
A Passionate Founder
Many entrepreneurs are in it just for the money, and it shows. When you’re evaluating an emerging franchise concept, take a hard look at the owner. Is he or she truly passionate about what they’ve created, and are they committed to being the best in their segment? If not, run — don’t walk — away. It’s hard to make a business a huge success, and if the owner isn’t all-in it’s not going to happen.
Dovetailing with passion, an emerging brand must have the authenticity to go the distance. Customers can sniff out brands that lack soul, and they stay away. For example, when I evaluated plant-based burger concepts, I eliminated brands where the owner wasn’t a vegan and went with nomoo, whose owner created his brand because he couldn’t find a decent plant-based burger anywhere in Los Angeles.
To make money with an emerging brand, the segment also needs to be emerging. You need a segment that isn’t simply a fad, because you’re going to want to have a long runway of at least 10 years to see a brand grow to more than 500 locations while the segment is still hot. I see this, and the data backs it up, regarding plant-based concepts.
Strong Unit Economics
For a franchisee to get rich via franchising, a concept must have strong unit economics to back it up. Numbers don’t lie. If a franchisor can’t offer impressive numbers, look for another emerging brand to invest with.
Franchisees want to get their money back quickly. When evaluating a concept, look for one where you will see fast ROI. This also means a franchisee will be able to use the power of compounding returns to reinvest in the concept and open additional units. The true ticket to wealth through franchising is punched when you’re a multi-unit operator.
By following these guidelines, prospective franchisees can evaluate if a new brand has the foundation to become the next Five Guys.