Make the Right Decision, and Don’t Get Stuck in a Money Pit!!
Investing is a franchise for the first time is a huge commitment, and it should be done with razor-sharp prejudice and meticulous research.
Please read and implement my advice on choosing franchises, because it could save you thousands and perhaps even millions of dollars in the long run!
1. Speak With Several Franchise Consultants and Don’t Fully Trust Any of Them!
Franchise consultants are useful in recommending franchises that could possibly match your preferences and business experience, but they make a living by selling franchise programs to people like you. Clearly communicate with them, and tell them exactly what types of business interest you. Some franchise consultants will try to persuade or push you into purchasing franchises that will pay them the highest referral commissions!
Always take this into consideration while you are investigating the franchise opportunities that they recommend. Perform your due diligence to determine if their suggestions will fit your expertise, budget, and preferences.
2. Speak Directly with Other Franchise Owners to Gauge Their Level of Satisfaction and Success
Often, a franchise consultant will put you in touch with a franchise recruiter or area developer who works at the franchise’s corporate office.
Some recruiters are amazing salesmen, and they will paint colorful pictures of wealth and paradise with their slimy words in order to convince you to buy their snake oil. Recruiters RARELY give you the reality behind the actual experience of owning their franchise because, of course, their compensation is usually based on how many people they recruit instead of how successful their recruit becomes.
This compensation structure differs in some franchises, but do not believe everything that these bug-eating reptiles tell you.
Instead, contact at least 10 CURRENT franchise owners who are actively running the franchise because they will give you a better understanding of the day-to-day reality of owning the franchise.
After speaking with several franchisees, you might discover that owning that franchise will involve a greater scope of work and capital than what was communicated by the recruiter.
3. Carefully Read the UFOC Sent by Each Franchise
Franchises are required to deliver these thick, god-forsaken, prospectus-like booklets to you whenever you investigate a franchise opportunity. They contain many pages of detailed information about the operating costs, territory sizes, marketing methods, and relevant data about the franchise.
Remember, these UFOCs usually contain AVERAGES, and they are only word-for-word accurate when it comes to outlining their franchise fees, training costs, and royalty fees. To obtain realistic numbers, contact the current franchisees whose phone numbers will be listed within the last pages of the UFOC. They will always give you more accurate expectations without the marketing fluff of recruiters and UFOCs.
4. If the Opportunity Feels Right, Run the Numbers
If an opportunity appears enjoyable and achievable, run the numbers and determine your return on investment.
First, determine how much you will be investing to get it up and running, and also figure out how long it will take to achieve positive cash flow. Basically, calculate the payback period, which is the period of time it takes for your franchise to pay off or to fully return your total investment. In a simple example, if you invest $150,000 in a franchise, and it delivers a net income of $75,000 per year, then the payback period of this franchise is 2 years.
Plus, you must also calculate your break-even point. This is the point at which your operating costs and expenses are equal to your income, and it is important because you must be selling or moving product or performing services above your break-even point in order to stay in business and become successful. The formula for a break-even analysis is:
Break-Even Point = (Fixed Costs) ÷ (Price of Subway Meal – Variable Cost of Subway Meal)
For example, if you own a Subway franchise, and your fixed monthly costs are about $7,000, you divide that by the price of the meal (about $12) minus the cost of making the meal (about $4).
($7000) ÷ ($6 – $3) = 875 meals per month to break even
This formula will help you price your products or services while setting realistic goals and expectations. Normally, prices will be predetermined by the franchise, but you will still have to know this for your marketing campaigns.
Also take into account the franchise’s monthly advertising fees and royalty fees. Some franchises will charge you a marketing or a monthly support fee, which can vary greatly, depending on the franchise. Plus, they will also charge a percentage of your gross income, normally 3-6%.
These fees can eat up all your profits during the initial start-up months, and you must make sure that your profit margins are wide enough to account for them. For example if your average profit margins are only 20% of your gross sales, and your franchise fees eat up 8%, that’s already 40% of your profits going to the franchisor. Don’t invest in a franchise that has a strong “pimp hand”, and do all the necessary calculations before making any commitments.
5. Involve Your Trusted Family Members and Friends
If you are married or engaged, it is important to gain the support of your wife or fiance. Many successful franchises are family-owned, and spouses can make great employees and business partners.
If you have a trusted friend who has similar interests and goals, it might be a good idea to create a business partnership with him or her to gain a helping hand and distribute the risk evenly. Many franchises are very capital intensive, and they require investments of over $120,000 during the first year alone. It might be a good idea to have a partner to share both the workload and the investment.
6. Conduct More Research and Analysis – Porter’s 5 Forces Analysis and SWOT
Just because you counted your beans and feel all warm and fuzzy about the new franchise, you won’t quite make millions just yet. It could make alot of sense on paper, but will it really make dollars in the real world?
The way to determine if your franchise will make money in your neighborhood is to investigate its competition and determine whether or not your franchise can establish and maintain a long-term competitive advantage.
Consider the number of direct competitors are within the territory of your franchise, and conduct a Porter’s 5-forces analysis to determine if your franchise can sustain profitability.
This analysis takes into account the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the amount of competitive rivalry within an industry, and the threat of substitute products. Since the details of Porter’s 5 forces can be found in every major search engine, I will only discuss the 6th force, which Dr. Evan Scheffel described as the Effect of Supplements.
Most of Porter’s forces are pretty doomsday-ish, and they deal with the rise of threats and power that can benefit or be detrimental to your business. The 6th force deals with the appearance of supplementary products or phenomena in the industry that can improve your company’s bottom line.
For example, if you own a gas station franchise that catered to electric cars… the advent of a supplement such the creation of an affordable electric family sedan would be a positive force that would bring increased profits and customers to your business.
In addition, performing a SWOT (strengths, weaknesses, opportunities, and threats) analysis of your franchise would also be important to sum up position in the marketplace.
7. Inquire About Financing Options Given to Franchisees
Some franchises have such proven systems that their franchisees receive preferential treatment by lenders. Depending on your credit history, franchises can link you up to banks that will lend anywhere from $25,000 to $200,000.
Achieving the perfect debt-to-asset ratio in any business is important. You don’t want to tie up all of your liquid assets in your business if it does not offer much liquidity, and you also do not want to finance your entire business with debt if interest charges eat up all of your profits.
To have a happy, healthy cash cow, you must determine the precise mix of cash and loans to use. Fortunately, most franchises will have recommendations and guidelines to follow.
8. Attend Discovery Day, and Investigate the Support Staff
Finally, you’ve expressed an extreme interest in a franchise opportunity, and you are ready to knock on doors every day to sell drapes, window covers, and blinds to people. Or perhaps you will be hiring teams of janitors who will clean movie theaters and office buildings. Or maybe you will be selling new and used video games at a shopping mall to prepubescent skaters.
Before you take the ultimate plunge and send in the first check to pay for the franchise costs and the training fees, you will have to attend a “Discovery Day” session at the franchise’s corporate office.
There, you will meet the support staff, the president, the recruiter, and everyone who will be training and guiding you through this wondrous experience of owning and managing your franchise.
Make sure that they provide you thorough support such as peer-to-peer mentoring, online best-practice directories, technical support for software and machines, customer service, marketing support, and reselling options for your territory. Again, don’t believe everything that they tell you at discovery day. Cross-reference it with the accounts of the franchisees that you call, and call at least 10 franchisees to get a realistic perspective.
Remember, do not let anyone pressure you into making this decision because it is an important and expensive one to make. If anyone tries to push you into a franchise, perhaps they have more to gain than you do. Always look for bedbugs between their sheets, and you’ll be amazed at what you’ll find!