Maybe you’re unemployed, underemployed or underpaid. Maybe you were expecting to be promoted this year and it didn’t happen. Or maybe your current job bores you to tears and you want out. Using any one of the above listed situations as justification to open a franchise (i.e., start your own business) has been done by many a now frustrated and bankrupt franchise owner. So, is your franchising decision based on the right motivators? Here are six important questions you need to ask yourself before delving into the franchise world:
1. If I could find a better/higher paying/rewarding job, would I still want a franchise?
Mitchell York, a franchise owner himself, wrote about his franchising experience in a book entitled Franchise: Freedom or Fantasy. In Mitchell York’s Entrepreneur interview, he argues that people who are simply burned out by the corporate world are not ready to start a business. In fact, if these people only desire a better and more satisfying job, a job that pays them what they deserve and into which they can easily transition, then these people need to just find a better job.
2. What’s the franchise’s profitability?
Let’s say you are really excited about owning your own business and are tired of lining someone else’s pockets with your hard work and ingenuity. Now it’s time for you to look at the most important aspect of any franchise: its profitability.
This may not be easy to find out if you’re buying a franchise from the company headquarters itself but there are websites where current franchise owners are trying to sell their businesses. For example, the site bizben.com shows various franchises for sale by current owners, their annual revenue and their net income. Here’s a good example of a coffee franchise for sale in Irvine, CA:
This ad is a real eye-opener into the franchising world. These coffee shop owners are stating how much it cost them to initially build the business ($350,000) as well as how much they gross per year ($264,000). What is most enlightening is the 13.6% profit margin of this business; this may indicate high property taxes, employee costs or other expenses that really eat into the revenue. The bottom line here is, if you were given $36,000 and told to live in Irvine, California (where an average two bedroom apartment costs $1,800/month) for a year, would you do it?
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3. Do I have 5 years of capital to keep my franchise afloat?
The buy-in on some franchises is quite low; sites like FranchiseClique and FranchiseOpportunities offer franchises for as little as $10,000. You might already have that kind of cash, but remember that the buy-in on a franchise is just the start; repairs, updates, licensing, incorporation, employees, systems and insurance will also take their share of your cash hoard.
By most estimates, your franchise will not turn a profit for at least five years, so you should multiply your first year’s investment costs by five. Now then…do you have that kind of capital to invest? Alternately, does your franchise qualify as an SBA approved franchise in case you need a business loan?
4. How much training and help do I need and will realistically get?
Franchises are often marketed as turn-key businesses that are supported by the parent company so they can’t fail. While the parent company is vested in your success and will help train you to run your franchise, you still need to be financially savvy, have basic management skills to oversee employees, know the legal requirements of your state and city/township regarding incorporation, alcohol and zoning, and have some business advisors on hand to help you when things get tough.
The International Franchise Association offers many useful resources for would-be and current franchise owners. After all, even having a brand name like McDonald’s won’t help you when a customer is burned by your coffee.
5. Am I comfortable leveraging my workload?
As a freelancer, you are used to getting work done your way and in your own timeframe. As a corporate employee, you are probably given predictable tasks that are your sole responsibility. However, as a franchise owner, you will be working with employees and all these people will come with their own unique ideas of when and where the work, and what work, gets done.
Furthermore, you’ll be unable to watch your employees full-time (hey, you gotta sleep too) and will eventually rely on assistant managers. Thus, if you live by the motto “It’s my way or the highway”, you’re not going to make it as a boss. If you’re a perfectionist with borderline OCD, you might also not get rave reviews from your underlings.
6. Do I have the stamina?
Owning a business is like having a baby. Just like with any new baby, it will keep you up at all hours, it will spit-up on you, and it will make you miss the days when you could actually take a shower. And yet, people continue to become business owners (as well as parents). For many, the thrill of owning a business beats all the late nights of peeling potatoes or wondering who keeps flooding the toilets.
Despite the power outages and water heater explosions, you watch with pride as your business flourishes and grows, as your customers give you rave reviews, as your profits grow year by year until you’re (gulp!) looking to add another store to your business. But if you’re not prepared for disaster to strike, if you simply want to earn a good living and get your two weeks of vacation every year, if you like leaving your work at work and not worrying about it all weekend, then franchise ownership is not for you.
The Bottom Line
Franchises are a great introduction into the world of business and can be quite profitable for those owners who are willing to stick it out and who have a grand vision for their business’ future. But the road is not easy and is probably not intended for those who’ve never even owned a lemonade stand in their younger years.
If you like thinking about profits and revenues and have always been wheeling and dealing for extra cash, then franchising may be the next big step for you. If you’d rather have some peace in your life (and better personal hygiene too), then franchising may be best left alone as someone else’s personal calling.