Musings

Are All Franchises Equal Opportunities?

I have a great network of friends in varying industries from finance to human resources, and one common theme I’ve noticed when discussing our professional careers is that people like to lump all franchises into one bucket.

People tend to make an association between one negative franchise story they’ve heard and ALL franchises. That’s like encountering one aggressive dog and saying that you never want a dog because they’re not friendly. 

Now, it is true that there are some franchise opportunities out there that are very risky investments. Concepts that maybe should have never been a franchise in the first place. Just because you make a great carne asada taco doesn’t mean you know how to scale and support franchisees. But there are also a ton of great franchise opportunities out there that offer a better quality of life and better financial future for you and your family. 

So we’ve already established the answer to our question: All franchise opportunities are certainly NOT equal. Here are 4 things to consider when evaluating franchise opportunities:

  1. Risk Factor: While it is true that the worst case scenario for all franchises is that you lose your entire investment, there are some that are a bit riskier than that. If you choose a brick and mortar franchise, it is likely that you’ll be required to sign a personal guarantee with the landlord when you sign the lease. This means that you’re on the hook for the rent personally, whether your business makes it or not. If you close up shop after 3 years and have a 5 or 10 year lease, you’re personally responsible for making those lease payments through the end of the term or for a lesser period of time, depending on your ability to negotiate. 

Brick and mortar franchises therefore offer more risk than a business that does not require retail space. They often have higher investments as well since you’ll have construction and furniture costs so there’s more money at risk overall.

But this doesn’t mean they should be avoided. Depending on the concept, it may have a higher likelihood of success. 

If you’re unsure about the added risk of brick and mortar franchises, maybe start with something with a small footprint. PetWellClinic, for example, only requires 600 to 1200 Square Feet, which is about as small as you can get for retail space. PetWell is a first of its kind walk-in veterinary clinic and the initial investment ranges between $150K to $255K.

  1. The Upside: Evaluate what your return on investment looks like over a period of time. Some franchises can beat this number, but if you can’t envision making your investment back in ~3 years, you may be taking on a riskier investment. Does 3 years sound like a long time? Put your money somewhere else. Opening any business, including franchises, requires hard work and time to see a return on your investment. 

If you compare the upfront investment to the overall potential of the business, it’ll be easy to identify winners and losers.

Surveillance Secure, an electronic security integrator, has an initial investment of ~$140K to $240K. There’s no real estate required and the majority of your investment (~60-75%) is simply the franchise fee and the working capital to operate your business for several months after you start. In Item 19 (Financial Performance Representations) of the Surveillance Secure FDD, they show gross sales for the company-owned location of $2.2M and an adjusted net income of $590K+. 

Obviously, like any franchise, there’s no guarantee that any franchisee would make that amount, but it’s hard to argue that it shows great potential. 

  1. Early Adoption vs. Mature Franchises: Being one of the first franchisees to invest can be scary and requires more of a leap of faith, so it’s easy to argue that there’s more risk involved than choosing a mature franchise with 100’s of successful data points. However, getting in too late means you may not get the territory that you want and will have to settle for a less desirable area to operate your business.  So could there actually be more risk in taking on a second-rate territory despite a wealth of data? Possibly. The data points drawn from the successful franchises are most likely drawn from territories that were cherry-picked by the early adopters. 

On the flip side, being early means you get to be the cherry-picker, and franchisors often award larger protected territories in the early days. The upside of an emerging franchise is arguably greater than the upside of a mature franchise due to the nature of how territories are selected by franchisees. The first franchisees get to choose the most desirable territories. 

  1. Lifestyle: A lot of people think franchise owners are in it simply to make money. That is certainly one of the more important factors, but sometimes the most important consideration for a franchisee is quality of life. How often and when you work is up to you. What type of work you do is up to you. And you can align your passions with the franchise you choose. 

Going back to our first two examples, PetWellClinic is a great franchise if you love pets and want to be the person in your community that provides a more convenient and affordable veterinary option for your neighbors. Surveillance Secure is a franchise that is all about business development. If you thrive on building relationships, networking, and closing deals, you’ll enjoy your day to day, and without set operating hours like a retail store, you truly control your schedule. 

At Oakscale, we align franchise franchise owners with franchise brands from a lifestyle and passion perspective first. If we check that box, it’s up to you to weigh the risk-reward, and decide what makes sense for your financial future. No matter what franchise you’re evaluating, the numbers are the numbers, and not all are created equal. 

November 10, 2020
by 
Joseph Sexton