Are you thinking about whether you should buy a franchise? As a Franchise Owner myself, I know intimately how massive and life transforming a decision buying a franchise can be. I In this post we are going to talk about the Pros and Cons of Buying a Franchise. Let's jump in!
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Did you know that in 2018, there were over 759,000 franchise units that generated over 760 billion dollars in sales and employed over 8 million people? I own 2 franchise locations that are 2400 miles apart from each other. In this post we're going to have an honest conversation on whether you should buy franchise.
Deciding to invest in a franchise could be the biggest decision of your life. I'm going to cover exactly what I believe you must know about owning a franchise from a franchise owner’s perspective.
Before we get started, go ahead and drop me a comment below and ask me any question that you have about the franchise process. I do my best to respond to all the comments personally.
1. Why do you want to buy a franchise?
Are you looking to replace your full-time income and leave a full-time job or a corporate job and own a franchise to completely support your family? Are you looking to just create an additional income stream and have something for retirement or just create a part-time income and find somewhere that you can invest your money in? Or are you looking to build wealth and try to get rich from owning a franchise?
When my wife and I made the decision to invest in our first franchise, it was going to be a significant investment. The reason why we were deciding to invest in a franchise is because I eventually wanted to leave my work as a financial advisor and we wanted to do something that was going to put ourselves in the best position to have an existing income stream that was already going, so that way, when I made the transition, we would be in a really strong cash flow position.
Deciding why or why you might want to buy a franchise will literally affect every other decision that you make along the process. It will decide what type of franchise that you invest in, whether you're going to wind up being an absentee owner or be active in the business, what industry you're going to get involved in, are you going to get involved in a service-based industry. This is going to decide everything for you and it's really important to be very clear about what your objective and why you want to own a franchise business
2. Show me the Money
The average franchise costs about $250,000 to get up and running. That's a lot of money!!
Look, that is a very important number to think about. Franchises can range from $10,000 all the way in the millions of dollars to get open. Obviously, if you're looking to open something like a Taco Bell or McDonald's or KFC or Burger King, you're going to be on the higher end. That SHOULD scare you because people have lost a lot of money investing in franchises, investing in the wrong type of franchises, investing on the wrong brands, and not running them well.
Money is something that you really have to think about. Ultimately, your financial situation will really determine what direction you can go with franchises. Most franchisors have a net worth requirement. They require you to have a certain amount of liquid money as well as a certain net worth in order to even qualify to be able to purchase one of their franchises. There are cleaning businesses that are as little as $10,000 to invest in. Those are likely going to have less of a net worth requirement. But keep in mind the lower, the cost of the investment for the franchise, the more effort and work you'll likely have to do on the front end in order to get that franchise up and running. So, if you invest in that cleaning franchise that as an example, you'll probably have to hit the ground a network and door knock and prospect and do all these things in order to get customers for that franchise business. Now, if you don't have any money to invest, then check out my post on How to Buy a Franchise with No Money Down.
The last thing to cover about the money part, is that investing in a franchise is a really, really serious decision. As I mentioned before, there are people who have lost a lot of money. People have lost their life savings investing in franchises because they didn't know what they were getting into.
3. Buying an existing location versus a new location.
This is something really important to consider. If you buy an existing location that already has customers, already has sales, is already generating a profit, then the likelihood of you succeeding goes much, much higher. Because you have all of those things in place and you're usually paying a price for the business that's based on the amount of profit that it's generating. So, as long as you don't come in and screw something up or there's not major competition that opens up, then it's usually going to lower your risk and put you in a better position in succeeding.
Now, when you're talking to a franchise company, you should ask them if they have any existing locations for sale. Oftentimes, they're not going to volunteer that information, because if you think about what a franchise company is really interested in, mostly is they want to get new locations opened up. When franchisors talk a lot about growing same store sales or same unit sales, then they're really focused on increasing the sales for existing franchisees. That's when you can get the idea that a franchisor really has the best interest at heart for existing franchises.
The other option is that you can invest in a new location. Obviously investing in a new franchise location carries a higher amount of risk associated to it because you don't have any customers, you aren’t established yet, you don't have any staff, you don't have any processes or operations.
Now, there are benefits to opening up a brand new location. You might be able to lock in a really good location for your business that's in a really great area. There might not be any competition in the area that you're looking to open your franchise in. So you really have to weigh the pros and cons of opening up a new location or buying an existing location.
When my wife and I opened our first franchise location, we were very nervous about it. I mean, it cost around $300,000 to get that first location opened. $300,000 is a big investment. So, I was really strategic about the actions that I took and the way that I thought about the processes of us opening, and we were able to become profitable our second month in business. This was HUGE and helped to alleviate some of our fears and nerves that we had around the franchise business, and made us feel a lot better about the decision that we made.
If you're interested in knowing how I actually got the business profitable in 60 days, I documented that entire process and created a Free 7 Step Blueprint to how I became profitable in 60 days. I'll drop a link for that below too, it's totally free, make sure you grab it. It'll be really helpful whether you own a franchise or a business that isn't a franchise, because those steps are applicable to any type of business.
One thing to mention about existing locations and the immediate cash flow that they provide is that there's also another really big benefit in potentially buying an existing location. And I'm going to share that with you and step number 6, so make sure you stick around for that.
The most important aspect to you succeeding in a franchise, or failing in a franchise is you. When I say that, think about it. Starting from the process of selecting the companies that you are looking at and possibly investing in, to the questions that you ask, the process that you go through, the due diligence process, the research that you do, the location that you pick. Ultimately, the constant throughout all of that is YOU. If you have a track record of not being able to make good decisions, then that will affect your ability to succeed as a franchise owner. When you're putting up a lot of money to get involved in a business, then you really need to do a self-analysis and a gut check to really make sure that you are going to be up for the challenge.
Another thing to consider is what your skill sets are.
It's really important to make sure that you're aligning a possible franchise opportunity with the skill sets that you currently have. Now, does that mean that if you're planning on opening a food franchise that you have to know food and be good at food? Absolutely not. My background is in motivational speaking and financial advising, and I have two juice bar businesses. I had no background in that whatsoever, although I was really passionate about a healthy lifestyle and making juices and smoothies and different things like that. What I did have a strength in was the financials of a business, operations, recruiting talent and managing that process. So I felt comfortable in owning a franchise because I'd be able to follow the system.
Another thing to think about is, can you handle your lifestyle potentially getting disrupted?
Franchises and owning a business is filled with challenges. If you own a business right now, then you know what I'm talking about. A crazy story that happened was, the day before my wife and I were getting ready leave and move across the State, in the middle of the night, someone broke into our business along with a number of other businesses in our shopping center, shattered the windows, made a mess, it was a crazy situation. Stuff like that may not happen often, hopefully that never happens to you, and it might not ever happen to you, but our life was completely disrupted for those 2 days. Then my life was completely disrupted for the next few weeks handling the insurance claim and the process and all the things that happened as a byproduct of that break-in.
If you're used to the normal comfort of a corporate job where once you leave your job, you get to put it aside and you're not disrupted at home, then thinking about investing in a franchise is something that you have to take a really deep look at. It's possible and likely that your normal and current lifestyle will be disrupted in some way. So the question really becomes, are the rewards that you'll get from that franchise worth the lifestyle disruption that will occur? When I say rewards, I don't just mean financial rewards, because even if you make the same amount of money that you're making in another job or in another business, if you have the freedom and flexibility to be able to set your hours and spend more time with your friends and family, or go on more vacations, then that's a benefit that you really can't attach a number to, it's a very intangible benefit.
It's important to note that there are likely going to have to be some sacrifices made if you do own a franchise. It's not just a life of glamor, there are a lot of real challenges. It's not anything that's sexy, and it could take you a number of years before you see the fruits of your labor really materialize.
5. Follow the System
The entire point of buying a franchise is that you are buying the name, the process, and the system. You have to be a person that is okay with following the rules and the system. If you're someone who doesn't like to be told what to do and doesn't like ‘authority’, or if you're someone that doesn't traditionally follow the rules and likes to do things on your own and thinks outside of the box, then maybe buying a franchise isn't for you, maybe you should start your own business instead.
Again the point of buying a franchise is following the system. If you don't follow the system and you start doing things on your own, it's possible you can get in trouble with the franchisor You can get fined or even sued. I have known franchise owners who started to break the rules with a franchisor and they refused to stop doing it, and got themselves in a bad situation with the franchisor. Then things just aren't good from that point. So, it's really important to make sure that you have the ability to follow the system, follow the process. If that's not something you're interested in, then you should not buy a franchise.
Now, that doesn't mean you can't be creative and use your own ideas, talents and skill sets. Obviously, you're owning your own business, so every day, you're going to have to use your strengths and your skill sets in order to make sure that that business is successful....but you're doing that within the operations of the system and the processes that are used. What I would recommend is talking to existing franchisees within the system and asking them about how flexible and how open the franchisor is to new ideas that franchisees come up with and implementing them into the business.
6. Exit Strategy
The last thing that you should consider when thinking about buying a franchise is your exit strategy. In thinking about your exit strategy, I'm a firm believer that you should be committed to whatever you're doing. When people aren't committed, that's oftentimes when they fail, but it's important to think about an exit strategy with a franchise because you're owning a business, and number 1, you're not going to live forever, and number 2, things could go wrong and changes could happen in your life where you either want to sell or get rid of the business. Think about what that looks like and start with the end in mind because that will help determine what decisions you make in even buying a franchise or in how you run the franchise during the time in which you buy.
Do you plan on receiving an income for as long as possible with the business and then selling the business at that point or passing it down to a child or grandchild or a family member? Do you plan on getting the business profitable or growing profits and then trying to sell the business? Think about what your exit strategy is with the business, because again, that's going to drive your decisions that you're making. What happens if the business isn't going how you planned it? What if you don't like it? What if you aren't making money? These are all things that you have to think about when buying a franchise so that you can be prepared and equipped to handle those situations.
I would highly recommend taking a look at either existing locations within that franchise that you're looking at or within that industry and see what they sell for, what are they priced at? What are they priced at based on the profit margins that they're making? What are they priced at based on how much it costs for those locations to build out. Oftentimes, you'll be surprised that a lot of franchises have poor resale value. So if you plan on only having the franchise for a few years and selling it, you put yourself in a position where you're losing a lot of money. This is one of the things that is incredibly important to think about-your exit strategy. The more research you do on the front end, the more you're going to be prepared on the back end.
So, guys, thanks for sticking it out with me all the way to the end. Go ahead and share it to someone who could benefit from it, and again, make sure you leave me a comment on any of the franchise questions that you have, and I'll make sure to do my best to respond to them personally. I'll see you in the next one.