What Franchises Need To Know Before Expanding Into a New State

Ask any franchisor what their ultimate goal for the business is, and you’ll likely get the same answer — growth. Whether a franchise is looking to be a household name nationwide or simply within a region of the country, growth likely includes expanding into new states. 

Because the U.S. differs so greatly in demographics, culture and regulations, there are a lot of factors to consider when bringing a franchise to a new state. Before a franchise begins looking for franchisees and promoting available territories, it’s important to think through all the details and sort out any logistical issues that might get in the way.

Here are a few things franchises should consider before expanding into a new state.

Local Demographics

If a franchise is ready to expand to a new state, it likely has a decent grasp on its target audiences for both customers and franchisees. There is plenty of research to do before expansion to ensure the demographics in the new market match up with the target audiences in order to give a franchise the best chance of success. 

This research will vary depending on the business, but it usually includes things like population size, income levels, home type and urban versus rural areas. Luckily, there are research software platforms that provide this information and are designed for this type of business insight.

“We use a tool called Buxton to analyze different markets,” said Terri Harof, director of franchise development at Workout Anytime. “We’ll do a search within 10 to 15 minutes of a prospective location to ensure there’s enough population there to support it. We’ll also look at income levels and the growth of the overall area to make sure it’s somewhere people are moving to.”

State and Local Regulations

States have very different ways of regulating industries and businesses overall. Before expanding into a new market, a franchise needs to make sure there is a realistic and efficient way of overcoming any regulations that pertain to it. 

These could include definitions of certain aspects of the business, shipping and storage of products, employment benefits, equipment restrictions and more. Franchises that require a brick-and-mortar store have a few more details to sort through than those that don’t.

For example, doggie daycares, which are a highly demanded service in a booming industry, have to consider local regulations before opening into new states. “Every municipality has different regulations and zoning requirements,” said Mike Gould, Founder of Hounds Town USA. "Some states are more antiquated than others, especially when it comes to their regulations for a pet care business. Laws made in the 60s and 70s were never really updated, so our daycare and boarding business model that didn’t really exist then has some extra bureaucracy to get through in those places to make it work.”

Competition

Another factor to consider in any new market is saturation and how much competition already exists in that area. Software and simple Google searches can determine which brands in a specific category already exist in any geographic location. Franchises can do a little more digging to better understand their competition's customer numbers and exactly how much share of the market they have. Even if an area has a lot of competition, that doesn’t mean they have a stronghold.

Ideally, though, franchises want to try to find markets that match their demographics and aren’t overrun with competitors just yet. 

“We look for underserved markets,” said Harof. “Can we go into markets with gyms on every corner and still succeed? Absolutely. But if we can find one that doesn’t, then the chances of being successful faster are much greater.”

Real Estate

A franchise can’t open without a location, so ensuring that this new state has the right real estate inventory to match the franchise’s needs and overall growth goals is imperative. More “common” spaces such as retail and dining may be easier to come by, but if a franchise model requires a more customized space, it will either need to ensure there is ample inventory or look into building. Both paths come with their set of unique challenges.

“Finding real estate is our top priority when a franchisee comes on board,” said Harof. “We try to take over existing spaces because construction costs are very high. We work with local brokers to find space, usually within a shopping center with other businesses aiming for our target market. Landlords are normally happy to have Workout Anytime because we can draw 200 - 300 additional people to their other businesses daily.”

Many businesses require larger or more non-traditional spaces such as a storage facility or industrial warehouse to build out what they need. Inventory for these spaces is lower than other traditional office or retail space, so franchisors should be aware of what’s available.

“Real estate inventory is a challenge,” said Gould. “Our daycare and boarding facilities need a certain size space, normally warehouse or industrial, which is a unique need. It’s hard to predict when these spaces will or won’t be available, and they’re not as easy to come by as office real estate.”

Opportunities in a New State

Yes, there are challenges when expanding in a new state, but franchisors usually find that the work is worth the reward. New markets bring new opportunities when it comes to brand awareness, growing a customer base and attracting future franchisees.

“The biggest opportunity is creating that positive brand recognition, which isn’t already established when opening in a new state,” said Cheryl Ackley, franchise development specialist with TWO MEN AND A TRUCK*®. “This is done through community involvement efforts and several marketing initiatives with the guidance and support of the home office team.”

Moving into a new state and improving brand awareness also exposes a franchise to a whole new pool of potential franchise candidates.

“It’s amazing how many of our franchisees become franchisees because they were members of the gym,” said Harof. “Going into new markets is great for us. We always promote the franchise opportunity alongside a new club opening so we can start to attract potential franchisees.” 

Despite the challenges and restrictions, many franchises are always working to expand into new states and see huge opportunity in their untapped markets. 

“Obviously a state has to have the right population and target audience for us,” said Gould. “But I don’t believe that there is a city or area of our country that isn’t in dire need of our services. We’re growing leaps and bounds in every market, and we plan to keep going.”