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Do you have the right personality to be a successful franchisee?

How To Buy A Franchise Show logo

How To Buy A Franchise Show logo

In this episode of the How To Buy A Franchise Show, internationally recognized franchise author, speaker and consultant, Dr. John P. Hayes, asks: “Do you have the right personality to be a successful franchisee?”

Listen to this week’s podcast for the answer. Continue Reading

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Why is the franchise fee so expensive?

Initial fee for franchise

Prospective franchisees always want to know: “Why is the franchisee fee so expensive?”

Initial fee for franchiseAll franchisors charge a franchise fee, a lump sum of money that franchisees are required to pay upon signing a franchise agreement and prior to attending the franchisor’s startup training course. Typically, these fees range from $10,000 (sometimes less) to $50,000 (and occasionally even more). These are one-time payments.

By collecting the money upfront, franchisors avoid teaching franchisees their “secrets” and then trying to collect the fee afterwards. Franchisors also do not negotiate the franchise fee — franchisees pay the same amount, although this year’s fee may be different than last year’s fee.

Are franchise fees too expensive? 

Almost every franchise prospect tells me in coaching sessions, or at my seminars, that franchise fees are too expensive. But I say, “Compared to what?”

A good comparison would be the cost of starting the same business without a franchisor. In other words, you’re on your own. No one is going to give you a checklist of what to do, and you won’t have the opportunity to attend a training session where you can learn how to operate the business. Let’s take a look at what the costs might be.

Coming up with the idea

To start a new business you need an idea. With a franchise, the idea already exists, and, depending on circumstances, it’s been tested and hopefully proven to work. What’s that worth? Lots of people get stuck at this stage of business development. Even if you’re good at coming up with ideas, how do you know if the idea is any good?

Let’s assume you’ve got a great idea. How much will it cost you to develop the idea into a business?

Consider the cost of research, licenses, permits, making contacts with suppliers, hiring employees, finding a location, marketing, customer service, back office support, employees, etc. And we’re not talking about getting it all perfect. We’re just talking about getting started.

But getting started is also the most dangerous period for new business owners. You may not know the type of location you need until you’ve opened a couple of units and discovered which location works best. You may not know the type of employees you need, or how to train them properly, until you’ve hired and fired a few!

Now consider that a good franchisor provides startup guidance and solutions that should keep you from making costly errors. A good franchisor tells new franchisees how to select a location and how to hire employees who will be able to do the work of the franchise. What’s that worth?

The cost of attracting customers 

Every business needs customers. How will you attract them?

You’ll need to develop a marketing and advertising plan, possibly including print ads, television commercials, and social media. What’s your advertising expertise? You can hire an ad agency, but have you done that before? Have you negotiated media fees before? Good franchisors already know how to attract customers and they share that know-how with their franchisees. What’s that worth?

Do you know how to operate the business?

What’s your operating plan for your business? Who will do what, when and how?

Who can you rely on for equipment, supplies and inventory? You won’t have any buying power, so you’ll need to be prepared to pay full price.

Who will you call when you’ve got a problem? Good franchisors provide an operations manual with guidelines, recommendations and requirements to help you build your business efficiently. They also provide training and support staff to assist you not only during the startup of your business, but for as long as you’re a franchisee.

Again: What’s all that worth?

Franchise fee may be a bargain

If you add it all up, will you pay more or less money to startup an independent business? Suddenly, the franchise fee may look like a bargain.

You’ve also got to keep in mind that an established franchisor has buying power and that saves franchisees money. If you buy one ad in a newspaper you’ll pay full price. But if the franchisor is buying dozens or hundreds of ads annually in a newspaper, franchisees benefit from the discounted pricing. Same with equipment and supplies, including inventory.

When you compare total costs required to a franchisee fee, you will almost always discover that the franchise fee isn’t expensive after all. Of course, with an independent startup you can pay as you go – you may pay $100,000 over six months’ time to get your business off the ground. But you won’t feel the pinch of having to pay a $50,000 franchise fee in one lump sum.

Profit for the franchisor? 

In spite of the benefits to be garnered from a franchise, many people still aren’t sold on paying an upfront fee. Some are concerned that “The franchisor is making a huge profit from the franchisee fee.”

To which I say: “Is that a fact?”

I’m not being sarcastic. Is it a fact that franchisors earn huge profits from franchise fees?

Find out!

How is the franchise fee spent? 

Before you buy a franchise, you can ask the franchisor to show you how your franchise fee will be spent. Ask for a line-by-line itemization.

The franchisor will say, “We spend the money to train you.”

Great! But drill down. “How much of the fee is spent on training? And what, exactly, are you paying for? Are you paying the instructors? Paying for materials? Paying rent for the training center? Do you pay for breakfast and lunch?”

The franchisor will also say, “We provide you with support as you are getting started.”

Keep drilling down for info

Great! Again, drill down. “Show me what that costs, please. Who provides the support? When and how? What does it cost, exactly?”

Whatever the franchisor tells you, ask for more explanation. Franchisors know exactly how the money is spent, and a good franchisor has no reason to keep that information from you.

How much is re-invested in you?

You may discover that most of your franchise fee is re-invested in you through training and support. Bottom line: You’re paying for an education that will help you succeed in the franchise business. The information is specific and tailored to the brand that you’ll be operating. Now: What’s that worth?

And what if the franchisor makes a profit from the franchise fee? The franchisor tells you, “Twenty percent of the fee is profit.” Is that a reason to object to paying a franchise fee?

Should the franchisor make a profit? 

Before you answer that question, think about this point: If a franchisor doesn’t make a profit, how long will that franchisor exist to provide you with the expertise, guidance, knowledge, training and support that you need to succeed as a franchisee?

Do you really want to join a franchise company that doesn’t make a profit on its sales?

It’s true that some franchise fees are expensive, but your job is to figure out the value of the franchise fee. And by the way, some franchise fees are not worth paying, and that’s why it’s important for you to do this homework.

Need help investigating franchise opportunities? You can rely on two best-sellers to help you: 101 Questions to Ask Before You Invest in a Franchise, and Buy “Hot” Franchises Without Getting Burned

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The Wisdom Of A Franchise Resale. When You Don’t Want To Build One From Scratch!

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Who else wants to turn a $150,000 investment into a $2-million sale?
Now before you answer . . .

·      It didn’t happen over night.
·      It didn’t happen without a lot of work and effort.
·      And it didn’t happen by accident.

Their plan was to sell the business

In fact, when Rich and Sonja Heaton of South Carolina decided to invest $150,000 into a small-town sign-making franchise in 2001, they did it with the idea of eventually selling the business for big bucks.

“People don’t seem to set up their businesses to re-sell them,” explains Sonja, “but that was our purpose for going into business, and for buying a franchise.”

The lesson of the franchise resale

Many people don’t think about the resale value of franchises. And many would-be franchisees don’t think about buying an existing franchise instead of building one from scratch. But today, the Heatons can teach you about these lessons, as well as others related to buying, building and selling a franchise.

After operating (but not owning) a jewelry store and a convenience store, the Heatons decided to look at franchises. And even though they had no experience in the sign-making business, that’s what they decided to buy.

What would attract a buyer?

“It didn’t matter what we bought,” explains Rich. “It could have been a waffle house, or whatever. We wanted to be the best we could be, and we knew that if we maintained our profitability, owned our own facility, and we developed the brand, we knew that combination would eventually attract a buyer.”

Oddly, it wasn’t easy to find a sign making franchisor that was interested in a small town location (population <9,000). Eventually, the Heatons discovered Signarama, based in West Palm Beach, FL. “Their franchise system, and their support, is unbelievable,” says Sonja. “I tell people all the time that I would go back and open another Signarama versus doing it on our own because they nurtured and supported us all these years.”

Aligning with a strong brand

All these years amounted to 14 before the Heatons decided to sell their business and . . . well, look for another one! ? “It’s smart to align with a strong brand,” says Rich, and that’s why the Heatons believe they will eventually buy another franchise.

Will they start one from scratch, or buy an existing franchise? That remains to be seen, but they are sold on the wisdom of a resale.

 

 

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8 Reasons To Consider A Lease For Your Franchise

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When you’re buying a franchise you probably need money – most buyers do – and numerous lenders are lining up, especially at franchise expos, to be of service. One option that buyers often overlook is leasing, and it’s worth your time to check out the possibilities.

If you’re investing in a franchise that includes equipment, such as a POS system, or ovens and appliances for the kitchen, or if you need a truck, such as a van, you may be better off leasing than borrowing. Leasing equipment is the equivalent of “renting” the equipment, which means that you won’t take money from your working capital to buy the equipment.

With a lease, you get to use the equipment and pay monthly, and at the end of the lease you can acquire the equipment, or upgrade it and roll the package into another lease.

Here are eight reasons why you should consider a lease when you start a franchise:

  1.       Hold on to your working capital. Cash on hand is a huge advantage.
  2.       Claim a tax benefit. Section 179 of the U.S. Internal Revenue Service Code allows you to write off a percentage of a monthly lease payment.
  3.       FICO requirements are usually lower for leasing. There’s less risk with a lease so credit rating requirements may be lower.
  4.       There are no prepayment penalties. If it turns out you’ve got extra cash on hand, pay off the lease without a penalty.
  5.       You can choose the terms: 24 to 60 months. This helps you keep the payment amount in line with your cash flow.
  6.       If you’re expanding your business by opening a second unit, you may be able to use the first business to guarantee the lease and not have to sign a personal guarantee.
  7.       Securing a lease may be faster than securing a loan – especially if you’re leasing an equipment package or a vehicle that’s recommended by a franchisor. Leasing companies like franchise deals.
  8.       Closing costs are minimal: almost always less than $500.

There are few disadvantages to a lease. Of course, you still need to provide personal financial information and provide a variety of documents to the lender, but this is all the easier when you’re buying a franchise. Savvy franchisors develop relationships with leasing companies to expedite franchise sales and development.

You’ll find more information about franchise financing in my Amazon best-seller: 12 Amazing Franchise Opportunities for 2015. Chapter 2 is titled Funding Your Franchise Acquisition.

 

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Prospective Franchisee: Do You Have This Skill?

How To Franchise Your Business | Best Franchise

Recently I wrote about What To Do Before Buying A Franchise and I suggested a couple of questions that you could ask yourself before deciding if franchising, as well as business ownership, made sense for you.

I pointed out that it takes skills to operate a business or a franchise and I also said that franchisors will teach franchisees the skills needed to succeed in business — of course, that’s relative to the franchisor and the situation. Remember that not all franchisors are created equal; some do a better job than others when it comes to training and other operational issues.

The Must-Have Skill

But then I said there’s one skill that can’t be taught. In fact, this skill will make or break your success in franchising. Without this skill you do not have much chance of succeeding in franchising and, in fact, without this skill you should not invest in any franchise.

What’s the skill?

The ability to follow direction!

Sounds simple, doesn’t it? But not everyone possesses that skill.

Is THAT A Skill?

In fact, some people would argue that that’s not a skill. Call it what you want (it’s a skill!) if you don’t have it, you’re not cut out for franchising.

If you’re a regular reader of this blog, or you’ve read my books, or you’ve heard me speak about franchising at a public forum or over the airwaves, you know that I’ve described franchising as a series of systems.

It’s All About Systems

Systems lead to success in business and especially in franchising. There’s a system for marketing. A system for sales. A system for operations. If a franchisor doesn’t have these systems, do not invest in that franchise!

Even if the franchisor has the systems, no matter how good they are, if you don’t have the skill of following direction, do not invest in that franchise, or any franchise!

Franchisor May Say “No”

If you do lack the skill, hopefully a franchisor will discover it and not accept you as a franchisee — but, once again, not all franchisors are created equal. Some need the money that comes from selling franchises, so they may let you slip by and hope for the best.

If you cannot follow direction (or you just don’t want to), how do you expect to succeed in a franchise? If you’re the type of person who wants to reinvent the wheel, or you need to ask Why? when you’re told to do something, franchising isn’t for you. Franchisors know that — now you do, too.