This approach may not be right for you – but at least you will have thought about the alternative!
Your initial response is probably:
“But I don’t know what to do! Where will I start? It’s all too hard!”
Your initial response may well be w-r-o-n-g. Read on, and then decide.
STAGE 1 - THE BUSINESS
Answer these critical questions:
(Note: Ensure you get the answers from a knowledgeable person.)
1. Is the franchise in an industry or of a type that is heavily dependent on the franchise brand for custom?
2. Is the franchise a business that requires “peculiar” skills & know-how that cannot readily be purchased?
3. Does the franchise sell a service or product, or use a methodology of such specialty and recognisability that no other substitute or alternative product could be developed to offer to the customer.
4. If your answer to these is “No”, then proceed to the next Stage.
STAGE 2 – THE COST INFORMATION
1. What will pay to the franchisor if you purchase the franchise,:
a. Royalty – say 7% (for the sake of this discussion. Change it if you wish).
b. Marketing fund – say 3%.
c. Franchise fee - say $50,000
d. Launch marketing package (sounds very impressive) – Say $50,000
e. Note: The investment in the actual franchise business (i.e. Fixtures, Fittings; Stock; Machines etc) is not relevant for the purposes of this discussion because we will assume that it remains the same whether you buy the franchise or create a business yourself.
2. What are the factors in relation to a) Selling the business and b) Operating the business that you must consider if you purchase a franchise,?
a. Selling or Renewing: You will only be able to sell your franchise or renew it after the initial period:
i With the consent of the franchisor. Note - This is NOT guaranteed.
ii Subject to the conditions in your Franchise Agreement (which will probably result in your being screwed on price IF you’re actually allowed to sell it).
b. Operating the business: Costs & Opportunities - You will have to deal with many “issues” that have a cost both in terms of an actual cost, and/or lost opportunity to decrease costs or increase income. Examples: a) An inability to add new product lines unless approved; b) Necessity to purchase from designated suppliers at an unfavourable price, etc. (Note: we will not discuss Trade Practices Act issues here as it will not contribute to the illustration of the principle we are discussing).
STAGE 3 - THE ACTUAL COST OF THE FRANCHISE IN DOLLARS?
STEP 1: Assumptions regarding Sales & Term
• Annual sales/ revenue – Say $500,000
• Number of years that you will operate the franchise (before you sell it) – Say 10 years
Note: Change assumptions as required.
a) Calculate what you will NOT be paying to the franchisor (if you don’t enter a franchise).
• Royalty & Marketing over 10 years. (See Note 1) $500,000
• Launch marketing package $50,000
• Franchise fee $50,000
b) Calculate the reduction in price that you will receive when you sell the business. (See Note 2) $150,000
TOTAL NOT PAID TO FRANCHISOR OR “LOST” ON SALE $750,000
Add back any items from the above that you’ll probably still spend if you create your own business
• Marketing at 3% of Revenue (Assumes you will still spend it) $150,000
• Launch Marketing package (Assumes you will still spend it) $50,000
TOTAL THAT YOU WILL STILL SPEND EVEN IF IT’S NOT A FRANCHISE $200,000
Calculate the net amount you will NOT pay to the franchisor (or lose when you sell the business)
NET AMOUNT YOU WILL NOT PAY TO FRANCHISOR OR LOSE ON SALE $550,000
(Total of Step 2 minus Total of Step 3)
Calculate the additional amounts you will need to pay in order to professionally create your own concept and get it to the Operating stage where it’s a professional well set-up business. (See Note 3)
• Concept development; Design development; Name registrations etc $25,000
• Start-up specilaists fee to set up the business for you (See Note 4) $125,000
TOTAL ADDITIONAL AMOUNTS YOU WILL NEED TO PAY IN ORDER TO CREATE YOUR OWN CONCEPT AND GET IT TO THE OPERATING STAGE. $150,000
STEP 6: Calculate the Total amount saved
TOTAL SAVING (Step 4 minus Step 5) $400,000
STAGE 4: DECISION TIME.
Not only have you saved a bucket load of $, you’ve also probably created a saleable asset that is yours, and you’ve not had the aggravation of paying out Royalty etc, and feeling as if you’ve received no benefit.
IS BUYING A FRANCHISE FOR YOU, OR WOULD YOU RATHER “GIVE IT A GO” FOR YOURSELF (WITH A GOOD ADVISOR TO HELP GET YOU THERE)?
10% of $500,000 X10 years. Note that for the purposes of this illustration we’re not bothering with the time value of money
This assumes that many businesses are sold on a 3 to 4 times earnings basis. As the Royalty & marketing will not be paid, your annual earnings will be increased by $50,000 (being 10% of $500,000). $50,000 * 3 = $150,000.
Note that we’re only talking about those “extras” that otherwise would’ve come with the franchise, but that you now have to get yourself (and pay for them).
SPECIAL NOTE: DO NOT PANIC - We know that you don’t have the skills to do what’s necessary, BUT THERE ARE PEOPLE WHO DO! The objective here is to determine what it would cost to “buy” those skills.
4-6 months work. This is the guy who is going to bring the industry and market expertise, and set up your business for you. NOTE: This is not some young uni graduate. This is someone who not only knows his stuff, but knows how to get it done quickly and inexpensively and who has done it before. Don’t get involved with some theoretical “genius”.
If you select “the wrong guy” you will pay a fortune, and get rubbish.
This guy is going to talk to you to make sure that he knows what your vision is, and he will then (together with you) set up the business so that its ready to trade. All systems, procedures etc must be in place. It’s a BIG job, but it will place you in a position to be running your own business, and maybe YOU can franchise IT! Why not?
Re: Don’t Buy A Franchise. Do It Yourself!
Thanks for the post!