Researching A Franchise Part One: Where to Start and WhyPublished on February 24, 2019
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You’re probably thinking that you can do this on your own. You’ve made other investments in your house, car, stocks maybe even Bitcoins. But franchises are different. Houses and cars are easy. Just like franchises you buy what fits your needs and what you think will work best for you over time. Franchises are long-term investments and require your leadership to be successful. But it is more complicated than you think. Get help from a Certified Franchise Investment Analyst at no cost to you.
Why is FIT so important:
Some years ago I worked with a client who had big dreams and very little money. He had been very successful in his corporate career but was sick of politics. He decided to buy a failing existing franchise for about 25%of the first owners cost. The business was producing about $300,000 in revenue but had shown losses under the first owner’s direction. It was easy to see why the owner wasn’t making money with the cost of goods sold about 20% more than the industry average. With a little investigation, it was obvious that the owner was not following the franchisor’s systems. Digging a bit more we found that she had “inherited” the responsibility for running the business when her husband decided to take a job after running it for a couple of years. Her resentment was palpable. My client decided to buy it anyway after doing much research. Six years later the business was producing $3.5 million in revenue at an 18% profit before taxes, interest, and depreciation. The owner was driving his new Ferrari to work one day when a semi truck crushed his car and killed him. We helped him sell his business for $1.8 million the building was sold for another $1.2 million. Not a bad gain on his $50,000 investment in the business.
The business you select should be a vehicle to get you to your destination. As an example, if you live in the East and want to go to Denver you can fly, drive, bicycle, or walk. Each method will get you there but at very different speeds. If you need to be in Denver within 2 weeks your options begin to narrow; only the plane and driving will work for you. Apply the same thinking to the franchise business you are buying.
Will it take you to your destination? Ask yourself a few simple questions:
- Will it makes the amount of money I need in six months, 1 year, 2 years, in 5 years?
- Will I work the hours I want?
- Can I afford the business in dollars and emotionally?
- Does my family understand the business, and are they supportive?
- Are my skills, talents, and abilities consistent with what it takes to be successful?
This is a critical time for you and your family. Be sure to involve them throughout the process and be sure they are getting their questions answered as well as getting answers you want.
Too many times have I seen the male partner in a relationship get excited about buying a business only to go home to their spouse who responds, “Not with my money you’re not” when he shares what he wants to do.
While on the topic of money it’s time to talk about financing your purchase. Because franchises are designed to run on systems the goal is to achieve consistent results each and every time. From the brand, to look, to service, to the product, to profit margins and net profit consistency rules the day. Banks love franchises. Mainly because they know franchises bring consistency. So you can get an SBA guaranteed loan from many banks for as much as 80% of your purchase price including working capital. But that’s not your only source. You may be able to borrow from family. You can get an asset-based loan using your home as collateral if you have equity. You can use your 401K by creating a self-administered by a 3rdparty to pay for your business without any tax implications through a company that specializes in these types of loans.