As an opportunity that offers a blend of entrepreneurialism coupled with the security of joining an existing brand, franchising has exploded in popularity over the last decade and represents a huge footprint in business. According to Statista, last year the economic output of franchise establishments in the United States was about $790bn, and franchising employed more than 8 million Americans.
Each year an average of 300 new companies start to franchise their concept. With thousands of franchise brands to choose from, how can a prospective franchisee pick a winner? I’ve spent my career in franchising, specializing in identifying small businesses and taking them from one location to international brands.
Whether it was Five Guys, QDOBA or The Halal Guys, there are certain qualities I look for that tell me if a small business has the potential to become a global brand. If you’re a potential franchisee on the hunt for your next investment, here’s how to weed out a winning food franchise.
Keep your eye on emerging brands
When people first think of a franchise, their mind immediately turns to established brands like Subway, Papa John’s, Pizza Hut or McDonald’s. While these fast-food franchises have achieved huge success, many new franchise owners find that today’s returns are not what they expected. In all investments, you make the strongest return when you take a chance and get in early. The same philosophy holds true with a franchise.
When you invest in an emerging food chain, you have a long runway to make money by helping contribute to the company’s growth wave.
I want a brand where, in 10 years, I can grow to over 500 units while the concept is still “fresh”. Additionally, when you buy a mature brand, the multiples trend much higher, thus it generally takes anywhere from six to 10 years to see a return on your investment, and even longer when you consider ongoing, mandatory refurbishments.
Emerging food business brands return an initial investment in about one to three years. From there, savvy franchisees compound those returns by reinvesting that free cash into more locations that, in turn, build a much bigger, more valuable business on the same investment. Remember, every McDonald’s and Chic-Fil-A started with one location.
Find the disrupter
When I look for a multi-unit franchise brand, I want a concept that’s doing something different. With Five Guys Burger and Fries, I saw a food restaurant that was elevating the classic burger. With The Halal Guys, I looked at the growing Muslim population and the growing demand for halal, and couldn’t believe there wasn’t a food franchise opportunity with a national presence that catered to this need.
People will always crave new and different, that’s what makes the food and beverage industry ever-evolving and exciting. Look for an investment opportunity that’s either doing something completely unique or has a fresh spin on existing favorites.
Dig into the data
Just because a franchise food operation is newer doesn’t mean there isn’t data to evaluate. Many brands disclose financial numbers in their franchise disclosure document (FDD). If they do, study them hard. When I see a company that has solid financials, it tells me it’s a concept that can scale.
For example, what sold me on working with Savannah Seafood Shack was that it had some of the best unit economics I’d seen from a restaurant concept in the past decade.
Capitalize on trends
To know if a restaurant chain has longevity, the potential business owner must understand trends, the customer base, and consumer preferences. This can be tricky because you must be able to distinguish between a fad and a true trend.
When I evaluate a lucrative business, I use my relationship with industry experts and trendsetters to help answer questions like, “Does this trend solve a need for people?” or “Is this something that has caught on fast and grown (fad) or grown more slowly (trend)?” I also analyze industry reports and data to see in what categories consumers are increasing spending and loyalty. These insights, combined with a holistic view of what’s happening economically and politically in the world, will tell how those factors will influence consumer behavior.
One trend that I see having a huge impact on the restaurant industry is the rise of plant-based eating. This is a segment that is no longer reserved for vegans, as people everywhere are incorporating more plant-based options into their diets. When big brands like Burger King, McDonald’s and Chipotle start investing in plant-based menu options, it’s a sign this trend is here to stay. With recent data indicating the plant-based industry is poised to grow to a whopping $162bn, I knew I wanted to be part of this new wave in the food and beverage industry. The key was finding the right restaurant franchise to grow with.
When I evaluated nomoo, based on my other criteria, I knew I found a plant-based winner.
The rise of desserts is another trend here to stay. It’s no surprise that after a global pandemic and volatile economy, people are looking for small, sweet treats to add delight to their day. The success of Sprinkles Cupcakes and Crumbl Cookies prove that this is a strong category – so much so that my firm, Fransmart, recently added two dessert brands to our roster. Working with Food Network star Duff Goldman, and Top Chef All-Star Fabio Viviani, we aim to push the envelope of what consumers are looking for to get their “just desserts”.
In JARS, I saw an easy-to-execute concept requiring zero baking on-site and low labor output. Add to it that it comes from Fabio, who has decades of experience running successful restaurants, and I knew JARS had the capability to go global. In fact, the brand has 27 units in development before its flagship location in Chicago opens early next year. I was attracted to Duff’s CakeMix because it gives an investor the opportunity to become a part of the hospitality industry without the headaches of running a restaurant. At the DIY cake studio, guests decorate cakes that are made from Duff’s recipes and arrive at franchise locations flash frozen — no baking required and no full kitchen needed. Add in Duff’s brand power and strong operations, and I knew Duff’s CakeMix can go the distance.
Find the right founder
One thing that is very important to me is the brand’s founder. It’s imperative that the founder is passionate about the brand and authentic in their intentions. When I was looking for a plant-based brand, I looked at many concepts and eliminated them because the franchisor wasn’t in it because they were passionate about plant-based – they were in it because they simply saw dollar signs. When I met George Montagu Brown, the founder of nomoo, he radiated passion for growing plant-based eating to cultivate a healthier world. That’s the person I want to work with. Like any business venture, you must also make sure you can work with this person on a regular basis. Do your personalities mesh? If not, no matter how good the brand is, it’s never going to be easy and you’re never going to be happy. You need a partner with whom you’re on the same page and able to effectively communicate to grow the business.
Building a restaurant business is hard work, so I look for founders that have a strong work ethic and grit.
When times are challenging, I want to know that this person has the perseverance to get through to the other side.
Embrace new technology
If a business doesn’t embrace technology, I walk away. There are so many tools available to help owners improve operations, reduce labor, elevate customer experience, and more. If a brand isn’t using existing tools or creating its own proprietary tech, it isn’t going to be successful.
Technology is especially important in the restaurant industry as it’s helped restaurants rebound after the pandemic and navigate ongoing labor and supply chain issues. From order kiosks to food warming lockers, restaurants must embrace innovation. The brands that lean into rapid adoption of new technology are more agile and profitable within their operations.
Rise is the perfect example of integrating technology while maintaining the best-in-class hospitality experience customers have come to know and expect. This popular chicken brand places an emphasis on its guests, employees, and tech. The chain pioneered temperature-controlled food lockers that improved delivery and takeout operations, immediately seeing employee and guest satisfaction improve when it implemented 100 per cent online and/or kiosk orders.
Brooklyn Dumpling Shop is a perfectly engineered ‘post-pandemic’ restaurant. With its online and kiosk ordering and modern Automat system, it can run with as few as two workers per shift. Founder Stratis Morfogen is a visionary who isn’t afraid to push the envelope and be the first to try out new tech. His approach to always innovate tells his franchisees that Brooklyn Dumpling Shop will always lead a trend, and never be irrelevant.
Listen to your gut
The last ingredient in the secret sauce is trusting your intuition. Sometimes everything can appear correct on paper, but there’s something that doesn’t quite feel right. If the facts say invest and your gut says don’t, follow your gut 100 per cent of the time.
While there’s no foolproof, risk-free business investment, I’ve found that by following the roadmap I’ve refined from over two decades in the industry, I can (and now so can you) mitigate risks and feel confident that my next franchise investment will be a winner.
How to pick a winner for investment
- Take a chance and get in early – I want a brand where, in 10 years, I can grow to over 500 units while the concept is still “fresh”.
- Dare to disrupt – Look for a brand that’s either doing something completely unique or has a fresh spin on existing favorites.
- Don’t disregard data – When I see a company that has solid financials, it tells me it’s a concept that can scale.
- Identify true trends – Ask yourself, does this trend solve a need for people? Is this something that has caught on fast and grown (fad) or grown more slowly (trend)?
- Can you click with the founder? – It’s imperative to me that the founder is passionate about the brand and authentic in their intentions.
- No tech? Walk away – If a brand isn’t using existing tools, or creating its own proprietary tech, it isn’t going to be successful.
- Trust intuition – If the facts say invest and your gut says don’t, follow your gut 100 per cent of the time.
Dan Rowe is founder and CEO of Fransmart. He finds the right emerging franchise opportunities at the right time and helps franchisors develop successful, multi-unit franchisees globally.