NEW YORK (
TheStreet) -- It seems hard to believe that
Dunkin' Donuts (its formal name is now
Subway all started out as small ideas at one point in time. In order to get in on a McDonald's franchise now, for instance, an investor needs millions in capital. For an investor new to franchising, that's not realistic. Even if possible, with same-store sales at the fast-food chain stagnating, the prospects of long-term financial success are iffy.
Given the foodie explosion in the U.S., there are many smaller and less expensive
franchise brands hitting on market trends. While many will fail, some clearly have growth potential. And not all are in food.
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The International Franchise Association, franchising's main trade association, estimates that roughly 2,500 brands are franchised in the U.S.
As of the first quarter, 203 new business concepts went the franchise route in 84 different sectors. Some 1,498 units were opened by these newbies, according to a report by independent research firm FRANdata. (That number includes both franchised locations and company-owned units.) The report projects another 2,500 units from the newcomers over the next year. New concepts are young brands that have recently converted into a franchised business or start-up concepts that are only entering the franchised market, the report said. Some 65% of the brands that entered franchising in the first quarter were non-food concepts, the report said.
Thanks to the increased availability in credit since the recession, franchised brands are growing again. The IFA says that seven of the 10 business sectors that it tracks franchising in are
adding jobs faster than the private sector
as a whole.
Franchising "is a lot more than just fast food. It's automotive, it's commercial and industrial, it's personal services, it's real estate, it's hospitality," said IFA spokesman Matt Haller. "It's really thousands of different types of businesses in sectors across the spectrum."
Outside of food, the top five sectors in which franchises have launched concepts in the first quarter include: health and fitness; child-related; business; maintenance services and real estate, according to the FRANdata report. Within food, the most popular category is QSR, or quick-service restaurants, which includes the explosion of growth in so-called fast-casual concepts. Fast-casual concepts are typically a step up from fast-food chains in that items are cooked to order and made with higher-quality ingredients.
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Just because a franchise is opening lots of locations, doesn't mean it's a sustainable business, says FRANdata CEO Darrell Johnson. "Franchising is a business model follows opportunity and opportunities in the business sector are trend based and so trends take multiple years to evolve," Johnson says.
Potential investors should thoroughly review a company's
Franchise Disclosure Document
(FDD), a document that franchisors provide to prospects that provides a variety of aspects to the business including supply sources, financial statements, any litigation and general background on the company, among other things.
Other factors to consider when deciding on a franchise: how long locations have been open, net location openings in any given year; and growth potential of the concept's given industry. Finally investors should talk to established franchisees in the system.
Eager franchise investors looking for the next great idea can get a sense of new brands and established concepts at the
International Franchise Expo
, held June 19 through June 21 in New York City. The expo is sponsored by the IFA.
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