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Franchise Entrepreneurs - Buying Yourself a Job?

March 19, 2007

A Franchise Opportunity - What Is This Exactly?

The best way to describe a franchise is to imagine it as a business that is delivered to you in a box at a certain cost and after approval. When you open the box, you will find marketing materials, contract templates, business plan templates. In short, everything you need to get legally started with a business, usually in an exclusive territory where only you can operate and sell.

Why Are Franchises Popular?

Franchises are popular. Research was conducted by the International Federation Association and the National Franchise Association recently. In 2005, there were about 850.000 franchises operating in the U.S. alone in which around 10 million people are employed. Sales volume accounts for about 40% of all retail sales with around $1.5 billion.
At this point, I do not really know if there is any business left that has not been using the franchise model already. You can find restaurant franchises, cleaning services and even dental practices. Most popular franchise categories still seem to be the restaurant, deli and sandwich franchises.
Franchises all have a couple of things in common that makes them attractive to potential business owners:

1. Fast start up utilizing a working marketing system;
2. Peace of mind because it has been proven to work already;
3. Exclusive territory (in most cases).

There are known disadvantages as well. For example, a lot of franchise companies do not give the level of support they promise. Some of them can be overly strict with their branding and marketing requirements, which may be disappointing for a creative entrepreneur. And there is obviously the work pressure, especially when operating a franchise that requires staff as well.

Cost and Benefit Analysis - Quick Overview

Costs
The convenience and peace of mind comes at a certain price. Let's look at some typical startup fees.
The average investment level is around $250,000 excluding real estate. This is the average investment requirement for about 80% of the franchises.
A typical example is Rising Roll sandwiches who requests a total capital investment of $300,000 and a net worth requirement of $500,000.
So called low cost franchises can start with a capital investment typically in the range from $15,000 - $40,000.
A typical example is a video business card distributorship that comes at a cost of around $15,000.

Benefits
No exact figures are known but I found the following indications based upon figures researched by the International Franchise Association. They found that the annual gross income for a typical franchise ranges between $75,000 - $125,000 (before taxes).
With an investment level of let's say $250,000 you can expect a pay back time of around 3 years.
It is clear that becoming a franchisee requires cash to sustain yourself and the business in the first years. It also requires some sustained hard work to get the business off the ground so to speak.

Franchise Entrepreneurs - Are You Capable

An survey among Franchisors (by Franchise 500 and published in Entrepreneur Magazine Jan 2007) has revealed they are looking for the following characteristics in a person to be considered to become a successful franchisee.

1 - People Skills

94% of the franchisors that were interviewed mentioned this to be a key skill. Not really a surprise. Even if you do not have staff, to move goods in most industries, you need at least some communication skills.

2 - Coaching

If you are unwilling to learn or accept proven formulas and methods it is very unlikely that you will become successful. Reinventing the wheel is not what makes franchisees successful. A view shared by around 87% of franchisors that were surveyed.

3 - General Business Skills

This is an interesting one. The percentage agreeing with general business skills being a requirement to become successful is 86%. Interesting because you would expect proven methods and systems to be in place already. Not so. In order to make it all happen, you need to study financial information, cash flow, balance sheets on a regular basis. You need to make decisions on your own regarding additional investment, marketing strategies, staff and so on.

4 - Access to Capital

If you do not have any money to get your business off the ground, it's better not to start at all. Careful planning is the key combined with a preparedness to live a frugal lifestyle for years to come.

Conclusion
Buying a franchise is a popular thing to do nowadays but it never appealed to me. It always felt like buying your own job. The amount of investment combined with the amount of work to put in simply does not match with my personal lifestyle. I would rather invest a bit less and work less hours but with a much faster pay back time.
There are still plenty of opportunities with proven track records over a couple of years that are suitable for lifestyle entrepreneurs and that will generate good income for years to come.

DISCLAIMER
The testimonials presented are applicable to the individuals depicted and may not be representative of the experience of others. The testimonials are not paid and are not indicative of future performance or success.