In a field crowded with emerging franchises, only the strongest brands thrive

The opinions expressed by entrepreneurs contributors are their own.

According to FRANdata, an average of 250 new franchise brands have been launched each year in the United States since 2001. That's no less than 5,250 brands launched over the past 21 years. Yet in 2022, FRANdata only had 4,000 total active franchises, down from 3,000 in 2010, which was also flat at 3,000 in 1990. So where have all these emerging brands gone?

The fact that several thousand brands have stopped actively franchising does not mean that these companies have failed or closed. Some reverted to a business model, were acquired and rebranded by competitors, or stopped adding new franchise units. Their franchising efforts went from "active" to "inactive" while the business entity itself continued. And yes, some emerging franchise brands have also failed. Franchisees who thought they were joining something destined to become bigger were deeply disappointed.

A cottage industry of facilitators helps companies launch new franchises. Unfortunately, the fees charged for these services create a conflict of interest when it comes to quality control. A consultant whose business model is to launch new franchises may be reluctant to tell someone they should delay the launch or that they are underfunded. The best companies that specialize in new concept launches publicly release their track records and have extensive screening and training for newly launched brands. They continue to work with these brands until they reach a level of maturity. Unfortunately, others will gladly take a large sum to fine-tune a standard Franchise Disclosure Document (FDD). Founders who try to launch their franchise business on the cheap without studying franchise best practices are also to blame.

Related: How to Get Started, Grow, and Thrive in Franchising

If they haven't taken the time to study franchising, founders have a steep learning curve. Many also don't understand how competitive the market has become to recruit franchisees. So they go for it, hoping their concept is exciting enough to catch fire and end up disappointed. Those sputtering hoping that private equity buyers will bail them out before they run out of cash should think again. Private equity investors want growth stories, not unproven brands without infrastructure. Even private equity firms that specialize in working with emerging brands generally want to see at least $500,000 in EBITDA and $1 million and above is preferable. They want good bones, a reliable team and real potential.

Franchisee advocates worry that would-be franchisees don't understand how risky emerging brands are and join a concept that turns out to be a bad bet. The Federal Trade Commission (FTC) Franchise Rule requires detailed disclosures. Potential franchisees have an avalanche of information from the franchise itself and the industry at large to help them check the viability of the concept. In addition to the required disclosures, there are numerous buying guides (including the Entrepreneur's Franchise Buying Guide), educational resources, consultants and attorneys to help guide candidates. All these resources seem to have a positive impact on the choices of future franchisees. The market seems to be turning away or is just too loud for smaller concepts to successfully attract new franchisees.

Stronger concepts have gained momentum, in part due to the help of private equity and investments. Going back to 1990, the top 3% of brands (100 of the then 3,000 active brands) accounted for 34% of the total number of establishments. Now, the top 20% (top 800 of 4,000 brands) represents 80% of new units sold each year (to existing franchisees and new franchisees). The Top 500 entrepreneurs (12.5% ​​of the 4,000 brands) represent more than half of the establishments open. It's a sign...