To buy or not to buy (a franchise), that is the question

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To buy or not to buy (a franchise), that is the question

When clients are considering investing in a franchise system, there is one overarching question – Can you be more successful with the franchise than you can without it? If you think you can, go for it. If not, don’t. If you are not sure, keep doing your homework.

The questions that follow are all variations of the same aforementioned question.

Does the franchise system offer assistance in your areas of weakness – does it plug your holes? 

In your job, you probably focus on one, maybe two, areas. Your experience is probably relatively linear – sales, sales manager, VP of sales, etc. (or whatever your variation is for your career). Now, all of a sudden, as a business owner, you are responsible for everything. Are you good at everything? Probably not. How you handle the tasks/areas you aren’t good at will probably determine the success or failure of your business. Many franchisees use proven franchise systems – marketing, accounting, management – to fill in their gaps and help them overcome their weaknesses. In addition to the system, they rely on the training and support they will receive from the franchise to teach them what they need to know to be successful in their chosen business.

Does it allow you to capitalize on your strengths?

Similarly, many franchises have proven systems that can “turbo-charge” the areas at which you are skilled. Those systems, when operated by a person who is talented in those areas, can empower the business to achieve previously unreachable heights. In most franchise systems, there are franchisees hitting revenue targets that would surprise most casual observers. It is the case of right worker + right tool = spectacular results.

Is the support the franchise offers worth the investment (up-front and ongoing) you are required to make?

Many people focus on the up-front franchise fees or the monthly royalty payments as an expense, but a good franchise system will provide a return on investment for those fees. They know how and where to invest the franchisee’s money to get the biggest bang for the buck, and they often get a volume discount because of the scale of their operations. If you have to advertise anyway, wouldn’t you want someone helping you that knew what they were doing?

At the end of the year, can you make more money using the franchise system or going on your own?

Again, in this area, people focus on the royalty as an expense. “Can you believe they want 8% of my revenue every month?” Think of it this way: you pay your household bills with your net income. If you can make $100k net income while paying an 8% royalty, isn’t that better than making $50k net income but avoiding paying that pesky royalty? Not saying you will or you won’t, but you have to look at the numbers from a bottom-line perspective, not from a single line-item perspective.

When it is time to exit the business, can you get more for your business (or is it easier to sell)?

When people are looking at buying a business, many are looking for a safe, predictable option, especially baby boomers who are transitioning from a job but are not ready to retire. When they know that they can rely on a proven system, with proven training, a long track record, and other franchisees for support, they often feel better about making a move into the entrepreneurial arena. Does it always work out? No, but the probability for success is probably higher. Conversely, when a prospective owner is looking at a business that is little more than the personality and will of the current owner, it can be intimidating and worrying to consider whether a new owner can replicate the success of the current owner. Do you have the same skills, contacts, and experience as the current owner? Can you replicate the same results? With a franchise system, in theory, the strength of the business is supposed to be in the system, not the owner. That is why you will frequently find a wide variety of backgrounds at a franchise annual meeting – accountants, sales guys, teachers, engineers, and others. They have all invested in a system that was designed to work for hard-working individuals who wanted to own a business.

One more thing – banks are often more favorable to lending money for successful franchise businesses. Not always, but often – for all the reasons detailed above. That’s good news to buyers and sellers alike.

In conclusion, for many people, owning a business is a very personal endeavor, an outgrowth of their lifelong passions and dreams. For others, it is simply a tool to achieve financial and lifestyle goals. For the dreamers, it is unlikely that a franchise will meet their needs, even those that are fairly flexible and unrestricted. But for the others, the practical utilitarians, it can be a (somewhat) predictable, repeatable vehicle to achieve their goals. Look in the mirror, see who you are and what you want, explore your options and choose wisely. There are many different pathways to successful business ownership. You just have to find the one that works best for you.

Scott Underwood

Scott Underwood holds a Bachelor’s degree from Ball State university. He has experience with various aspects of small business and entrepreneurship. He enjoys working with entrepreneurs in various stages of business, from feasibility to start-up to growth. His ability to consult with clients and ask the “hard questions” helps provide a different perspective to business owners and opens new avenues for success. He also has industry-specific experience in the franchise industry.
Scott Underwood can be reached at sunderwood@isbdc.org.
Posted in: Starting a Business

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