Franchising presents people the opportunity to invest in business models from restaurants to shipping services and more. In 2017, there were 745,290 franchise establishments in the United States. While franchises make up large brands that people know, individual or multi-unit operators work hard as small business operators tied to a larger strategy. The following tips will help you decide if franchising is a smart move.
1. What You Should Be Getting
Investing in a franchise can be one of the best moves of your life to gain financial freedom or it can wreck you. In addition to paying a franchise fee, a monthly or yearly percentage of revenue for brand marketing and improvements, build-out costs, and tenant improvements after the 5 year mark to re-fresh your space, you should focus your attention on this as an investment because there are many other choices you can make when choosing where to put your hard earned money or risk of borrowing money to make a dream come true.
One of the major benefits beyond brand recognition and a strong leadership team at the helm of the overall strategy, is buying power.
Food and other supplies are expensive. As a small business owner, your buying power for supplies is often limited to the places most solo-preneurs shop. A strong franchise will focus on distribution and buying power to improve profit margins, so you make more money, ideally, than having a burger joint on your own. When franchises operate in more than one state, it is important to ensure that suppliers can carry the same menu items to retain brand integrity at the customer level. Imagine having a great tasting bun in one state and a mediocre one in another. The goal with franchises is to have a repeatable process with the same quality.
Technology is also critical to a successful business operation. Systems like REVEL offer operators the ability to set enterprise menu items, inventory management, and ordering to keep stores running in addition to labor modeling. Franchises today must invest in technology partnerships at the enterprise level and offer individual operators great systems to run their businesses. If you don’t see technology as a key piece of the offering, run. Tech is in and it is here to stay.
Coaching is also critical to help your business stay afloat. From mandatory human resources training to sales training, strong franchises offer strong support to the operator to ensure their success. Having a conversation during the discovery phase is a great way to see if this is truly a partnership or a way for someone to make $30-40,000 off of you with little interest in seeing your success. There are plenty of horror stories out there of franchise promises and little support, so ask the hard questions and trust your gut if it says walk away. A good franchise is a good partnership.
Stability is key. It will take most operators anywhere from 2-5 years to pay off their initial investments depending on the model they choose. If you see this model as something that is not sustainable or threatened by similar fads popping up, think twice before investing. If you see the leadership team has not figured out their core concept, profitability, distribution, and brand promise, think twice or see if there’s an opportunity to join their leadership team to provide the needed guidance if you believe in the brand concept enough for the long-haul.
Marketing that delivers results. You will typically pay a fee each month or year for marketing. The parent organization will hire marketers to help you open your restaurant, start a social media program, learn what offers and when you can offer them to drive sales, and support from the top with corporate programs, messaging, and targeted ads to drive engagement. If you look at their marketing program and know you can do it better, question the fee you are paying and if they can truly drive sales from their marketing efforts to keep your business going. On the local level, you need to engage your community as a business leader with the big brand name behind you. Local marketing has always worked to build a strong following of loyal customers because people like the product and they like you for caring about their needs from school parties to non-profit fundraisers. You can also see if the franchise has a social responsibility program and match for funds donated to non-profits. Franchises of the future need to value social responsibility as a core pillar of their business model to connect with next-generation consumers.
Location, Location, Location services. Ideally you will want to have a sound real estate team or access to retail brokers who know the landscape and who will offer unbiased opinions. While the franchise should know what real estate plays are best for their brand based on market research and pro formas, you can also reach out to local commercial real estate representatives early on to put the word out to find the best locations. When you become more aware of how franchises work, you will see a trend of stores that always seem to operate alongside each other in strip malls. If you notice what works well for your competition, consider a similar placement for your location.
2. What’s Your ROI?
Under franchise law, the franchiser cannot tell you how much you will make. Some may provide you with a range based on similar locations, but none will tell you what you can make. This makes it critical to ask the hard questions and to gain access to other operators to speak with them directly. A good program has no issue with putting you in contact with happy operators. When you meet with an existing franchisee operator, you can ask questions like:
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Tell me how the experience is going for you?
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What support is going well and what is missing from the program?
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Would you open another location or multiple locations with this program?
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Are you happy with the money you are making compared to the initial investment?
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Have your sales grown or decreased, and if so, by what percentage since you’ve opened?
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Can you give me a range of what you think I will make as an owner-operator after expenses, including loans, if I want to pay myself a starting salary of $85,000? Is this doable or do I need to lower my salary?
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When do you expect to be debt free and turning a true profit?
3. Where You Are in Life
Running a business is not an easy task. The ability to think like an employee goes out the window when your employees call out sick on weekends forcing you to drop everything or close your doors disrupting the business promise you’ve presented.
Financial issues must be resolved before taking on more risk. In America, small businesses fail at high rates after the 5-year mark. What this means is this…you took a loan out for your franchise business opportunity, you received sales revenue to cover the bills, 5-years later you paid off your debt while earning a modest salary, and the industry changed or the franchise group changed resulting in declining sales and a brand that was a fad.
Most people in the franchise business who are not buying themselves a job and who are true investors do so in stable concepts and across a region, controlling an area as multiple-unit operators or exclusive franchisees for a state or county. This has its benefits because operators can share resources more efficiently and can close down stores that are not performing vs. one store as they have a portfolio to manage.
The systems in place within a sound franchise offer hardworking, customer focused people the ability to do well, provided they learn fundamentals of management, human resources, leadership, and business.
Overall, franchising presents numerous opportunities to business savvy individuals who are looking for the right support, a fun experience, and ability to serve people doing what they love. For more resources checkout the International Franchise Association and their annual conference to see if franchising is right for you.
