For new franchisees, investing in a franchise
frequently begins with a consumer
experience. A prospective franchisee enjoyed that brand’s food, had
a need for a service or heard positive reports about a company from
their family or friends.
The challenge is that using franchise services or eating at a
franchise location is far different than investing in a franchise.
There are often significant differences between a good consumer
franchise and good investment franchise.
First, great food and a good customer experience matter – to
both the consumer and investor. It is the number one priority for
the consumer but should not be the basis for an investment.
A good number of prospective franchisees begin their search
for a franchise investment
as consumers. This mindset continues throughout the due diligence
process and does not shift to the investor mindset as quickly as it
should. This can lead to unfortunate outcomes when investing into
an unhealthy franchise system.
Instead of remaining in the role of a satisfied consumer,
the first and primary objective for an investor is a return
on the investment. This requires that a prospective
franchisee thinks and acts like an investor.
A healthy franchise investment requires two results; a
fair return on the initial investment and strong revenues per year
to generate an acceptable wage. The initial
investment needs to be recouped over the course of an initial
franchise term. This can be described as the annualized cost of the
investment. Profits from the business need to be large enough to
support the annualized cost of investment. This calculation is
simply the initial investment divided by the number of years on the
initial term. This does not include renewal terms as there can be
material differences upon renewal that may prevent you from signing
a new agreement.
Since franchisees are active investors (i.e. you work and
operate the franchise), the investment must also provide a
reasonable wage, or market adjusted salary. This should be
comparable to the cost of paying a manager or other employee to
perform the tasks you would perform in the operations of the
Some very well-known consumer franchises may not be healthy
investment options. Due diligence is not effective unless
reviewed as an investor. An investor is not waiting in
line at the drive-thru, buying lunch or dinner every few weeks,
shopping in the store once a month or calling to schedule an
appointment or service once a year.
A franchise investor works daily in the business attending to
customer needs. This commitment deserves a reasonable return on
your investment. If you are an individual that is considering a
franchise investment, the first step is to move away from a
customer mindset and focus on the franchise investment and return
that an investor will achieve.
Get in touch with Jeff Lefler at
email@example.com or 800-975-6101 to
see how your system measures up.
Visit FranchiseExpo.com where
you can search for opportunities by industry, investment level
and area while researching the franchise industry as a whole using
its free resources.