How much money can I make?
This is the first question most people ask when they’re looking at a franchise investment. Over the years, I’ve spoken with over a thousand prospective franchisees. This is one of the most common questions I’ve been asked. And it’s a hard one to answer. It depends on the type of franchise, royalty rate, the location, the cost of labor, the liquid capital they have available and many other factors.
What is interesting though is that some prospective franchisees don’t seem to care what the answer is. They’re enamored with a specific franchise. Their friend owns it or they read an article about it. More commonly, they’ve eaten at that restaurant and the food was great or they noted how busy it was on a Saturday night. I call this a consumer driven mindset – The desire to invest in a franchise based on an inherent consumer experience.
This is a very bad reason to invest in a franchise. And I believe it’s one of the biggest reasons franchisees fail. For the inexperienced business owner, there are many new sights and sounds that are available when looking for a franchise. There’s lead generation websites promoting certain franchises, brokers promoting other franchises and the franchisors themselves who are promoting their brands.
It’s easy for you to get caught up in the marketing hype of a specific franchise, especially if you start your search with a consumer driven mindset related to the personal experience you’ve had with that franchise.
To truly answer the question of money, the first step is to take yourself out of the consumer driven mindset and transition into an investor mindset. This is the only way for you to truly focus on unit economics and profitability.
Now, how do you figure out how much money you can make?
- Look for an Item 19 and review it carefully. Looking at the information a franchisor discloses is a good start, but more importantly you need to look for missing pieces of information. How many franchise locations did they disclose compared to how many are open?
- Talk to franchisees. The easiest way to find out if they’re making enough money is to ask them directly. But if a franchisee is unwilling to tell you, ask them these three questions: a) How long have you been a franchisee? b) Would you recommend this investment to a family or friend? And c) If you had to do it all over again, would you?
- Pay an accountant and lawyer. Paying an expert 3rd party for advice doesn’t cost a lot when you think about the total investment of both money and time you’ll invest in a new business venture. Don’t take free advice. Free advice is worth what you pay for it. Spend the money.
A franchise investment is first and foremost an investment. There should be an ROI. You should have the opportunity to make more money than you would in another venture or a job. Get out of the consumer driven mindset if you are looking at investing.
So what if the burger tastes good. That’s not the most important factor for investing. If you can’t make money, be a customer not an investor.
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