Owning a Franchise
Very generic question. Currently work in real estate debt and equity. Analyst earning 150k. Not very thrilled about long term career prospects. Considering going down the route of further exploring franchises. Can secure 1-2 million of startup capital from friends and family. Given you all on this forum work to acquire businesses, wanted to see if anyone else has considered this and thinks it’s worthwhile? Not sure which franchise I’m interested in yet as this is very preliminary.
UPS, Crumbl cookie, ace hardware, etc, etc.
Interested in one day doing this. My thoughts are that things go down two paths (all things equal, let's assume you're above average in terms of performance):
All of that to say, I think it truly depends on what you want out of life. If you want to use this as a means to generate income then the 2nd route is probably the move. If you really have that entrepreneurial spirit and want to learn about/grow the business then I think it generally requires going all in.
I'd also suggest reading some FDDs for the companies you're interested in. They all will have varying liquidity requirements and other hurdles to jump through. Outside of that, finding something that has available territory in a geography you feel comfortable in will likely be a challenge.
I am sure you've thought about it, but it's less plug-and-play of capital than your initial post comes off as.
Based on the most helpful WSO content, owning a franchise can indeed be a profitable venture, especially if you choose the right one. The right franchises can be much easier to scale and take business model risk out of the equation. However, it's important to note that franchises truly work at scale, ideally with 30+ locations in a sufficiently diversified geographic portfolio.
Your profitability can be subject to traffic patterns, and your expenses (royalty, forced marketing expenses, etc.) are all done as a minimum % of revenue. So, if there's a road construction causing cars to go another direction for a few weeks, your profits could be gone.
Also, keep in mind that the franchisor does not care if you make money or not as long as you fulfill your obligations to them.
In terms of the capital, having a good on the ground manager/operator is key. This kind of business can be a great side-business with partners.
In terms of profitability, without being too specific, there are some industries that clear well in excess of 30-40% 4-wall EBITDA margins. There are more that can clear 15-20%. You might not get rich from 1 location, but even at a small scale ~5+ locations - you can start clearing 7-figures in EBITDA/cash flow.
In my opinion, the right franchising opportunity is a good candidate for a finance professional because it allows you to keep your job, fund the franchising, and start generating passive income. It's a higher risk/reward version of real-estate investing basically.
Remember, the key to getting this working is you need someone who is execution focused.
So, if you're considering this route, make sure you do your due diligence, understand the risks involved, and have a solid plan in place. It's not a decision to be taken lightly, but it can certainly be a worthwhile venture if done right.
Sources: Personally Buying a Small Business - Quitting the Rat Race, Arctos Sports Partners / Sports Private Equity, VC startup idea - PE or VC interest? Are these numbers viable?
Bot, bot, bot... this is simply not true. If the Franchisee isn't making money and going out of business you end up like Quiznos.
Bump - for selfish reasons. Hoping to get someone in here that works in the lending space to comment on the financing/cap structure aspect.
Non-bank Lender in true small business space here (read: SBA and some non-SBA). I have sat on both sides of the desk as lender and borrower (was the CFO for several small businesses in early growth stage). I lend to a lot of franchises and a lot of non-franchise businesses. Happy to answer any specific questions related to anything.
My advice:
Could provide more advice on specific topics; but the answer to your actual question could be "Yes, it could be worth it.*" With the footnote being that it will depend entirely on you and that ain't for some people. And that's OK.
For the small business folks I deal with; there's rarely a choice for them. They are serial entrepreneurs in the sense that they've started and ran 2-3 businesses and sold/closed them and then took some time off and started a new concept. And throughout all of that they did not clear more than $100k on taxable income, don't own their home, have debt on their car, and can barely bring any capital to the table when they launch each venture. It's not a passion project; it's just what they do. But they always pay their employees on time, they don't have any business debts, and they eat/sleep/breathe what they do and will talk to you about it for as long as you're willing to listen.
How can a financial analyst in the US purchase a franchise and are these acquisitions common for people in their 20s there?
It all depends. Money greases the skids in all things and if you have enough capital; you can typically buy a franchise. Some of your more well-established big-name brands likely won't sell to somebody without a certain number of years of direct experience (eg: Buffalo Wild Wings) but in most other cases it's about having sufficient capital. The franchise will typically set standards for what they consider an acceptable location (population density, traffic count, median income, etc) and if you have enough money and the proposed location fits those criteria; their view is (generally) that they give you the tools and if you can't do it then its your fault because they've proven it works elsewhere in a large enough sample to be indicative.
What are some of the more promising franchises to help get you into the world of franchising? Chic-fil-a you can only own one or two and you have to physically manage it long term, anything under big brands like Yum! Brands (Taco Bell, kfc ect) only sell to super high net worth individuals/PE firms, wing stop is at capacity in many of its regions and would probably give first look for new locations to their established franchisees like Rick Ross, Pizza Hut/dominos franchisees had to have had previous experience working at their shops, McDonald’s own the real estate of their franchisee’s restaurants so that’s not really worth it, subway is a dime a dozen, canes I’m sure requires one to have a significant amount of capital and probably precious franchise experience. Someone above mentioned ace hardware but I see those eventually going the way of the dodo with Amazon and other online retailers (grainger). What’s left to get into the franchise game? Especially for someone that doesn’t have a million dollars net worth.
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