To Be a Franchisee or Not to Be a Franchisee

The question on the minds of many people who have left their jobs by choice or by design, is what do I do with myself now?

 While we sift through the funnies to look for work. I believe that there are incredible opportunities today to go it alone and become an entrepreneur.

 It may sound a little overly opportunistic, however when times are tough this is when the best opportunities make themselves available.

 Today, an entrepreneur can embrace a variety of business opportunities. The options are:

     1. Start your own business. 
     2. Buy an existing business. 
     3. Buy into a partnership.
     4. Buy in as a silent partner while you keep working.
     5. Buy a Franchise

 Deciding which path to choose is equivalent to a journey through your own personal likes and dislikes in life.

 The one factor that must be considered is your own comfort level to take risks. Briefly probing each opportunity you can see which of the options best suits your own ambitions.

 In addition to this I would like to introduce you to Exec-Guys risk assessment:

 Risk Level 1: There is a high level of failure rate and with each investment it is likely you will need to personally guarantee any loans or debt.

Risk Level 2: A medium level of failure rate, most likely a sound opportunity, however you will still need to provide personal guarantees.

Risk Level 3: A low level of failure rate, either a sound business already in operations or an opportunity where there is a niche and high level of growth. However, the personal guarantee still posses a personal financial risk.

Risk Level 4: A very low level of risk for failure, the business has a sound customer base, product lines and the threat of competition exists however the business has a strong brand equity that diminishes some of the risks. Return on Investment is good therefore, your ability to service debt is good.

Risk Level 5: No risk! Difficult to find and often this is a business of significant value and a high multiple for acquisition in essence it will come with a high price to acquire.

You will need a substantial level of cash and access to borrowing funds with a lender that will work with you.

Start Your own Business:

I usually assess this as a risk level 1-2. My personal point of view is that if you posses a high level of technical licensed required experience you can improve your tolerance to risk.

The businesses that would usually survive as a startup are plumbing, electrical, home repairs etc.

I am less likely to favor a startup that is capital intensive, building out a store, lease agreements and a high level of competition from well known established players. These competitive issues increase the risks of failure substantially. 

Buy an Existing Business:

There are plenty of business broker web sites that you can tap into and see which businesses are for sale. Interestingly, many are small and likely not solid business ventures. Usually the business you want to get into will depend on your own negotiating skills.

The risk level with existing businesses will vary with the size and scope of the opportunity. In addition your own personal level of business experience with the industry that you are exploring is a critical success factor that cannot be dismissed. If you know nothing of the industry and or have limited experience at running a business, I would throw out a yellow flag and ask that you stick to what you know.

Buy in as a Partner:

For those who have limited business experience and would like to be self employed this is a unique approach. However, the partner aspect is something that can be more engaging than getting married. Too often partners don’t get along and or the business fails to meet expectations then the blame on strategic approaches and decisions begins.

If you are considering a partnership there are a few things to consider. First, get to understand the business. Second, if the owner(s) are interested in your investment getting a written non-binding agreement which will include confidentiality and allow you to review their business strategies and financial reporting for the past 3-5 years.

If your leap of faith is assured by what you have seen, then look closely at an agreement that allows all parties comfort on how decisions will be made. You can either hire a lawyer to draft an agreement for you or buy a ready made fill in the blanks partnership agreement.

At the end of the day, there is risk in this arrangement depending on the industry, competition and prior history of the business. Remember buying into a partnership does not mitigate your personal risks from legal action or failure to repay debt.

Buying in as a Silent Partner:

This scenario for me is equal to buying ownership in a company that trades on the stock market. However, buying stock in a company that doesn’t trade on the market is a much higher risk. You will not be able to sell your equity as quickly and unless it is a unique opportunity where others have a high level of interest to buy. 

Again your risk tolerance is a key decision for you as an individual.

Buy A Franchise:

There is probably no better time than in this downturn to buy a franchise. If you have the means to raise capital and know which franchise you want to invest in, many franchisors today are offering simpler terms so that they can continue to grow.

I have a preference for franchises that have a high brand awareness and solid consumer demand. Few businesses are recession proof however a franchise offers opportunities that make your risks a little more tolerable.

I am not fond of franchises that are in the home or business services sector because they lack proven ability to sustain customer growth and afford the franchisee leads for growth. Branding is limited and you will likely only be buying a job.

I love franchises that have a strong brand equity and the potential for growth is high. McDonald’s is the best in the class of franchisors, however, not a lot of these opportunities exist.

That’s the ticket for me when it comes to a franchise am I buying a job and making the franchisor wealthy or is it a proven situation of mutual growth?

What to look for in a Franchise:

-         Is it a known brand?
-         What is the franchisors track record?
-         What is the satisfaction level of franchisees with the franchisor?
-         Do they have a strong internal support network?
-         Is the franchise growing?
-         What percentage of stores are, franchised versus corporately owned?
-         What markets are being offered as franchises?
-         Who are the big competitors and is the franchisor spending the advertising budget?
-         Talk to other franchisee’s get to know all aspects of the franchisor- franchisee relationship.

The bottom line is this. Any of the above options requires an investment and it is your money and personal equity and for that matter, sweat that is being invested. The risk is all yours therefore invest wisely.

Exec-Guy