Can I make money in franchising?
On the surface, it is a great question. But it’s not the question most people are really asking! There is clear, irrefutable evidence of franchise businesses that actually make money and are truly profitable investments. A glance at many current franchise disclosure documents (FDDs) will back this up, as will a few calls to active franchisees. You don’t have to look very hard to find the answer to this question.
The real question most prospective franchisees want answered is actually a composite of four questions:
The intent of these questions is to gain as much clarity as possible in the transition.
Prospective franchisees want to learn to go bear hunting while understanding how to avoid stepping on a financial bear trap. This is the crux of the entire franchise vetting process and why we created Franchising: Decoded & Demystified. Our aim is to help growth-oriented potential business owners answer these four key questions themselves so that they fully understand the transition.
A New Set Of Instructions
But to do so, you will need a new set of instructions to use in evaluating franchise concepts. The answers to each of these questions will vary widely from person to person, and from franchise concept to franchise concept. That’s why we developed our Franchise Evaluator, which you can find toward the end of our guide, Franchising: Decoded and Demystified. It will help you find your own answers and empower you to make the most informed decisions possible. However, before we demystify franchising, it is important for us to consider a little more context.
- Can I make money in franchising?
- Franchising Vs. Independent Businesses
- Can I keep my current income source while I build a business, so I don’t take a wrecking ball to the life I’ve built?
- The Seven External Factors & The Seven Internal Factors
- What Does A Growth Opportunity In Franchising Actually Look Like?
Franchising Vs. Independent Businesses
“Why Not Build From The Ground Up?”
The first question people ask themselves is:
“Do I want to be in business for myself?”
For people with the entrepreneurial drive in their DNA, the answer is an easy
The second question, however, can be far more challenging to answer:
“Should I start a business from the ground up?”
Many entrepreneurs choose the ground-up route, generally trading on a specific skill, intelligence, or passion they have for the professional path they have chosen. People who build businesses from the ground up also realize that trial-and-error is the best teacher, yet usually the most costly. Starting a business from nothing typically carries a greater level of risk, but of a different kind than risks associated with franchising. For example, is there a market for the business you’re about to start?
Franchise Vs Independent
What Kind of Business Owner Are You?
Other people who are interested in business ownership would prefer not to reinvent the wheel to conserve their two most precious assets—time and money. These entrepreneurs would rather leverage a business operation template with a support structure: as in a franchise concept.
Neither type of entrepreneur is wrong, or inherently better or worse. It simply comes down to understanding what you want the business to do for you, your role, skills, tenacity, and how you want to go about setting it up.
Franchising and Business Ownership
A New Base of Knowledge
For entrepreneurs who go the franchising route, the overarching reason, based on all the research we have done and the conversations we have had with thousands of interested candidates, is that business ownership requires a completely new base of knowledge and application of new skills than those that currently made them successful.
And if the goal is to build a successful business while mitigating the risks to the life they’ve built, they come to realize it will only be possible by following an existing franchise template thereby reducing time to market and ramp to profitability while avoiding foreseeable errors. Of course, success is not guaranteed, but franchised businesses have a frame of reference and allow you to speak with people who were in your shoes and made the leap. It can feel like there is far more help, support and, most importantly, a knowledge-base available to people who are evaluating a franchised brand.
Business ownership requires a completely new base of knowledge and application of new skills than those that currently made them successful.
There Are No Riskless Businesses
While it is true many franchise concepts offer more resources and franchisee support than you will find when starting an independent business from the ground up, it is important to remember there is risk in every business concept, and no franchise concept is a guaranteed success. The wild card is the marketplace. The consumer does not care about the risk you’re taking. They only care about getting their needs met. Everyone considering a franchise, no matter how experienced, must be prepared for these risks, including failure—there is simply no way to avoid a certain level of risk.
However, with the right kind of research and planning (and careful application of our Franchise Evaluator), potential franchisees can maximize their chances for success.
DO UNICORNS AND “A FRANCHISE THAT CAN BE RUN SEMI-ABSENTEE” REALLY EXIST?
The people for whom we designed our guide face an interesting predicament when considering whether or not to become a franchise owner. These people are successful in their professional careers, have amassed a certain net worth, and are now seeking to transition either from, or alongside, a career into business ownership. If everything goes to plan, this should allow them to augment or surpass their current income and realize certain quality-of-life goals.
The challenge is limiting the impact, in this transition, on their current lifestyle
A New ‘Big Question’.
At this point, we will add another “Big Question” to the four from the beginning of our guide Franchising: Decoded and Demystified.
Can I keep my current income source while I build a
business, so I don’t take a wrecking ball to
the life I’ve built?
The answer is: “it is possible.” But it will depend on which concept you are considering and if it is set up to allow this to happen. Some systems actually strongly suggest you do just that, maintain your current income source until you have built your new operation to the point where it can sustain you. This is especially true in the case of a retail-based business during the real estate selection, build-out and initial hiring and training process. With other systems, however, you are all-in from day one.
It starts to get trickier when the business is actually open, operating and engaging customers, especially during the critical ramp-up period discussed earlier.
The way to answer this question for yourself is, again, the Franchise Evaluator.
Strong Operational Systems are the Key
What is in question here are mostly internal factors: the franchisee’s role and the nature of the franchisor’s operational systems. With well-defined operational systems, it is clear who is doing what, how what they are doing relates to what others are doing, what the objective is, when the output meets or does not meet these objectives, how the customers are handled, and how to maintain consistent quality in products and services.
Simply put, if it is possible for you to open, ramp up and operate your franchise business to profitability while maintaining your current income, it will be because of the sophistication of the operational systems in place. This will include everything that goes into employee training, the system’s operational efficiency, and the strength and approach of the franchise’s leadership team.
Simply put, if it is possible for you to open, ramp up and operate your franchise business to profitability while maintaining your current income, it will be because of the sophistication of the operational systems in place.
Franchisor Situation In Focus
There is a growing holding company of consumer service franchise brands who put an inordinate focus on building systems for semi-absentee operation. The nature of the business precludes franchisees from being at the center of the transaction or deeply involved in the operation at all. The franchisees’ role is to manage overall business growth functions.
A franchisor with sound systems should be able to talk you through exactly how the system works, why it is critical to the business, what the output should be, how it is evaluated, how output is measured, and who manages everything.
As previously discussed, a key area to investigate is the marketing and customer acquisition demands on the franchisee. Many franchise concepts require far more of your involvement for a longer period of time than you might anticipate. You should be able to find and talk to current franchisees who opened and ramped up their own franchise while holding down a full-time position, and you must rely on their experience for guidance. If you cannot readily find current franchisees who built profitability while keeping their day job, it may not be a realistic expectation with that franchise concept.
Semi-Absentee Does Not Mean Semi-Committed!
There is a huge ‘but’ here. We are talking semi-absentee with respect to your time, not your personal commitment to business success. No matter what time commitment you make, your personal commitment to business success must be 100%.
There are many systems wherein semi-absentee or part-time ownership simply is not possible or not allowed, and there are also many systems claiming it is possible, yet it simply is not possible from a practical, real world standpoint.
You must deeply probe a franchisors systems and all related functions to understand whether or not it is possible to open and ramp up around a full-time job, and consider what your own personal commitment will be to make this arrangement work.
The Seven External Factors & The Seven Internal Factors
Market Size – What population are you serving? Is your market broad, niche, or somewhere in-between?
Industry Trend –Is the industry developing or mature?
Product & Service Drivers –What drives the purchase of the product or service? Is it a “need-to-buy” or a “want-to-buy”?
Real Estate Needs – What type of location, if any, is needed to deliver the product or service? If real estate is needed, are the requirements flexible or stringent?
Competitive Climate – Are competitors a major factor in operating your business? If so, is competition sparse or saturated? Will it matter to your business?
Regulatory Climate – Are the business’s products or services regulated, or do they require licensing? Will you or your employees require special licensing? If so, is the regulatory climate strict or lax? Will this affect recruiting employees?
Brand Recognition – How well would potential customers recognize the brand? Is it unknown or well known? Is it emerging, fading or static? Does it matter?
Understanding each of these external factors will give you a rough, back-of-the- envelope way to know which factors are must-haves and which you can grant a little flexibility as you evaluate.
Also, if you identify external factors that do not work for you with respect to a particular category or brand, there is no reason to move forward to consider the internal factors. It is time to walk away.
The Seven Internal Factors of the Franchise Evaluator
Operation Model – How does the franchise business operate? How does it make money? Are financial performance representations made?
Franchisee Role – What role is the franchisee expected to play in operating the business?
Franchising Experience – How experienced is the franchisor at being a franchisor?
Leadership – What is the tenure, background, and commitment of the franchise’s leadership?
Franchisee Engagement – How often and how well does the franchisor engage franchisees?
Financial Health – In what kind of financial shape is the franchisor?
Operational Systems – How developed are the systems on which you will rely to operate your business?
In much the same way external factors shape the business in which you operate, these internal factors have a material effect on how your business operates. You will notice an interdependence between external and internal factors, in much the same way there is an interdependence between franchisor and franchisee.
Both sets of factors are important, and both are required to paint as complete a picture as possible.
How to Find Reliable Information to Use in the Evaluator
There are several publicly accessible sources of data that are detailed, reliable, and accurate enough to enable you to fill out your Franchise Evaluator and make an informed decision. You can use the following data sources to eliminate entire external categories at a time.
External Factor 1 Market Size
To find data on things like population, density, and demographics like household income and age breakdowns, there are few data sources better than the U.S. Census Bureau. We favor sources that use census data while making the information easy to access, as well as effectively organizing and visualizing it. Statistical Atlas is one of our favorites: https://statisticalatlas.com.
Franchisor Situation In Focus
A consumer service brand we’re aware of provides a fairly unique service for women. When examining the market, it is a rare example of a service that crosses cultural, generational and socio-economic lines. There’s a considerable market there.
Once you understand who your target audience will be, you can plug in the demographics factors, like age, gender, household income, families, and more, to get a rough sense of your base of potential customers. Using this information, in addition to things like your expected average transactions, the number of local competitors, and others, you can begin to predict rough figures for potential gross revenue. It is important to note that it’s unlikely your franchisor will be able to provide you this type of information in the sales process, as it can be deemed an “earnings claim” because you can use it to infer potential revenue. As mentioned previously, if any financial data is provided to you by your franchisor or by one of their authorized sales agents, it must be listed in Item 19 of the Franchise Disclosure Document (FDD), and it must be substantiated. However, a current franchisee of that system is free to tell you about their experiences with far less restrictions than the franchisor. Also, a franchisor may have you complete your own pro-forma financial statements to help you draw your own conclusions and set goals.
"WHAT DOES A GROWTH OPPORTUNITY IN FRANCHISING ACTUALLY LOOK LIKE?"
Illuminating the 12 Mysteries of Franchising and exploring concepts using The Franchise Evaluator are very useful tools for more complete understanding and deeper evaluation.
People still ask us ‘what does a growth opportunity in Franchising actually look like?’
We are now getting into the area of personal/professional observation, so take it with a grain of salt.
To us, a growth opportunity in Franchising has 5 macro attributes taken directly from the Franchise Evaluator.
Operation Model –
- Size – Large
- Demand – Necessary, not discretionary
- Competitive climate – Few or no recognized brands
Industry Growth Path:
Identifying where the industry is on its growth path
– Developing, not mature
Franchise Operating Model:
- Low initial and ongoing operating costs
- Manager-run business
- Low inventory; low staff needs
- Your role as a franchisee to manage your Manager, who in turn manages the systems and the operation
Precise Operating Systems:
Every aspect of operation systemized for manager-run businesses with consistent outcomes across multiple units – Simplicity is key
Strong Franchise Leadership:
A deep bench of proven franchise expertise and focus
This is just a brief overview. For a full explanation of the process, demystifying the 12 mysteries and for the Franchise Evaluator, Download Franchising: Decoded & Demystified.
Certainly let us know if you have any questions or have feedback for the CFT, our site and Franchising: Decoded & Demystified.