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How to Buy a Franchise: An Exploration in the Paths to Franchise Ownership - Episode 12

Erin Carpenter
May 23, 2018 6:40:33 AM

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Franchise ownership. At first glance, it seems like a simple concept. If you buy a franchise, you’re a franchise owner. But, if you dig a little deeper you’ll find that there are many different forms of franchise ownership you can take to fit your lifestyle and income goals.

We spoke with Jane Stein, a franchise consultant who is the founder of Your Franchise is Waiting, to discuss the various types of franchise ownership, and who may be the best fit for each.

Owner-Operators vs. Semi-Absentee Franchise Ownership

Jane’s career in franchising began when she found herself looking for a new challenge post-retirement. She had some extra money to spare, so she decided to explore business ownership through franchise investment.

Jane figured she could put a little bit of money into a franchise concept, and then someone else would run it. Easy, right?

This type of ownership - where you, the owner, take a step back and have a manager run all day-to-day operations - is called semi-absentee ownership. While it sounds like an easy path to franchise ownership, this isn’t a realistic path for most women looking to buy or invest in a franchise.

First, you need a lot of capital to follow this model. This is because the only way to have significant earning potential is to have multiple locations with a centralized office and an entire management team in place running the business. It is so expensive, semi-absentee ownership is typically done by financial heavy hitters like private equity firms.

Further, the most successful franchise locations almost always have a committed owner who is highly involved, at least in the very beginning.

If semi-absentee franchise ownership is within financial reach for you and something you still want to try, Jane has several tips to help you make money faster:

  1. Choose a franchise with brick and mortar locations. Brick and mortar businesses are attractive because you’ll get walk-in traffic. These are typically B2C businesses where you can throw your money into advertising and have your business build itself over time through reputation, reviews, ads. Home-based franchises are not ideal for semi-absentee owners.

  2. Select your location carefully. The franchise brand should support your search for real estate, but a good location is key to semi-absentee success. Do as much research as possible to find one with heavy foot traffic and feature that will make it attractive to customers (easy parking, proximity to compatible businesses, etc.)

Owner-operators are at the opposite end of the spectrum from semi-absentee owners. These franchise owners are actively involved in their businesses, day in and day out.

Owner-operators can absolutely succeed in brick and mortar franchise concepts, using the same tips Jane laid out above for semi-absentee owners. But, they also have the option at being successful home-based franchise owners.

Home-based franchises have a lower start-up cost and are easier to ramp up, leading to faster cash flow, which makes them a very attractive option for many first-time franchisees.

The catch is that you have to build a home-based business yourself, either putting a lot of money into advertising, or by being willing to go out and make sales calls. If you have time time and money to put into this, a home-based franchise opportunity could be right for you.

Whether you buy a brick and mortar or a home-based franchise, it will be a ton of work at the outset as an owner-operator, so you need to be prepared for that.

stressed at workMany women seek franchise ownership because they’re tired of putting all of their time and effort into a corporate job, feeling like all their work just benefits their bosses and not themselves.

We hear women say things like, “I am so tired of giving my all, working for decades, and I’m not seeing the benefits come to MY bottom line. All of my efforts are enriching my boss,” all the time.

If you’re considering becoming a franchise owner-operator, it’s important you realize you’ll probably be working just as much or even more than you have been at your corporate job.

The difference? You will love your business and it’s yours. It’s exciting. You’re building something and it’s important to you and benefiting you. It just feels different, and is generally far more satisfying.

The Perks of Multi-Unit Franchise Ownership

If you’ve been researching franchise opportunities, you’ve probably heard someone refer to three as a magic number. Why is this? Because once you have over three locations of a brand, you’ll have higher margins, and can manage things like staffing and inventory more easily.

This is why multi-unit ownership is attractive to so many women.

But, it can be expensive and time consuming to open several locations. Many women (like Bri, from episode 2 of our Franchise Rising Podcast) start by opening an initial franchise location. Then, they start building their portfolio. Once you have a cash flow-positive business, it’s very easy to get a loan for a second one because you and the business have a good track record. From there, you can keep adding on as you’re ready. This is a common way to build an empire within a brand.

guilherme-petri-602659-unsplashAnother common path to multi-unit ownership starts similarly, with the purchase of a single brick and mortar location, say a waxing business. If a space next to your business opens up, you could open a different, compatible franchise, like a blow dry bar. You can build a lot of wealth this way, by creating a whole experience for your customers, because they can spend a whole afternoon or even day at your businesses.

While these paths to multi-unit ownership are certainly effective, not everybody has the energy or the capital to follow them. If this sounds like you, don’t worry - there are other ways to scale a business.

In these cases, Jane typically recommends a home services franchise, like closet design or blind installation. You can often get started in these types of businesses with under $150,000 because you can start by running it on your own, and don’t need a big warehouse or full-time employees at first.

You can scale these businesses by putting money into advertising. Once your phone starts to ring, you’ll go to the customers’ homes yourself to estimate and bill the job. Then, you’ll have a contractor do installations. As your business grows, you’ll be able to add on - techs, salespeople, trucks, etc.

These businesses can have a very very high return on investment because the initial investment is small and because they scale very easily. Jane has seen women build franchises like these into $3-5 million businesses within 5 years.

Home services franchises like these are often good, solid, low-risk businesses for a first-time business owner.

How to Buy an Existing Franchise

Another path to franchise ownership is buying an existing location. This is an attractive option for women who want the least risk possible, since they’re buying a business that’s already cash flow-positive.

There are two scenarios that would allow you to buy a pre-existing franchise:

  1. The original owner’s initial contract is about to expire, and she is not interested in signing onto the new contract terms.

  2. The original owner has decided to leave her business after 5-7 years to move on to a new opportunity.

Let’s start with explaining a bit more about option one. Most franchise contracts are ten years long, and the terms of your contract stay consistent throughout the entire ten years.

When it comes time to sign a new contract, the terms typically aren’t as attractive as they were initially. Royalties are often higher for second-term contracts, or the brand may require you make changes to your physical location so it’s up the the brand’s new standards. With less attractive terms, some owners decide to sell.

Other owners go into the world of franchising with a shorter-term plan. They know the contract is 10 years long, but only want to be in the business for 5-7 years. In these cases, they need to find someone else to cover the end of their contract.

Some franchises, like those in The Dwyer Group family of brands, are known for helping franchisees exit the business. But others leave owners on their own, so they then need to hire a broker who can value and market the business.

woman handshakeSo, how do you find out about these franchise opportunities? You’ll want to work with a franchise consultant like Jane, and also with a business broker in your community who may have more information about these sales opportunities. Between those two resources, you should be able to find any franchise sales opportunities in your area.

While the thought of buying an already thriving franchise is appealing, it’s important you keep in mind that it can be difficult to actually do this. It’s very hard to find a franchise in yourtown, within your budget, in an industry you’re interested in, and up for sale. It’s like finding a needle in a haystack.

If you’re interested and able to find an opportunity like this, jump on it! If there aren’t any available, another path to franchise ownership is more realistic.

Area Developer and Master Franchise: Additional Paths to Franchise Ownership

Area developer and master franchise roles are amazing paths for women who want to build an empire. But, it requires a very specific type of person to succeed in these roles.

First, what is an area developer (also known as an area representative)? An area developer is responsible for not only selling franchises, but supporting all franchisees in her area.  

An area developer’s role is different within every brand, but they typically have four main responsibilities:

  1. Recruiting new franchisees within their designated area
  2. Helping franchisees find the best real estate for their businesses
  3. Coaching and mentoring franchisees
  4. Coordinating franchise marketing efforts within their region

It can be extremely profitable to be an area developer. Area development opportunities are often already filled at larger, established brands, so if this is something you’re interested in, you will probably want to look at newer, emerging franchise concepts.

Area developers are responsible for a very large area, which could be anything from an entire state to several states. When franchisees buy a location within their region, they’ll pay a development fee instead of a franchise fee. The development fee can be quite substantial, typically between $200,000-$300,000, and is proportional to the number of locations that region has capacity for.

As an area developer, you’d not only reap the benefits of the a portion of the development fee, but you’d also get a percentage of the royalties from each location (typically 50%).

Master franchise is a similar role to an area developer, but is is commonly used for developing franchises abroad. The main difference between the two is that a person in the master franchise role has the added responsibility of executing contracts.

This adds the burden of executing the physical agreement and has legal liability. If the franchisee decides to sue, they are suing you. With this added level of risk, you have potential for great reward. But, the higher level of risk make area developer opportunities more attractive to many women.

woman leading meetingSo, who is the ideal candidate for either of these roles? An executive with background in sales, marketing, operations, and management.

This person needs a lot of skills because the area developer and master franchise roles require self-propelled lead generation and the ability to walk franchise candidates throughout the entire sales process, so marketing and sales skills are essential.

They also need have the operational ability to help new franchisees launch their businesses, including helping with initial hires and helping them through the initial struggles that new business owners can face.

Management experience is a key to success in these roles - if you’ve never managed people before, this is probably not a good fit for you. Experience in the franchising world as either a franchisee or franchisor isn’t necessary, but would be helpful to someone pursuing one of these positions.

Area development and master franchise opportunities are great options for the right person - that highly-skilled executive who has the wherewithal (both financially and skill set-wise) to build an empire.

No matter which path you choose, from single-unit ownership as an owner-operator to an empire-building area developer, keep in mind that all agreements can be negotiated to fit your personal goals. A skilled franchise consultant or attorney can help you navigate the contract process to help you create an opportunity that will work best for you.

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