Why Should I Buy a Franchise? It’s helpful to have a clear vision of why, before we try to deal with how or what. To get started we need to examine our individual reasons for being self employed in the first place, so that our appreciation of the stakes is crystal clear. Simply wanting our own business is not enough. We need to define the specific end result that we want to achieve by owning a business. This exercise makes it very clear to us why we should give the business our all.
Very few people make a living pursuing their passion in life. For most of us, our career is a vehicle that allows us to gain access to the things in life that are truly important. Any business can have its frustrations, but they need to be taken in the right context. If you have a clear vision of what your business can help you achieve for yourself or your family, it minimizes the impact of the parts of the business you may not enjoy as much. After all, what element of business isn’t worth enduring in order to reach your goals? As long as what you do is legal, moral and ethical, there are no obstacles that aren’t worth overcoming in pursuit of your desired outcome. So we need to determine what our specific goals are and in order to do so, we should think back to what motivated us in the first place.
Your motivating factor might be a desire for more time with your family, better control of your destiny, more money or pursuing a specific passion. You should identify whatever the primary driver is for you and then spell out the accompanying goals that go along with it. Let’s assume you want to own your business so you can have control of your time and be a better father/mother/husband/wife. If you sketched out the specific objectives that went along with that it might look like this:
- Be involved in my kids lives on a daily basis
- Make sure my kids get the best possible education
- Spend more time with my spouse
- Interact more with my extended family and friends
- Give back to my community
- Continue to make a good living
- Pursue my own personal enrichment goals
These are the types of things that will drive you every day. By keeping these goals in front of you and enjoying the benefits that come with attaining them, you will not only be able to suffer the slings and arrows inherent in business ownership; you will actually enjoy the opportunity to face them! Additionally, knowing what you want your life to look like will enable you to find a business opportunity that will support those objectives instead of making you compromise them.
Once your goals for business ownership are clearly defined, you can start the process of identifying the right business to launch. Now I will admit, for some people a franchise is not the best choice. If you find it impossible to color within the lines, you may not be a good fit for a franchised business. For the real mavericks among us, there are Licensed Business Opportunities which can be tricky to evaluate, but there are some very good ones out there and they offer the readymade business model of a franchise, but few if any strings attached. However, most people are going to benefit from the structure of a franchise and will achieve far greater success by being in partnership with an organization that specializes in a certain field of endeavor.
In the course of my business, I am often asked “When I buy a franchise, what do I get for my money?” The short answer is “a business model.” A business model is a framework for creating economic value, in other words, it’s a system for making money.
Many first time entrepreneurs think of the investment in a franchise as a purchase of physical property, when what a franchise represents is intellectual property. The capital equipment, inventory, furnishings, fixtures or the cost of building out the location is part of any business, be it franchised or not. The real value in a franchise is that you get a fully formed, proven business model. An effective business model is the difference between success and failure in a business.
The old maxim that most businesses fail because they are undercapitalized is only half true. Most of these businesses wouldn’t have been considered undercapitalized if they would have had an adequate business plan. Every year thousands of well capitalized startups with brilliant ideas for a product or service fail. This not for lack of money, it is because they eventually burn up all of their cash while trying to develop a system for delivering their product into the hands of a paying customer. All business models are initially perfected by trial and error – this is a very costly process that most small businesses cannot afford to live through. That is why so many private startups fail where franchised concepts succeed. The franchisor has already footed the costs associated with perfecting their business model, so the franchisee can skip right over that phase of developing their business.
The expenses associated with perfecting a business model will almost always eclipse the cost of paying a franchise fee. The average franchise fee is about 30k. Most starts up waste more than that in advertising costs alone while they experiment with different marketing strategies. The advantages of having the learning and cost curves reduced to a fraction of the “learn as you go” method, are very significant to say the least. Having a realistic expectation of what it will cost to launch your business is really the best way to be sure you will have enough funds on hand to get to your cash flow break even point.
The other cost component of a franchise is the royalty. This is a fee paid for on-going support which of course includes continuous improvement of the business model, access to vendor discounts, product R&D, marketing and advertising programs, etc. Typical support royalties are between 5% and 8% of revenue. This fee usually pays for itself due to the savings realized when the franchisee purchases goods and services for the business at below market, national account rates. Additionally, most franchisees will experience much higher sales than they would as a private company – greatly in excess of 8% higher – because of the franchisor’s well designed marketing strategy.
A franchise may not be right for everyone and they are certainly not all created equal, but a good business model can lower the risk factor and accelerate one’s potential for long term success.
As always, the key is finding the right match between the model and the operator.