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Researching a Franchise

Research Your Investment

Want to know how much money it’ll take to buy a franchise, where to get the funds and how long it’ll take to make a profit? Here are your questions answered.

Jeff Elgin

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There are many reasons people decide they want to acquire their own franchise business – and each of these reasons involves a variety of considerations. In the mind of most people contemplating such a decision, however, there is one overriding factor: money. If you’re considering buying a franchise, you should be asking yourself a number of significant money-related questions. Here’s what we consider to be the ‘Top 10’.

1. How much total investment will this franchise require?

This is a key question, since the franchise agreement normally expresses this information in terms of a very large range of possible answers. In your calls to existing franchisees, and your research concerning your local market, narrow down these answers to provide as accurate an answer as possible. If you aren’t completely sure, err on the high side.

2. How much will I need in operating capital reserves to cover losses after opening the franchise until it reaches the break-even point in terms of cash flow?

You’re not going to have any customers or revenue on the morning of your first day in your new business, but you will have expenses. Until your revenue grows enough to cover these expenses, you’re going to have to feed additional cash into the business to pay the bills. Make sufficient allowance for this factor in your plans and, when in doubt, guess high. No one has ever gotten into trouble on a new business start-up because he or she had put too much in financial reserves.

3. How much extra cash do I need to cover living expenses while I’m starting my franchise?

This is one of the critical areas many new franchisees fail to consider. After becoming a franchisee, there’s a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses. You need to carefully budget your living expenses to understand how much you’ll need on a monthly basis and then make sure you’ve got sufficient cash – in addition to your business investment – to cover your expenses during this period. Then add a significant reserve on top of this amount – it’ll help you sleep better at night.

4. How long will it take my new franchise to reach break-even?

This is one of the most important money-related questions you’ll need to answer. It’s no fun to feed extra money into a business to cover operating losses, but that’s the reality in most start-ups. You’ll normally find the answer to this question is a potential range of time for the franchise you’re considering. Always plan that it’ll take the longest time within this range to reach break-even, so you’re as safe as possible.

5. How much of my total investment (including capital reserves) do I need to have in cash?

This answer can range from 0 to 100%, depending on the franchise business being contemplated. There’s no right or wrong answer – just make sure you know what applies to you and that you easily have that amount of cash on hand.

6. What standard financing options exist for me?

The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably have to be secured by your personal collateral (such as the equity in your home). Most new franchisees find that securing an open line of credit against their home equity is the easiest and least expensive form of bank financing available to them. Leases can also be a favourable option, since they are typically fast to procure and secured by the assets that are being leased (though they sometimes require a personal guarantee as well).

7. What alternative financing options exist for me?

In addition to standard sources, there’s always the standby financing source: family and friends. There are also a number of companies that assist people in accessing retirement money, without early withdrawal penalties, to use as a funding source for a franchise business.

8. How much money can I make in this franchise?

You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.

9. What are the ranges in financial performance of the existing franchisees?

Don’t stop your research until you are completely confident you know both the high and low end of the range. Two answers are not sufficient to establish a range you can have confidence in – 10 or even more would be much better.

10. How financially strong is the franchise company?

The franchise company is required to provide you with a copy of their audited financial statements in the disclosure document. You obviously want to work with a franchise company that is strong enough to survive, but also has the resources to reinvest in training and support of the franchisees. Review their financials and ask for help from a competent advisor if you’re not comfortable doing this yourself.

You should know the answer to each of these questions before you decide to invest in any franchise opportunity. If you do, you can minimise some of your concerns about money as you build your new business.

Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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Researching a Franchise

Maximise Your Social Media Reach This Holiday Season

Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.

Diana Albertyn

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It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?

You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.

Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.

Related: Why Your Business’ Social Media Marketing Strategy Is Probably Wrong

Know your customers well

The first step to attracting customers and getting them to complete a sale is understanding their customer journey.

“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, ‎VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.

The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.

Master social listening

You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?

“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”

Related: 10 Laws Of Social Media Marketing

Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.

Try something new

50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.

Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.

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Researching a Franchise

Selling Your First Franchise? Consider These Key Pointers

You’re ready to franchise your business, but who do you sell to and how? Your first few franchisees may be the hardest to acquire, but the process will be smoother if you get some basics right.

Diana Albertyn

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Business experience gained running your independent brand will come in handy, but looking for franchisees is a different ballgame. “We have to attract the right people in enough numbers to make the difference; and, the key to more leads is to have a multi-prong strategy to marketing,” says franchise strategist and expansion expert Lizette Pirtle.

Using media (social, or otherwise), trained experts in franchise sales, and keeping in mind that whoever you sell to will become an extension of your brand, are important considerations before selling your to first franchisee:

1. Use (all) media wisely

Website marketing, print advertising and social media are just some of the many different ways to attract potential owners to your franchise. But the most cost-effect of the three may be a ‘tweet’ or ‘post’ away, says former Director of Marketing at the International Franchise Association and owner of Burris Branding and Marketing, Jack Burris.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

“Three out of four people using the Internet are either on Facebook or LinkedIn or Twitter or all of them. Take advantage of social media,” he says.

“There’s typically no cost to play in the space except for the time that you need to invest to build your brand with a social media presence.”

2. Seek out franchise coaches or brokers

While this is a more traditional method of making reliable franchise sales, it’s a great way to form lasting associations that will take you beyond your first few sales. “Using broker networks is a great way to supplement your own efforts. However, you must spend time developing relationships with these people if you want to get results,” advises Pirtle. “Don’t think that just listing your opportunity with them is sufficient.”

Franchise coaches and brokers have multiple options for potential franchisees, so to put yourself high on their list of consideration when prospects enquire, you have to form memorable relationships.

Related: 3 Factors To Focus On When Opening Your First Franchise

3. Always consider the bigger picture

Out of all the people your marketing efforts attract, always keep in mind that few will check all the boxes and compromising could cost you in the long run.

“The franchise relationship is a long-term one. If you’re going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you’ll have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise,” says Mark Siebert, CEO of the iFranchise Group, a franchise consulting organisation.

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Researching a Franchise

3 Factors To Focus On When Opening Your First Franchise

To become a successful franchisee, there’s lots more to learn. Take notes and this will be an adventure still with its challenges, but less stress.

Diana Albertyn

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Experts and those who’ve gone through the launching, managing and successful running of a franchise will tell you that owning a franchise can be just as risky as owning an independent small business – and it doesn’t get easier after signing on the dotted line. But that doesn’t mean it isn’t worth giving franchising a shot.

“The hardest part of being a franchisee is learning and adopting all the processes that exist in the brand you’re buying into. But it’s important that a customer can walk into any franchisee’s property across the country and have the exact same experience,” says Jeff Chew, Pizza Factory franchisee.

With that in mind, remember the financial, emotional and physical investment you’ve made in this new venture and let it fuel your success, from before you even serve your first customer

1. Financial and intellectual wealth

Don’t buy into a franchise where you might be undercapitalised, advises Paul Durant, a Junk King franchisee.

Related: Expansion Funding Options For Your Growing Business

Keep in mind that running a new business isn’t challenging only mentally strenuous, but financially too, because you’re not always immediately profitable. Ensure you have enough runway for a few years at a loss or minimal profit.

“I did not do a thorough job in my initial research and discovery calls. I used a lot of my own assumptions and luckily they were fairly close,” recalls Durant.

“I would, however, suggest that you ask very detailed questions during the discovery process and listen carefully to the responses. Often what is not said is equally as important as what is said.”

2. Remember the purpose of the manual

The point of buying into the concept you’ve chosen is to ensure success based on a roadmap that’s already been drawn out for you. Straying from this plan unnecessarily is a shortcut to failure. This doesn’t mean you cannot make changes, but always ensure your growth is where it needs to be by following the system completely.

Franchisee Mark Arduino thought he was taking the advice he’d been given countless times: Just follow the system. But he quickly realised he wasn’t when all the franchise-specific training he’d been through was forgotten in favour of easier shortcuts.

“Then I realised my mistake. I came to see that it’s very user friendly. I’m sorry I didn’t use it from the start!” he says.

Related: How To Choose The Right Finance For Your Business Or Property Portfolio Expansion

If you think you have a better way of doing something detailed in the franchisee manual, do your research. Your decision should follow a discussion with your franchisor, then align to the business plan.

3. Learn at every opportunity

It’s great that you have previous experience in business. It’s a huge bonus that could put you ahead of other franchisees in your network. But, always be willing to learn and put your hand up or open a book if you’re not sure. A vast business background doesn’t guarantee automatic success as a franchisee, so be open to learning from others.

“I have learned more from two of the franchisees in my area than I could ever have imagined and I owe my early success in large part to their willingness to help,” says Jeff Steele, a CMIT Solutions franchisee.

It may sometimes seem like you can do it all on your own, but even when you feel you can do anything, you cannot do everything. That’s why you joined a franchise that (hopefully) offers good support structure.

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