The Nuts and Bolts
January started with a real celebration of the economy, business and franchising! Interest is high and activity is really breaking records. More people are curious about franchise business ownership than I have seen in a very long time. I had the good fortune of being interviewed for a popular magazine as well in January. They asked the key questions most curious professionals are asking today. Here is a segment of the interview that answers the basics:
How do you get into the franchise business? What is the process?
Everything begins with learning. In order to get into a good franchise business, you need to learn about the opportunities out there that match your goals, skills and quality-of-life requirements. The research process can take as little as a few months to years, depending on your commitment and if you enlist help along the way. Once you get yourself educated on the many categories franchising is happening in, you can begin narrowing down your search by the sectors you are interested in. Then, finding out the top performing companies, the ones poised for real growth. You can enjoy free assistance with this process from firms like ours, who specialize in educating and advising potential franchisees. There are many other resources out there to help you learn. The IFA website, magazines like Entrepreneur 500 and websites like BeTheBoss.com and FranchiseGrade to name a few.
With a short list of good brands, you begin “due diligence”, a process that takes about 8 weeks to complete. In that process, which is guided by the franchisor representative, you will be given all the information and materials you need to study to learn all you can about the opportunity. Here, folks often use the services of a franchise attorney to review legal documents, called the Franchise Disclosure document and the Franchise Agreement.
Next, you are given the opportunity to talk to franchisees both past and present. You can ask anything you like to insure you get the whole story. Franchising is very transparent, so long as you know where to look for info! At the end of the day, you will want to know certain things: How much money can I make and in what time frame will I break even, what will the quality of my life be with this business in it, and what do I do each and every day. All of this and more should be clear to you before you get into any business.
What are the typical costs to entering the franchise business?
Typical is a hard word to use, because there are so many variable, but one way to look at it is this – basically three categories:
- Simple retail; like a subway or a small gym or massage business. Typically 1500- 2000sq foot , minimum wage workers, average costs between $150 -$300K. Usually multiple units and can be semi-absentee.
- Sophisticated Retail -like a Meineke Muffler, an Urgent Care facility, a Day Spa. Typically 2500-6,000 sq ft, skilled workers, average costs between $300k - $750K. Can be semi-absentee
- Home Based or Small Office Based – like a Tutor Doctor, 1-800-Water-Damage, mobile service business. No retail space, low overhead and very good margins. Typical costs $75K – 175K
So, I often say opportunities range from about 75K – 750K with the need for approx. 20% liquid for a cash injection. The rest financeable. There are of course other models like Master Franchising and other types of retail, like large hotels. This model covers the more typical and recognized opportunities.
Are there any franchises easier to get into? If so, what are they?
You may find newer franchise systems have a less rigorous process to become a franchisee, but new or old, the stricter the process the better. You want to know the franchisor knows their ideal franchisee and screens applicants against it. You want to know they believe in your ability to be successful because you fit the mold of their top performers. A loose process or worse, a hard sales process is a huge red flag. I have found, the stronger the system, the more selective the franchisor is about awarding territories.
How much can a person make from a franchise business?
I’ve seen very average people build significant million dollar and multi-million dollar businesses through franchising.
I’ve seen senior level execs replace their income through franchising, and home-based folks earn multiple 6-figures.
Back in my corporate days, I’ve seen good people lose everything.
That’s the spread.
The bottom line is that you need to be clear on your financial goals and find a business that can produce revenue within your target. It’s not a crap shoot, there is a structured process to investigate these opportunities that will give you all the info you need. Then, once in the system, follow the model. The biggest cause of failure in franchising, I believe, is deviation from the proven systems. Second to that is being underfunded and cutting back on marketing and advertising when the lean times come.
Why are franchise businesses more profitable than others?
There are many factors that influence profitability. First, the business model. Typically, service businesses have better margins than brick and mortar businesses. But you also have to look at volume.
Cash management, of course, plays a role as does expenses and expense control. A benefit of a franchise is massive buying power, so that you have a better chance at keeping costs in line than if you were out on your own.
Then there is raw talent. Does the business require sales skills? What percentage of the business is dependent on those skills, and can you bring them to the table or hire someone who can.
Again, we see the “fit” between you and the potential business is critical. That’s what most of my time is spent on. There is no limit to the number of outstanding opportunities that are out there. It’s a game of narrowing down the options based on the business characteristics important to you, your skills, and your time-commitment.
What are some tips you can share with people who want to start a franchise business?
Read all you can about franchising. A great book, one that I give to each of my clients is “The Franchise MBA” by Nick Neonakis.
Know Thyself – ask yourself the critical questions about your transferable skills, your needs, wants and desires out of a business.
Get help – there are many avenues for support along the way. Companies like The Franchise Advisor and others are available for coaching and advise at no charge. Franchise financing professionals will walk you through your options without any commitments. There are many skilled lawyers and accounts that specialize in franchising. Stick with specialists because franchising is full of nuances.
Learn about the FDD. This is the legal document required by law to outline each franchise offering. It is full of useful information, although it is written in legalese an can be cumbersome to get through.
I’d say the best tip is get professional assistance and don’t ask Uncle Tony who used to have a franchise or friends at a cocktail party what they think. Most often, you will hear words of caution and an occasional horror story that never tells the true picture.
How long have you been advising people about franchises?
My franchise career started in 1988 and since 2004 I’ve had the good fortune of being able to educate and advise people on how to discover and evaluate top franchised businesses with the greatest opportunity for wealth-creation and quality of life improvements.
What are some realistic goals people should have about the franchise businesses?
I think a realistic goal is to expect to get all their franchise questions answered by creating a team of a: franchise advisor, franchise attorney and franchise funding specialist.
Then, to have all the brand specific questions answered by a thorough investigation of: the franchisor, the FDD and franchisees experiences
Ultimately, you will want to find out that the business has a great product/service, cooperative franchisee-franchisor relations, positive growth, happy and successful franchisees and a strong, clean brand reputation. When you find this combination, you know you are on to something!