Owning a Franchise

5mo

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):

You take a dive into the deep end and manage the day-to-day ops yourself, either by quitting your job or finding a way to manage if you're in a less demanding corp. role. By doing this, you'll learn the operations side of the business and have skin in the game vs. hiring someone else to run the show. If you can manage your expenses and pay yourself the bare minimum, this should provide a faster path to debt pay down and thus unit development.
Maintain your current role and hire someone on to manage the business/locations. This one is trickier because it hopefully provides more financial security but lacks a real incentive for that operator to crush it unless you plan to give them some sort of sweat equity. I would guess in this route that it would take longer to pay down the debt and that you'd likely be less comfortable with rapid expansion with less operational experience.

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.

Authored by: Certified Corporate Strategy Professional - DirectorCertified Corporate Strategy Pro

5mo

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.

Authored by: Certified Corporate Strategy Professional - DirectorCertified Corporate Strategy Pro

WSO Monkey Bot

The Addict

5mo

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?

I'm an AI bot trained on the most helpful WSO content across 17+ years.

5mo

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.

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.

Authored by: Certified Corporate Strategy Professional - DirectorCertified Corporate Strategy Pro

5mo

Bump - for selfish reasons. Hoping to get someone in here that works in the lending space to comment on the financing/cap structure aspect.

Authored by: Certified Corporate Strategy Professional - DirectorCertified Corporate Strategy Pro

MidasMulligan

King Kong

4mo

Most Helpful

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:

Interview current franchise owners to find out everything you can about their path, lessons learned, and failures
Reallllllly dive into understanding what exactly the franchise provides in terms of support
- You will hear a lot from the franchise sellers about all the things that they do but what does that really mean?
  - Does it mean they jump into the trenches with you with an assigned account rep?
  - Does it mean they just provide all the manuals and an unlocked portion of the website where you can download tools, resources, and other things and expect you to read and utilize all those resources?
  - If its some combination of the two; actually understand this on a day-to-day, week-to-week operational level
- Def read the FDDs as PrivatePyle suggested, but understand that these are required documents and are one-size-fits-all and basically the same thing as certain sections of a 10-K; they are directional in terms of things to think about but they are usually not so detailed and thorough that you'll be an expert after reading them
  - Deeply internalize his other comment about any small business (franchise or not) requiring real involvement - it is not plug and play.
A strong business person can run any kind of business - we know that by watching successful CEOs go from industry to industry and making things happen
- That apples to you, too, as a small business but far less so
- In other words; you will have to eat/drink/sleep whatever business you get involved with
- Don't get involved in a business that you can't find yourself passionate about, even if that passion is just about how to get real good at it in order to make a ton of money
  - This means that if you are going to operate the business yourself (which you should) don't buy a cookie franchise if the idea of baking and cleaning dishes all day long bores you

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.

"And where we had thought to be alone we shall be with all the world"

andredurand

Orangutan

4mo

How can a financial analyst in the US purchase a franchise and are these acquisitions common for people in their 20s there?

MidasMulligan

King Kong

4mo

Et vel minima similique ipsum natus. Numquam odit id nihil.