New corporate entities and Hailey’s Comet both come around about once in a lifetime. Why should you care, read on, I’ll get to that.
The L3C is a form of limited liability company (LLC) it has many characteristics of a typical LLC, it is a for-profit entity, offers a flexible ownership structure so each member’s management responsibility and financial stake may vary according to individual needs, and members enjoy limited liability. Lastly, like a LLC, the L3C is classified as a “pass-through entity” for federal tax purposes.
There is one major distinction between the L3C’s & LLC’s; both are profit-making entities, but the primary purpose of the L3C is not to earn a profit, but to achieve a socially beneficial objective, with profit a secondary goal. Sounds like the old Control Data Corporation model!!!!!
Why is it important to you? Have you ever gone to the federal government’s website recovery.com and gotten past all the jobs created or saved baloney? If so, you were redirected to a site grants.gov where all the “stimulus” money is being given away. Millions given away to study yaks mating calls or oil drilling in Brazil. Almost none is designated for small business! The vast majority is reserved for government, schools and non-profit corporations. That’s right, the job creating engine know as small business gets almost nothing. Government jobs do not create GNP, small businesses do.
OK, I promised there would be something in it for you, here it is; Start one! Start a L3C.
Haven’t you always wanted to start a company to save the planet or your fellow man? The urge is there, but where is the start up dollars and how will I get paid? Here it is. Start up a non-profit L3C and achieve non-profit 501 (c) 3 status and be able to take donations. Apply for the grants to get funded and keep writing grant papers. How do you get paid? Easy, just because it’s non-profit doesn’t mean you can’t take home a salary. I’m not advocating taking big fat 6 or 7 figure paychecks like some of the big non-profits with household names pay their CEO’s, but pay yourself fairly. Feel good that you finally followed your heart and are using your talents to help the earth and its inhabitants.
Worth checking into. Careful, now there is no excuse to not do good work!
Saturday, March 27, 2010
Your Stock Doesn’t Know You Own It
Peter Lynch in his book One Up On Wall Street, once said “a stock does not know you own it.” It sounds silly, but many people believe that good things happen to good people and since they are good spouses, parents, mentors, employees and can mix a great martini that the stocks they buy will always go up.
Stock value has everything to do with the company, and nothing to do with you.
Small businesses are similar. Sure it might be your name on the door like Bob’s Garage, but the value is derived from the company value, with a little left over for personal Goodwill. But remember if too much of the company is tied to the persona of the owner, it is worth less to a perspective Buyer who replaces you. Colonel Sanders might be an exception where his persona kept on after he sold KFC, but that gets into a whole different topic of branding.
I recently had a meeting with a business owner who I had put a market value on his business of just under $2 million. Nice business, had some of his adult children involved in the daily operation, but the truth is that he was the innovative and driving force in the business and as he approached retirement age, that drive as slowing down. So were sales and profits. Very typical in the life cycle of a business. The key is to recognize this early and sell the business to someone who will invigorate the business before the business starts to slide. Better to rise up a business from flat sales than to try to right a sinking ship.
After presenting my analysis of the market price I asked the owner what he thought the business was worth. He stated $5 million! Checking to see if I missed something I inquired as to how he got to that figure. The answer was $2 million for my wife and I and $1 million for each of our three children. Hard to counter logic like that, even though I tried. We never did come to terms on a listing price.
The sad truth is that today I could sell the company for $2 million and have a steady pool of Buyers looking for a business like this, but if he holds on to the business for a couple more years and the slide continues, we will be selling it for far less, if we can sell it at all.
Remember, a business doesn’t know you own it…….or how many children you have.
Dave Roeser
Stock value has everything to do with the company, and nothing to do with you.
Small businesses are similar. Sure it might be your name on the door like Bob’s Garage, but the value is derived from the company value, with a little left over for personal Goodwill. But remember if too much of the company is tied to the persona of the owner, it is worth less to a perspective Buyer who replaces you. Colonel Sanders might be an exception where his persona kept on after he sold KFC, but that gets into a whole different topic of branding.
I recently had a meeting with a business owner who I had put a market value on his business of just under $2 million. Nice business, had some of his adult children involved in the daily operation, but the truth is that he was the innovative and driving force in the business and as he approached retirement age, that drive as slowing down. So were sales and profits. Very typical in the life cycle of a business. The key is to recognize this early and sell the business to someone who will invigorate the business before the business starts to slide. Better to rise up a business from flat sales than to try to right a sinking ship.
After presenting my analysis of the market price I asked the owner what he thought the business was worth. He stated $5 million! Checking to see if I missed something I inquired as to how he got to that figure. The answer was $2 million for my wife and I and $1 million for each of our three children. Hard to counter logic like that, even though I tried. We never did come to terms on a listing price.
The sad truth is that today I could sell the company for $2 million and have a steady pool of Buyers looking for a business like this, but if he holds on to the business for a couple more years and the slide continues, we will be selling it for far less, if we can sell it at all.
Remember, a business doesn’t know you own it…….or how many children you have.
Dave Roeser
Sunday, April 19, 2009
Financing the purchase of a business
Financing the purchase of a business
Purchasing a business isn’t like buying a house. There have been many financing options in the past few years where buyers could purchase a house with zero down. That just isn’t possible when buying a business. So if you have a dream of being your own boss some day, start saving now!
Typically, and in the current environment there isn’t anything really typical these days, but generally a bank will be looking for 20% to 30% down. That can vary greatly based on the following;
• How much of the purchase price is Goodwill vs. Assets
• Experience of the Buyer in that industry
• Seller willing to carry any debt on the business sale
• Industry
• Cash flow of the business
• Tax records of the business
• Credit worthiness of the Buyer
• Is there Real Estate involved
• Collateral
Combinations of the above can really change the financing landscape. Let me outline some common combinations that work and don’t work.
We (Business Brokers) often encourage owners of businesses to finance some or part of a business acquisition. There are several good reasons to do this;
• Buyers have confidence that the business is good since the Owner still has some skin in the game. Banks like this too.
• Sometimes the SBA departments in the banks will consider Owner financing to be almost the same as Buyer cash in the deal to. This means that a Buyer could put less down, maybe as little as 10%.
• There are tax advantages to Owners when they finance part or the entire sale. They may be able to defer taxes until they actually receive the payments in future years.
• There is the added “boot” of interest income from the financing. Also risk.
• Lower down payment requirements for Buyers open the door to more candidates which helps the business sell faster and at a price favorable to the Owner.
Goodwill isn’t where you take your old clothing to donate, well yes it is, but not in this instance. I’ll explain Goodwill and tax issues in a future article, but for now let’s consider Goodwill as it relates to a bank loan.
Banks like “hard” assets. Something tangible. Something they can reposes it all goes wrong. Inventory can move out the door to quickly, so banks aren’t big fans of inventory as collateral in buying a business. Accounts Receivable (A/R) is discounted depending on the quality and age of the receivables. Banks like bricks and mortar, equipment, etc.
Goodwill is an intangible. You amortize goodwill, you depreciate equipment. Similar, but very different. Basically a business has value based on the cash flow of the business. Think for a moment about a computer. On eBay, you’d get two cents for a used one. If that same computer was on the desk of a key employee, imagine the revenue lost if it were gone. Not priceless, but it has a lot more value than the one on eBay. Same computer, different uses. So you could say the difference the two computers is from the “goodwill” that is created by an ongoing business.
The Goodwill is the difference between the fair market price of a business and the total of all the other assets of the business. Assembling all the employees and training them costs lots of money, they are included in the goodwill. So if a business fails, all the employees are gone, and all the profit, and it leaves you with the hard assets, which are about two cents. Now you know why banks don’t like goodwill. Today, SBA loan underwriters like to see seller financing equal to the goodwill of the business. Not a rule, a guideline.
Of course, a Buyer must have some experience. If you’d like to own a restaurant but never worked in one, the bank will not loan you the money. If you have a felony conviction, you can’t own a bar. It’s that simple.
The SBA has also ruled out financing for C-Stores with gas. Too many failures and too many environmental issues with the gas tanks.
The business should have current tax records for that business. It the returns are blended with other businesses or locations, the bank will require that a full scale audit and accounting is made for the business unit being sold.
One last thing, the SBA is the Small Business Administration. They do not make loans. Most banks have a SBA loan department. The SBA will make guarantees to banks that follow their guidelines (exactly). The guarantee is for a portion of the loan and reduces the risk the bank has. This allows the banks to make loans and keep business and commerce going. Defaulting on a SBA loan costs all us taxpayers. The SBA to fund these loan guarantees sells notes on the market. These placements cost money and the high risk is expensive too. SBA fees are therefore higher when taking out the loan. SBA loans are typically 2% to 2.5% over prime, or the rate banks charge their best customers.
Hope this helps. Look for future articles on collateral, inventory, capital goodwill and several hybrid financing solutions.
Purchasing a business isn’t like buying a house. There have been many financing options in the past few years where buyers could purchase a house with zero down. That just isn’t possible when buying a business. So if you have a dream of being your own boss some day, start saving now!
Typically, and in the current environment there isn’t anything really typical these days, but generally a bank will be looking for 20% to 30% down. That can vary greatly based on the following;
• How much of the purchase price is Goodwill vs. Assets
• Experience of the Buyer in that industry
• Seller willing to carry any debt on the business sale
• Industry
• Cash flow of the business
• Tax records of the business
• Credit worthiness of the Buyer
• Is there Real Estate involved
• Collateral
Combinations of the above can really change the financing landscape. Let me outline some common combinations that work and don’t work.
We (Business Brokers) often encourage owners of businesses to finance some or part of a business acquisition. There are several good reasons to do this;
• Buyers have confidence that the business is good since the Owner still has some skin in the game. Banks like this too.
• Sometimes the SBA departments in the banks will consider Owner financing to be almost the same as Buyer cash in the deal to. This means that a Buyer could put less down, maybe as little as 10%.
• There are tax advantages to Owners when they finance part or the entire sale. They may be able to defer taxes until they actually receive the payments in future years.
• There is the added “boot” of interest income from the financing. Also risk.
• Lower down payment requirements for Buyers open the door to more candidates which helps the business sell faster and at a price favorable to the Owner.
Goodwill isn’t where you take your old clothing to donate, well yes it is, but not in this instance. I’ll explain Goodwill and tax issues in a future article, but for now let’s consider Goodwill as it relates to a bank loan.
Banks like “hard” assets. Something tangible. Something they can reposes it all goes wrong. Inventory can move out the door to quickly, so banks aren’t big fans of inventory as collateral in buying a business. Accounts Receivable (A/R) is discounted depending on the quality and age of the receivables. Banks like bricks and mortar, equipment, etc.
Goodwill is an intangible. You amortize goodwill, you depreciate equipment. Similar, but very different. Basically a business has value based on the cash flow of the business. Think for a moment about a computer. On eBay, you’d get two cents for a used one. If that same computer was on the desk of a key employee, imagine the revenue lost if it were gone. Not priceless, but it has a lot more value than the one on eBay. Same computer, different uses. So you could say the difference the two computers is from the “goodwill” that is created by an ongoing business.
The Goodwill is the difference between the fair market price of a business and the total of all the other assets of the business. Assembling all the employees and training them costs lots of money, they are included in the goodwill. So if a business fails, all the employees are gone, and all the profit, and it leaves you with the hard assets, which are about two cents. Now you know why banks don’t like goodwill. Today, SBA loan underwriters like to see seller financing equal to the goodwill of the business. Not a rule, a guideline.
Of course, a Buyer must have some experience. If you’d like to own a restaurant but never worked in one, the bank will not loan you the money. If you have a felony conviction, you can’t own a bar. It’s that simple.
The SBA has also ruled out financing for C-Stores with gas. Too many failures and too many environmental issues with the gas tanks.
The business should have current tax records for that business. It the returns are blended with other businesses or locations, the bank will require that a full scale audit and accounting is made for the business unit being sold.
One last thing, the SBA is the Small Business Administration. They do not make loans. Most banks have a SBA loan department. The SBA will make guarantees to banks that follow their guidelines (exactly). The guarantee is for a portion of the loan and reduces the risk the bank has. This allows the banks to make loans and keep business and commerce going. Defaulting on a SBA loan costs all us taxpayers. The SBA to fund these loan guarantees sells notes on the market. These placements cost money and the high risk is expensive too. SBA fees are therefore higher when taking out the loan. SBA loans are typically 2% to 2.5% over prime, or the rate banks charge their best customers.
Hope this helps. Look for future articles on collateral, inventory, capital goodwill and several hybrid financing solutions.
The Value of Long Term Employees
There are several strategies in a business cycle downturn, lay offs being one of them.
Lately there has been a new practice of laying off your most senior workers because they are the highest paid. We have seen Glenn Taylor do this first with the Timberwolves where ticket prices are now at a all time low, and then its operating companies. I have a friend in the packaging industry who recently lost his job to someone half his age. The lack of experience and judgment in his replacement is staggering and very costly.
If you really think about it, why are senior employees paid higher. Usually because their experience allows them to complete tasks more quickly with fewer mistakes. One mistake that could have been avoided through experience will quickly pay for their higher salary many times over.
At a time management should be looking for how an experienced employee can cover more areas and get them through the tough times, some companies do the opposite.
I used to work for a couple visionaries named Bill and Dave. Hewlett-Packard (HP) was in a down turn in the 1980’s and faced laying off workers. Instead they realized that the downturn would be temporary like all those times before. They asked everyone to take a 10% pay cut. Hourly employees took every other Friday off; management just endured a pay cut. Moral was high because no one was laid off. The monetary value was met with the 10% in wage reduction across the board. Sure no one likes taking a cut in pay, but being able to keep your job at 90% of pay had a lot of value.
And they were right, in three months things had turned around, only H-P was able to quickly bring back workers to full staff and pay to meet the demand. Three months later middle management was back at full pay and three months after that senior management was back at 100% pay. Don’t think we’ll see that type of program from GM, too bad.
I help people buy and sell businesses every day. The true value of the business isn’t the sum of the buildings, machines and office equipment. The true value is how well all those fixed assets interact with “human assets” to make cash flow.
Want your small company to be more valuable, keep your long term, tested and trusted employees. Believe me, Buyers of businesses are always concerned about losing that “human asset” during a business sale. Buyers put a higher value on businesses with long term employees. Why, because they know the business will perform better with that talent. Don’t make the penny wise and pound foolish decision with employees. Try something visionary!
Lately there has been a new practice of laying off your most senior workers because they are the highest paid. We have seen Glenn Taylor do this first with the Timberwolves where ticket prices are now at a all time low, and then its operating companies. I have a friend in the packaging industry who recently lost his job to someone half his age. The lack of experience and judgment in his replacement is staggering and very costly.
If you really think about it, why are senior employees paid higher. Usually because their experience allows them to complete tasks more quickly with fewer mistakes. One mistake that could have been avoided through experience will quickly pay for their higher salary many times over.
At a time management should be looking for how an experienced employee can cover more areas and get them through the tough times, some companies do the opposite.
I used to work for a couple visionaries named Bill and Dave. Hewlett-Packard (HP) was in a down turn in the 1980’s and faced laying off workers. Instead they realized that the downturn would be temporary like all those times before. They asked everyone to take a 10% pay cut. Hourly employees took every other Friday off; management just endured a pay cut. Moral was high because no one was laid off. The monetary value was met with the 10% in wage reduction across the board. Sure no one likes taking a cut in pay, but being able to keep your job at 90% of pay had a lot of value.
And they were right, in three months things had turned around, only H-P was able to quickly bring back workers to full staff and pay to meet the demand. Three months later middle management was back at full pay and three months after that senior management was back at 100% pay. Don’t think we’ll see that type of program from GM, too bad.
I help people buy and sell businesses every day. The true value of the business isn’t the sum of the buildings, machines and office equipment. The true value is how well all those fixed assets interact with “human assets” to make cash flow.
Want your small company to be more valuable, keep your long term, tested and trusted employees. Believe me, Buyers of businesses are always concerned about losing that “human asset” during a business sale. Buyers put a higher value on businesses with long term employees. Why, because they know the business will perform better with that talent. Don’t make the penny wise and pound foolish decision with employees. Try something visionary!
Thursday, February 19, 2009
Blue Sky Brand names like Coke where millions are spent every day to promote the brand. Trained employees, a company’s most valuable asset is never on a balance sheet. Product development costs, if not spent there would be no product to sell. Loyal customers take a lot of time and money to create Product image, like Cadillac or Chevy. Cadillac spends a lot to promote the image. Customer contracts and purchase orders that ensure future business. Trademarks, patents, copyrights, licensing agreements A great location Special technology
I once asked my son when he was younger if he knew what Goodwill was, and he said “It’s that place where we take old clothes each year”. Kids!
Blue sky is often used to describe Goodwill. I actually can’t stand this term when used to describe the Goodwill value in a business. Blue sky sounds like, thin air. Bankers don’t like to finance blue sky, and with a name like that who would. The SBA is about to impose a limit on the amount of goodwill they will finance in a business, which will be a detriment to small businesses. This misnomer of Blue Sky gives Goodwill a bad rap, which then influences fiscal policies. Often people think goodwill is “thin air”. Nothing could be further from the truth.
Why is Blue Sky or Goodwill important? Businesses are comprised of basically two things, hard assets and goodwill. You can take a count of hard assets like machinery and inventory, but a business is worth much more than the sum of the hard assets.
Here are some examples of goodwill. Tell me if you think this is just thin air.
Convinced? Doesn’t sound like blue sky to me. Sounds like value. I believe that the name Blue Sky has been detrimental to what goodwill is really about. That bad rap is about to influence less informed political policy makers in Washington into making a decision that will hurt small businesses for years to come. Remember, small businesses drive our economy and create jobs. With punitive tax structures, without the proper capital policies and with strangling SBA financing rules, those job creating businesses will cease to exist.
Saturday, January 31, 2009
When is the Right Time to Sell Your Business?
Buy low and sell high is the adage of Wall Street. But what about Main Street businesses, when is the right time to sell?
Can a business bring a fair value in a recession? The answer surprisingly is yes. A good strong business will fetch a good price in most economies. One reason is that during a recession more Buyers enter the market looking to “purchase” a job. More Buyers in the market increases the odds that the business will sell and for a fair price. It seems that leading up to a recession, consumer confidence wanes and individuals avoid risk taking. But even in a risk avoidance period, good businesses sell.
Seasonality has some bearing, but mostly on the length of time a business takes to sell. After the first of the year many Buyers enter the market after reviewing their career past and vow to make changes. They may have been encouraged at a holiday party by someone who is a business owner. Businesses can enter the market a little past this peak by waiting until their tax returns are completed usually by the March 15th corporate tax filing date. Summer tends to be a slower period as vacation scheduled slow up time tables. The 4th quarter can be filled with diversions as many firms have their peak season and individuals’ holiday schedules and parties consume time and lengthen the process.
Even more important than recessions and seasonality is the condition of the business. This can be greatly affected by the following items. Selling your business before these conditions affect your business will have the largest impact:
Sell before:
You get burned out. Yes, even the business owner can get burned out.
Capital constraints strangle the business.
Stress takes a toll on your family relationships.
Medical reasons force you to sell. Have a plan ready, now.
Complacency erodes earnings.
All of these five real life occurrences affect a business price more than anything else. Make an honest self evaluation to see if any of these are present. If so, your business value will erode as you allow these to fester.
You built a successful business on planning, hard work and a little luck. Improve your odds of selling your business for a higher and fair price by recognizing these real life events and make a plan to deal with these issues before they affect the value of your business.
Start by contacting a licensed business broker. Set up a meeting date and ask a lot of questions. A business broker can tell you what you need to do to prepare the business for sale, instruct you on what things increase a businesses value and will provide a market price analysis at no cost. Business brokers perform this service in the hope that when the day is right to sell your business, you will contact them.
Armed with the helpful information and a market price you can start to make your future plans for the business. Plan to sell before you need to sell.
Buy low and sell high is the adage of Wall Street. But what about Main Street businesses, when is the right time to sell?
Can a business bring a fair value in a recession? The answer surprisingly is yes. A good strong business will fetch a good price in most economies. One reason is that during a recession more Buyers enter the market looking to “purchase” a job. More Buyers in the market increases the odds that the business will sell and for a fair price. It seems that leading up to a recession, consumer confidence wanes and individuals avoid risk taking. But even in a risk avoidance period, good businesses sell.
Seasonality has some bearing, but mostly on the length of time a business takes to sell. After the first of the year many Buyers enter the market after reviewing their career past and vow to make changes. They may have been encouraged at a holiday party by someone who is a business owner. Businesses can enter the market a little past this peak by waiting until their tax returns are completed usually by the March 15th corporate tax filing date. Summer tends to be a slower period as vacation scheduled slow up time tables. The 4th quarter can be filled with diversions as many firms have their peak season and individuals’ holiday schedules and parties consume time and lengthen the process.
Even more important than recessions and seasonality is the condition of the business. This can be greatly affected by the following items. Selling your business before these conditions affect your business will have the largest impact:
Sell before:
You get burned out. Yes, even the business owner can get burned out.
Capital constraints strangle the business.
Stress takes a toll on your family relationships.
Medical reasons force you to sell. Have a plan ready, now.
Complacency erodes earnings.
All of these five real life occurrences affect a business price more than anything else. Make an honest self evaluation to see if any of these are present. If so, your business value will erode as you allow these to fester.
You built a successful business on planning, hard work and a little luck. Improve your odds of selling your business for a higher and fair price by recognizing these real life events and make a plan to deal with these issues before they affect the value of your business.
Start by contacting a licensed business broker. Set up a meeting date and ask a lot of questions. A business broker can tell you what you need to do to prepare the business for sale, instruct you on what things increase a businesses value and will provide a market price analysis at no cost. Business brokers perform this service in the hope that when the day is right to sell your business, you will contact them.
Armed with the helpful information and a market price you can start to make your future plans for the business. Plan to sell before you need to sell.
Saturday, January 24, 2009
To Be a Franchise, or not Be a Franchise, that is the Question
There are a lot of mixed emotions out there when it comes to owning a franchised business or not owning one. My advice is to try not to let emotions get in your way of making the right decision.
There are many very successful franchises out the like McDonalds and a few not so successful ones, so franchising isn’t always the answer.
One example I tell people asking why they should consider a franchise is this; If I were to start Dave’s Take and Bake Pizza, would I have customers the first day and how successful would I be. Then consider if I opened a Papa Murphy’s Take and Bake Pizza franchise store, I’d probably have a line waiting for the doors to open the first day.
So a brand can make a big difference. It speaks to consistent quality, good training and a proven model. Franchises without those three things often fail.
Another difference I have been making a mental note on is management. I have noticed that many successful franchises train and promote the owners to be managers first and worker bees second. Managers that greet customers, actively market the business, go to local events, associations and clubs tend to have more successful businesses than where the owner is just another employee behind the counter, chair or tool bench. It’s hard to lead when you are caught up in the day to day operations.
So a franchise can be the right answer, but then again not. How does a person find a franchise opportunity that is right for them? Here are some thoughts;
Location is important. Even the best franchise will fail in a bad location.
Franchise support is important. Before you can sign up as a franchise owner, most often you have to meet with the franchisor and review a UFOC. This document spells out the ground rules. You must wait 10 days before you can sign a UFOC, so take the time to read it and get council to help you with the terms.
Shop the same franchise in different locations. Is the quality and service the same? This will speak to the training by the franchisor and the district management. A Big Mac is the same in Chicago as it is in Tokyo, Japan!
Is the franchisor more focused on opening stores or helping existing ones? Two years ago McDonalds shifted their focus from opening stores to improving what they already had. They were one of the few positive stock market trends last year and you have probably noticed the difference at your local favorite Mickey D’s.
Is there critical mass in your area? Two issues here; 1. Will you be the first one so that the brand means nothing in the area? 2. Is there so much market saturation that same brand stores take business from each other?
Does the franchise offer something unique or is it an also ran?
Do you need specialized skills to operate the business or are management skills and a good system all you need?
Check around, do local franchisees own more than one store. Good indicator of success.
Franchisors charge royalties and advertising fees. Royalties can be in the 5% to 7% of sales range. This pays for the brand name, franchisor support, software and district management to help train your employees, etc. Advertising fees are in the 3% to 5% range and cover national advertising and maybe some local coop advertising. Read the UFOC to be exactly sure on these.
These royalties and ad fees often amount to 11% of total sales. Sounds high, but if the brand name drives customers to your business, management training and software help you run a profitable operation and support helps you keep the consistency, then the fees are well worth every penny.
Last thought or observation; If you already know everything and a franchisor can’t teach you anything and you never plan to attend a local meeting or franchisor training or support session, then franchising in not for you. If on the other hand you have some skills and can follow a good plan, a franchise business can be a gold mine.
There are a lot of mixed emotions out there when it comes to owning a franchised business or not owning one. My advice is to try not to let emotions get in your way of making the right decision.
There are many very successful franchises out the like McDonalds and a few not so successful ones, so franchising isn’t always the answer.
One example I tell people asking why they should consider a franchise is this; If I were to start Dave’s Take and Bake Pizza, would I have customers the first day and how successful would I be. Then consider if I opened a Papa Murphy’s Take and Bake Pizza franchise store, I’d probably have a line waiting for the doors to open the first day.
So a brand can make a big difference. It speaks to consistent quality, good training and a proven model. Franchises without those three things often fail.
Another difference I have been making a mental note on is management. I have noticed that many successful franchises train and promote the owners to be managers first and worker bees second. Managers that greet customers, actively market the business, go to local events, associations and clubs tend to have more successful businesses than where the owner is just another employee behind the counter, chair or tool bench. It’s hard to lead when you are caught up in the day to day operations.
So a franchise can be the right answer, but then again not. How does a person find a franchise opportunity that is right for them? Here are some thoughts;
Location is important. Even the best franchise will fail in a bad location.
Franchise support is important. Before you can sign up as a franchise owner, most often you have to meet with the franchisor and review a UFOC. This document spells out the ground rules. You must wait 10 days before you can sign a UFOC, so take the time to read it and get council to help you with the terms.
Shop the same franchise in different locations. Is the quality and service the same? This will speak to the training by the franchisor and the district management. A Big Mac is the same in Chicago as it is in Tokyo, Japan!
Is the franchisor more focused on opening stores or helping existing ones? Two years ago McDonalds shifted their focus from opening stores to improving what they already had. They were one of the few positive stock market trends last year and you have probably noticed the difference at your local favorite Mickey D’s.
Is there critical mass in your area? Two issues here; 1. Will you be the first one so that the brand means nothing in the area? 2. Is there so much market saturation that same brand stores take business from each other?
Does the franchise offer something unique or is it an also ran?
Do you need specialized skills to operate the business or are management skills and a good system all you need?
Check around, do local franchisees own more than one store. Good indicator of success.
Franchisors charge royalties and advertising fees. Royalties can be in the 5% to 7% of sales range. This pays for the brand name, franchisor support, software and district management to help train your employees, etc. Advertising fees are in the 3% to 5% range and cover national advertising and maybe some local coop advertising. Read the UFOC to be exactly sure on these.
These royalties and ad fees often amount to 11% of total sales. Sounds high, but if the brand name drives customers to your business, management training and software help you run a profitable operation and support helps you keep the consistency, then the fees are well worth every penny.
Last thought or observation; If you already know everything and a franchisor can’t teach you anything and you never plan to attend a local meeting or franchisor training or support session, then franchising in not for you. If on the other hand you have some skills and can follow a good plan, a franchise business can be a gold mine.
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