What is franchising?
Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
Why a franchise? What can a franchise do for me that I cannot for myself?
The FFS answer is speed to scale. However, the answer to this question resides in the buyer’s evaluation of the “value” that the franchise delivers. This might be the focus of an investigation of the potential franchisee. Regardless of whether you have industry or business ownership experience, you can purchase most franchises because they offer complete training, comprehensive support from the home office, a proven business system, and a product or service that has proven itself to be popular and in-demand. One could think: if 100 other business owners are conducting the exact same business, following the exact same formula and they have made it, as a franchisee I might have an easier time making it than I would if I went it alone?
How do I choose the right franchise?
Deciding which horse to ride can be a daunting one, but the process for figuring this out isn’t as hard as it might seem. At the FFS we suggest starting with our class on franchising basics, this is designed to give you plenty of questions to think through. At the FFS we suggest that you don’t start with the widget. In our opinion, buying a business because you like the taste of the food isn’t the most sophisticated strategy out there. Click here to Sign up for a Free Webinar
How much will this franchise really cost?
The FFS answer: for Retail Concepts a solid range is $200,000-$400,000 and for a Service Concept it is $70,000-$200,000. Having said that you will find ranges from $4,000 to $1M; much of the lower investment franchise options are sales pitch, if it seems too good to be true it probably is. Below we have compiled several questions we get around money and franchising.
Common investment related questions:
- How will this franchise really cost?This question will take several sources to get an accurate answer. The FDD – Item 7 will give prospects a range for initial investment; at the FFS we would then take that information and call several franchisees to verify what they spent. We would think about the cost to open, working capital dollar amount – the number of months to cash-flow break even, etc. compare their information to your market, rent, labor cost, etc. to determine what your actual cost and range might be to open your location.
- How much will I need in operating capital? We want prospective franchisees to think about the cash reserves they will need to cover losses after opening the franchise until it reaches the breakeven point? You’re not going to have any customers when you open, but you will have expenses. When a businesses revenue or sales exceeds the expenses to run the business, we call this cash-flow break even. The business owner no longer needs to feed the business money to keep it alive. We suggest sufficient allowance for this factor in your plans and, when in doubt, guess high.
- How much extra do I need to cover living expenses while I’m starting my franchise?This is typically covered by a spouse’s income in the franchise world of investing. This is also a common area of shortfall that can cause heartburn for the investor. We suggest that you carefully calculate the money you are currently living on, plan it out with the whole family so everyone is on board with the plan and required belt tightening. You can also include an owner’s salary in the business plan projections as well as the business loan with the bank.
- How long will it take my business to reach break even?This is one of the most important money-related questions you’ll need to answer. The short answer is it depends on the business model, some businesses naturally break even quickly and others take longer. It’s no fun to feed extra money into a business to cover operating losses, but that’s the reality in most startups. The best way to understand the answer is to ask existing franchisees how many months went by before they no longer needed to feed the business money. They will all know the answer to this question, trust me.
- How much of my total investment (including capital reserves) do I need to have in cash?This answer can range from 0 to 100 percent, depending on the franchise. There’s no right or wrong answer–just make sure you know your numbers ahead of time, good rule of thumb – more cash is better.
- How much money can I make in this franchise? You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
Can I have a business partner?
This varies depending on the preferences of the franchisor but yes, most concepts will allow you to have a financial partner who may also be an operating partner, if you choose.
How can I be sure I won’t lose money?
No one can be 100 percent sure; there are no guarantees in business. Although the majority of franchisees are satisfied, successful business people some do suffer financial losses. If you hear a franchise company state any kind of earning claim, this should be a red flag for you and seek alternative information sources on that franchise. If you hear a claim about a company that sounds too good to be true, it probably is. Your success can come only through your hard work. Success or failure ultimately depends on you.