When buying any business (or any asset for that matter) it’s advisable to do your homework. Logical? YES! Practical… Not always. In the case of a franchise they (the franchisor) often has the power of numbers, “X number of franchisees can’t be wrong”, (yes some can be ‘wrong’, but they may not want to admit it.) Of course there are other ways the ‘numbers’ can be glossed over to make things look rosy.
It’s time to take a look at the reality for some.
Let’s look at some basics, there are large, small and medium franchises, and most have the basics of a good business so let’s take one group and single it out for viewing… the small franchise.
To begin with you have a reason for looking for a business opportunity, perhaps you want to get out and about more than a job stuck behind a desk, good reason, but in reality the numbers involved might not add up to all you want them to be. Sure money is not everything, but we are talking business so there needs to be some profit, otherwise you are running a charity or a hobby.
The smaller franchises are often to do with home or business services, gardening, dog wash, cleaning, handymen, and so on. The Franchisor offers the business for sale, you want to run it, and away you go. So lets break down some basic costs and look at what happens when it’s all added up. Remember you are in business to make money so you may well be making money to pay for a lot of things BEFORE being able to pay yourself.
Note: I have not put in any figures for any of these as they will vary greatly from business type, to business type and then between various Franchises.
Franchise purchase price – A one off amount, some people take out a loan for this amount, while others may have a redundancy package, savings or an inheritance they will use. Either way it’s money spent on a potential asset, in this case the asset should be one that can appreciate, not depreciate… At the end of the process if you choose to sell your ‘asset’ you would like to think you made this amount back in earnings (perhaps it shows up as profit) or if you can sell the franchise then you would hope to make this amount back in the sale price.
Franchise fees – Monthly amount to keep the head office wheels in motion – area supervisors – master franchisees – admin costs – systems development – Training – Call centre operation, the list goes on. It should be seen as a fee you pay that provides great value to you, and not as a fee that bleeds you dry each month or is seen as a burden of some kind.
Vehicle - Many of the small franchises mentioned require a vehicle, some require specific signwriting which may be part of the initial franchise outlay. You may have a lease on that vehicle, you may have to tow a trailer and want to use an existing vehicle (either way you have an outlay vehicle or trailer).
Overheads – Every business has these, phone, home office, computer, mobile phone, materials, fuel, tool maintenance, liability insurance, sickness insurance (You may well need it!), uniforms, the list can go on and add up quickly.
Marketing fee – This is usually deducted by the Franchisor with the monthly franchise fees and covers some of your marketing costs that the main company will do. Sometimes they want to do more and may ask for an extra levy to be imposed, this depends on the contract and how they can go about it, it can be legitimate but an extra cost to be aware of.
Wages – If you have staff they want to be paid, so think of the workers insurance, the holiday pay you have to cover and so on. If you take a wage out yourself you have to look at it carefully
Profit – The bit left over after all the expenses are taken into account.
There it is, the list of costs, if you look into these for the business you want to buy, you now have a starting point to fully evaluate the situation. This will give you a solid objective viewpoint to work from and not an emotive one which is so often the case with someone going into business for the first time (or even the fifth!)
In an ideal world after the expenses, you will have paid yourself and have a profit to put into the bank and watch it build. However in reality the opposite can also be true, which can shatter a dream in no time flat. Be aware that this can happen.
Remember the statistics do not lie (they may bend the truth a little…) so take a look with both eye’s open. A little known fact is that many franchises are seen as being a great business model because people often appear to last longer in them than starting their own business, true BUT note that most are in contracts that have them paying fees for the duration of that contract. So instead of a business going ‘belly up’ after 12 months it looks like 3 or so years have passed and even then it may be just a transfer of ownership to the next person looking at a business opportunity. On paper it looks rosy, in reality it may not be. And that’s just the start…
For more information on Franchising click here.
