Franchising

[wakeboarder109]

I've been searching for career options for my soon to be wife and have been looking into a few "newer" franchises. Has anyone bought into a franchise? I wanted to get some 3rd party (non-biased) help as to whether it's worth our time and money. She has a degree in the Science of Human Nutrition so I was looking into something pertaining to food and nutrition. The few I've considered so far are under $100,000 for start-up costs and the corporation would take 6% of profits for I believe a period of 7 or 10 years.

For anyone who's been down this path before, does it financially make sense? If she could walk away with at least $50k/year, I would consider it worth our time as she could work this in with having kids (down the road). I can't imagine that wouldn't be a feasible goal.

Thoughts and comments?

[Myrder]

If everyone could invest $100k into a franchise and then make $50/yr everyone would be doing it. My experience is limited but with Quiznos it was absolutely horrendous and with all the other costs that it takes to run a franchise it was basically breaking even...the 6% you mention sounds about right, but any deals or coupons offered by the company are deducted from your earnings only, not their 6%.

[Seminole]

Originally Posted by wakeboarder109

I've been searching for career options for my soon to be wife and have been looking into a few "newer" franchises. Has anyone bought into a franchise? I wanted to get some 3rd party (non-biased) help as to whether it's worth our time and money. She has a degree in the Science of Human Nutrition so I was looking into something pertaining to food and nutrition. The few I've considered so far are under $100,000 for start-up costs and the corporation would take 6% of profits for I believe a period of 7 or 10 years.

For anyone who's been down this path before, does it financially make sense? If she could walk away with at least $50k/year, I would consider it worth our time as she could work this in with having kids (down the road). I can't imagine that wouldn't be a feasible goal.

Thoughts and comments?

I don't own a franchise, but you really need to do an analysis of what the NI will be at the end. I've audited very successful companies who will only earn a NI of $6M on revenue of $150M. I found this, which cites IRS data, on small business income (http://smallbiztrends.com/2010/11/ho...ners-make.html) and it shows the average NI for a food services company is 2-3% of sales. To earn $50,000 you'd have to generate almost $1.5M in sales every year.

[Inspired]

Originally Posted by Seminole

I don't own a franchise, but you really need to do an analysis of what the NI will be at the end. I've audited very successful companies who will only earn a NI of $6M on revenue of $150M. I found this, which cites IRS data, on small business income (http://smallbiztrends.com/2010/11/ho...ners-make.html) and it shows the average NI for a food services company is 2-3% of sales. To earn $50,000 you'd have to generate almost $1.5M in sales every year.

That's kind of ridiculous. So you only get to keep 3% of what you really make? I find that hard to believe.

[kihun]

I was interested in UPS store and found out most of the store owners don't make any money for the first 4-5 years. you can google them. find something that might interest you and do owner's review. you'll find quite some. most popular franchise in few years was frozen yogurt. I still see many of them opening up in my area.

[Seminole]

Originally Posted by Inspired

That's kind of ridiculous. So you only get to keep 3% of what you really make? I find that hard to believe.

Revenue =/= Net Income....

Revenue is your sales, i.e. you sell a hamburger for $10, your revenue from the sale is $10. You don't really "make" $10. That burger cost you money in the form of the raw ingredients, the salaries you have to pay your employees, the rent for the building where the business is located, utilities, franchise fees, etc, etc. At the end of the day you take home a fraction of that $10.

It really depends on the industry, but most restaurants are not high profit margin businesses. If you were able to have a NI percent of just 10% you would be significantly exceeding the norm.

[Mr Tonka]

So, $100k for start up, but what are operating costs and what is the projected time frame to start breaking even with operating costs? I'm assuming that with a franchise, they know what the operating costs are up front.

So you'll not only need your $100k start up cash, but depending on the franchise you could also need an additional $100k to $200k for operations until your cash-flow gets positive.

You may want to look at something like SmootieKing, Yogurtology, Yogurt Mountain, etc... Those can typically be located in some lower rent locations and require less payroll expense than some of the larger franchises.

[Mr Tonka]

Originally Posted by Seminole

Revenue =/= Net Income....

Revenue is your sales, i.e. you sell a hamburger for $10, your revenue from the sale is $10. You don't really "make" $10. That burger cost you money in the form of the raw ingredients, the salaries you have to pay your employees, the rent for the building where the business is located, utilities, franchise fees, etc, etc. At the end of the day you take home a fraction of that $10.

It really depends on the industry, but most restaurants are not high profit margin businesses. If you were able to have a NI percent of just 10% you would be significantly exceeding the norm.

Yeah, 10% is high for food industry, franchises are typically lower than individual restaurants.

We had a delivery only pizza shop and we were around the 10% NI figure, but being delivery only, we could keep cost (rent & payroll) really low. Cost of goods were our largest expense, but that's way out of the norm.

Our flooring business has a NI of about 7% on average. But because we can do $3m and $5m with the same fixed costs, our NI swings from 5% to 10%.

[Cuz5150]

You need $500K.......open up a Dunking& Donuts..........Rich over night. Heck once you open 1 up, you can open others, and it rains money. I know a guy that ownes 22 Dunking/Donuts stores. He has a separate office with 3 people to keep up with all the "paper work"-----aka $$$Money$$$. I told this cat, if he ever wanted to gift one/write off--------->I''ll take one

What i want is a WAWA store, those stores might just have a mint press in the back....printing money. However, Wawa does not franchise nor they are listed to buy stock. I wanted to buy stock for Wawa since i was 17yrs old.....I had a vision-----> damn them for not offering stock. I would be sitting on an Island right now. Shorts/T-shirt/bare footed on the beach, holding a Cuban cigar and a alcoholic beverage "Not giving a care in the world"

[dreamingat30fps]

Originally Posted by Cuz5150

Shorts/T-shirt/bare footed on the beach, holding a Cuban cigar and a alcoholic beverage "Not giving a care in the world"

Don't need a WAWA to do that. I do it every weekend.

[persian54]

Originally Posted by Seminole

I don't own a franchise, but you really need to do an analysis of what the NI will be at the end. I've audited very successful companies who will only earn a NI of $6M on revenue of $150M. I found this, which cites IRS data, on small business income (http://smallbiztrends.com/2010/11/ho...ners-make.html) and it shows the average NI for a food services company is 2-3% of sales. To earn $50,000 you'd have to generate almost $1.5M in sales every year.

If she works there as a manager, they can cut their payroll expense quite a bit (of course, this is assuming her time is worth whatever you would pay a manager at that type of a business, be it 3k/5k/etc per month).

owner-absentee business is not nearly as profitable as owner-operated, but owner-absentee allows one to pursue other forms of employment/business/etc, while owner-occupied allows you to net more from this one business (while sacrificing your time, thus not allowing you to venture out to other business ventures/work/etc)

I have a family member who owns multiple Johnny Rockets, Robeks, and he used to have a couple Subways.
He doesn't work at any of them, but he does go there on a daily basis to take care of things. He told me he nets about 2-4% depending on the season.
It's a lot of work for minimal income at start. If you can stick with it, make it worth, increase volume, while working there yourself, I could see her walking away with $50k.

But, as others stated, don't forget to include capital for operating expense (unless somehow thats included in the 100k... which I find hard to believe..)

[EyeGuy]

I own a franchise where I pay a royalty of 14%. I've owned it with a partner and have been in business 5 years. Between rent and royalties my overhead comes out very high. We do pretty well for ourselves and have been fortunate enough in that we are able to support our families. For the business to survive, one or both owners need to be there. Those who own businesses, and who are able to not be there surely have put in their time in the beginning. In order to make it successful you must know every single aspect of your business.

Now that I know the ins and outs of my business, I would not invest into another franchise. They specialize in making money off of the franchisee. Most of these corporations will franchise locations that need work while keeping the highly profitable ones for themselves.

At the end of the day you are buying yourself a job while paying someone hundreds of thousands to have their name on your store. That is unless they are well recognized and spend millions on advertising, I don't see it worth while.
My advice is to choose your location wisely with a low rent and start your own. Yes its a bigger risk, but if your good, a much bigger reward.

[Nkc]

It's unlikely that a $100k investment will yield a $50k income a year. The question is, why not just get your wife to find a job that pays $50k and save the $100k investment money for something else?

[Vanity]

Keep in mind that the success rate of business startups is around 20%. That means 80% of new businesses fail from the get-go. I think if you're imagining this being an easy process of buying a franchise, employing the wife, and making bank, you need to look elsewhere. She needs to thirst for the business' success otherwise it will go under. If she's just looking for a job, then look for a job. Running a business is a 60+ hour affair every week.

That being said, a friend of mine recently took over a cafe. Invested $300k into it, but it's in a terrific location and she's pulling in $20-30k/monthly gross. Probably around $10-15k for herself after it's all said and done, depending on the season (winter gets so slow and revenue dives). But, to keep this afloat she literally gets little to no sleep. That's what it takes, and that's just a cafe.

[wakeboarder109]

Originally Posted by Mr Tonka

So, $100k for start up, but what are operating costs and what is the projected time frame to start breaking even with operating costs? I'm assuming that with a franchise, they know what the operating costs are up front.

So you'll not only need your $100k start up cash, but depending on the franchise you could also need an additional $100k to $200k for operations until your cash-flow gets positive.

You may want to look at something like SmootieKing, Yogurtology, Yogurt Mountain, etc... Those can typically be located in some lower rent locations and require less payroll expense than some of the larger franchises.

A portion of the operating costs are included in that initial investment needed. The franchise fee is $30k with $5k for software. The rest goes towards salary for a trained chef, kitchen staff, marketing staff, lease and a kitchen. I need to get more details and request informatin on what kind on NI there may be.

This would be a lower rent (2-4 employee operation) but the low rate of competition and client base are what initally got my attention.

Smoothies would be another good route to go (i.e. Robeks). They are a lot better than most of the chains in my area.

[wakeboarder109]

Originally Posted by EyeGuy

I own a franchise where I pay a royalty of 14%. I've owned it with a partner and have been in business 5 years. Between rent and royalties my overhead comes out very high. We do pretty well for ourselves and have been fortunate enough in that we are able to support our families. For the business to survive, one or both owners need to be there. Those who own businesses, and who are able to not be there surely have put in their time in the beginning. In order to make it successful you must know every single aspect of your business.

Now that I know the ins and outs of my business, I would not invest into another franchise. They specialize in making money off of the franchisee. Most of these corporations will franchise locations that need work while keeping the highly profitable ones for themselves.

At the end of the day you are buying yourself a job while paying someone hundreds of thousands to have their name on your store. That is unless they are well recognized and spend millions on advertising, I don't see it worth while.
My advice is to choose your location wisely with a low rent and start your own. Yes its a bigger risk, but if your good, a much bigger reward.

I can definitely understand that and starting your own thing definitely seems like the way to go. I would have to imagine theres a lot of money in building a successful restaurant and then successfully franchising it. Something to consider though.

[wakeboarder109]

Originally Posted by Nkc

It's unlikely that a $100k investment will yield a $50k income a year. The question is, why not just get your wife to find a job that pays $50k and save the $100k investment money for something else?

I guess I should have been more specific in that first post. Eventually, a few years down the road, I would want her t be close to that figure. I am sure that it would take some time and hard work to get there. Having her find a position that pays that and investing the money may end up being our best bet. If she wants to get a career with something related to her major though, she will have to go back for an advanced degree though.

[pt]

You really need to look into the quality of people at the home office. Who are they, where were they in the past, etc. At this point in time, with all sorts of people out of work and a dearth of available jobs, fraudulent companies are after your money. In the event that you fail, will they try and claw the future minimum royalties from you? They'd calc the PV of the future cash flow and give you a discounted penalty, for example. So you want to deal with people that have some set of values where they won't eat franchisees and resell territories.

As with any business, you need to take stock of who the clients are, who the competition is and how professional they are and the abundance of product/service in your territory. Competition = cancer in any business so keep an eye on the average net margin and make sure you're comfortable with it. You can only do this by calling other franchisees as part of the validation process. Beware of pre-recorded validation calls with certain franchisees. Also beware of franchise coaches that pitch organizations they're a part of - total conflict of interest. But a good franchise coach will be a big help to you.

Critically, look at www.unhappyfranchisee.com - look specifically at organizations with black eyes at the upper left of the website. Also look at the worst franchises by SBA loan defaults. An SBA loan comes with a personal guarantee on your house - DO NOT do that. And run, don't walk from those organizations.

Also, beware of politically motivated sales tactics. Anyone in an organization, whether it's home-office leadership or a franchisee that says anything like: "once you join, we'll show Obama that we really did build that" is a money-losing schmuck. Just walk away - if they had a good business model, they wouldn't have to resort to emotional sales tactics.

This said, there are plenty of good franchises out there. I'm in the process of starting one now after months of research. Very competitive market, but very strong business prospects for the area and no other co-franchisees around. Very strong leadership at the home office, very business-savvy people rooted in strong values. Line of business does not depend on rising / falling markets. I'm scared for sure, but am confident sure I've made a good decision.

The investment is always going to be scary. But if you're dealing with a business that would be easier to start with their training as well as assistance from other franchisees, this might be a good option for you. I am happy to take a PM on this if I can help you further.