You’ll find many routes to owning a small business and several intriguing paths to participating in a franchise business. It’s not ‘one size fits all’ – not even close. If you think of franchising in one dimension, you’ll limit your opportunities. There are so many ways to get into franchising beyond building and operating a new pizza restaurant. Keep your ears open for opportunities, and prepare to be flexible. With the right approach to franchising, you’ll quickly find yourself on the road to career satisfaction and financial success.
Here are the five most common ways you can participate in a franchise programme:
1. Go the Classic Route
This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it yourself. It’s all new, and it’s all yours. You roll up your sleeves and plunge into your new business as an owner/operator.
This is the classic route because it is precisely how so many thousands of franchisees built their multi-unit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership.
Among the advantages of this approach is the full new term of the franchise agreement, allowing you the maximum time you need over the term of the agreement to recoup your investment. You also have the opportunity to build your business from scratch. When you open the location, it’s brand new and ready for business; any mistakes made in the establishment of the business will be your own. You don’t inherit anyone else’s problems or hiring mistakes. You hire your entire team, and your direct involvement will make you the owner, manager, boss and unquestioned captain of the ship.
The best upside: The new concept could take off and become a smash success – and you got on the elevator at the lobby level.
There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome. Second, your team is untried, so the training and opening support had better be solid. The start-up phase of the franchise at a new location will drain your cash until the operation’s growing revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and never go into a start-up franchise undercapitalised.
2. Buy an Existing Franchise
The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year – and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment’s uncertainty – and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you’re successful, you’ll build a strong business out of a weak one, and reap the financial benefits.
Buying an existing franchise business means that you’re subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it’s possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5% to 15%) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you’re buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor’s prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner’s making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn’t plan on spending. They range from unhappy supply vendors and dishonest employees to defective equipment-and they simply come with the territory. Add an ‘unexpected problems’ line to your opening budget, and plan for the unexpected.
3. Buy Master Franchise Rights
If you’re looking for a more aggressive role in the franchise system, you could check into becoming a master franchisee. The details of the master franchisee concept differ from one system to the next, but the basics are the same: A master franchisee is appointed to serve as a local or regional representative of the franchisor, providing training and field support, and is compensated for those services, often by receiving a percentage of the royalty revenue generated in the assigned territory. The master franchisee may also have recruiting responsibilities, generating commissions on franchise sales made from his or her efforts.
The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programmes.
A master franchise is often confused with a sub-franchising programme, but there’s one important distinction: A sub-franchisor offers and sells franchises directly, for its own account; and, of course, a master franchisee does not sell franchises directly. A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing.
A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit, while continuing to operate your own franchise business
4. Absentee Ownership and Conversion Franchises
For the right kind of business, with the right employees running that business, it is entirely possible – though rare – to own a franchise business and not be directly involved in its management. Rare, because it is hard enough to own and operate a successful small business even when you’re on the floor every day.
What type of business lends itself to absentee ownership? First, it must be a business that doesn’t have valuable inventory. I once had a senior executive of a muffler franchisor tell me his shops couldn’t be run by employee managers because too much of the inventory would leave at the end of the work day. Only an owner on the premises is sufficiently motivated to prevent that from happening.
Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that limit the owner to a modest salary. So the key question then becomes: What drops to the bottom line for the owner?
Service businesses with training programmes that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right programme and a handpicked management team, it can work.
5. Buy Into a Conversion Franchise
A conversion franchise allows an existing independent business to affiliate with a national brand. Affiliation programmes have been launched by a variety of professional service providers, such as handymen, home-repair programmes and hotel chains.
Conversion franchise programmes offer an attractive balance of brand identification and buying power. If you’re operating an independent business and long for the competitive advantages of being tied in to a national reservations system or receiving local leads generated by a national or regional advertising campaign, you may want to consider joining a franchise affiliation programme in your business category.
Can you use your current business name, or do you have to completely identify with the franchisor’s brand? That depends entirely on the system.
Often, the fees paid for an affiliation programme are considerably lower than those of traditional franchise systems, reflecting the fact that the franchisee is an experienced business owner and needs less training and less support than someone new to the business.
Franchising doesn’t exist in a single investing dimension; it has developed in ways that allow virtually any level of investor in any business situation to participate. The lesson is clear: Keep looking until you find an investment that’s well-structured for your interests and needs, and you’ll probably find it in the franchise arena.
Is franchise ownership in your DNA?
Franchising isn’t for everyone. Read on to see if you have eight key characteristics to survive in a franchise.
Many people believe franchise ownership is for the true entrepreneur – the type A personality with the confidence to blaze new trails in the business world. The truth is actually quite different.
Franchising is about following a proven system to replicate the success of the original unit that the franchise is based on. Entrepreneurs often create innovative new businesses, but it’s the Steady Eddie types that tend to produce most of the success in franchises.
Great franchisees tend to be those who are strong at networking and meeting new people. They understand that establishing themselves in the community, by joining civic groups and other organisations, will give their business more visibility. They enjoy managing people and will work to retain valuable employees.
A successful franchisee is focused on producing results. They have a clear understanding that activity is not the same as accomplishment. They have great respect for the importance of monitoring milestones and benchmarks as they move forward to achieve objectives.
Motivator and Cheerleader
Being able to motivate oneself and one’s employees is a key personality trait shared by successful franchisees. A franchisee can’t sit back and wait for the business to come to him; he has to make it happen.
Calm and Confident Leader
Especially in these trying economic times, a key characteristic of a successful franchisee is to be the rock that everyone around him can count on. A leader recognises what’s happening in the market but doesn’t panic or run around screaming that the sky is falling.
A successful franchisee has a positive and forward-looking attitude. He focuses on opportunities and solutions rather than problems. He addresses any negative issues by solving them without worrying about establishing blame.
People who want to minimise their risk will choose a strong franchise system with a proven track record. They’ll take advantage of all of the training offered and learn as much as they can from the franchisor staff and other franchisees. If you like to blaze your own trails while running with scissors, a franchise just isn’t going to be right for you.
A successful franchisee has his eye on the prize, which is the long-term result he desires to accomplish through business ownership. He’ll be imagining his future income and lifestyle while doing what it takes to keep the business growing.
You can’t hold a good franchisee down for long. He bounces back quickly because he knows that even during challenging times, he’ll ensure that things get better. He can trust in the franchise system to work effectively over time and that lets him keep any setbacks in perspective.