13 Tips on Buying and Owning a Franchise
I rarely see this topic covered on Bigger Pockets, so I decided to interview my partner, Bob Paulus. In addition to PPR, he’s been quite successful in running franchises. He started out buying a couple Rita’s Water Ice franchises, before getting involved with Hollywood Tans. These were all successful. It wasn’t until Bob got more involved with PPR that he and his wife sold several of the franchises, except for a Rita’s Water Ice. He has seen all three sides—buying, running, and selling—of a franchise.
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Starting Out: How He Did It
Can you tell us a little bit about how you got started in Franchises or Franchise Investing and why it was right for you?
I wanted to work for myself. I started researching what companies were available in the area. And my three main considerations were: what can I afford; what interests me; and what is a good fit? But, as much as I wanted to work for myself, I didn’t have the time, knowledge, or money to start a business from scratch. And, when you get involved with a franchise, because they have processes in place, it makes it much easier.
What advice would you give someone that’s new about investing in a franchise?
Make sure you do your research—it is all about the due diligence. Also, make sure you’re not stretching yourself too thin financially. If you have a partner, even if it’s a spouse, it is critical that everyone’s roles are clearly defined from a time and financial perspective. I’ve seen a lot of partnerships dissolve for lack of communicating the responsibilities.
Buying a Franchise
What’s the easiest and safest way to buy a franchise?
The easiest way, of course, would be if you have cash in the bank and you don't need to get a loan. If you have a line of credit on your house, that's easy to tap into as well. It may be more difficult, and more paperwork, if you need to get an SBA loan. But, this could be easier if you have 20% liquid and finance the rest; as they will not want to give an SBA loan to finance the business 100%.The safest way, however, would not be to have the business tied to your primary residence. Statistically 90% of businesses fail in the first 5 years. So, I wouldn't suggest risking your primary residence knowing that there's a 90% chance of failure.
How do you analyze a franchise (due diligence)?
You will want to research the franchise to find out if they’re stable and have a good reputation. Franchisors may vary in the level of input or guidance they give you. Some may be very flexible, giving you guidelines but allowing you to be creative, while others may be stricter, providing more structure. Make sure that it’s a good fit for you. It’s crucial to speak to as many franchisees as possible and retrieve information about the positive or negative aspects of their dealings with the franchisor. Make sure the franchisor’s information is the same as what the franchisees are saying. Do this to make sure the franchisor is being honest with you. Also, research how much the franchise would charge for royalties.
What kind of capital is required to buy a franchise?
Franchises probably run from as small as $30,000 for a cleaning company to an excess of $1 mil. if you want to buy a hotel franchise. The biggest variable would be if you’re buying property. If you’re taking property out of the equation, probably the bulk of franchises cost between $50,000 and $200,000. When you’re starting out this could include a franchise fee, initial start up cost of goods, purchasing equipment, any improvements/alterations to the building so that it fits your business model (negotiable in the lease), and some cash set aside for the first few pay rolls, marketing and advertising, and as a safety net.
Are there certain franchises that you stay away from?
Yes. I stay away from absentee owner franchises, which means the franchisor will tell you that you don’t really have to be there that much. I don’t think that a franchise can fully maximize its profits if the owner isn’t there enough. I also stay away from a franchise with the reputation of not supporting the franchisees or any franchises with a well above average royalty percentage. I would stay away from a franchise that is new to the market as well, because there may be more risk of it being unsuccessful in that geographical area.
Owning and Running a Franchise
What are some of the pitfalls of franchise investing?
I guess a pitfall would be when the franchise decides to change the business model, you don’t really have much of a say. That could be, for example, deciding to add or subtract a product line. They might decide to add a product line that could cause additional expense in equipment or they may decide to remove a product line that was very profitable in your particular location.
What are the advantages of owning a franchise?
Brand recognition is probably the biggest advantage, as you will have customers who are loyal to your brand right off the bat, although this does depend on your geographical area. Another advantage, as I may have mentioned, is you’re able to be your own boss while still having the franchiser help you—you’re not totally on your own.
What kind of time commitment do your franchises require?
On average, a franchise should probably require a minimum of 30 hours a week.
Are there exit strategies for franchises? Are there upsides to selling?
There are no more so exit strategies or upsides to selling than a self run business. I wouldn’t start any business venture without an exit strategy in place prior to starting it.
How does real estate factor in?
Well, first off, owning the property provides stability because you’re no longer at the mercy of the landlord as far as terms and dollar amount. Also, the tax benefits of owning your properties are better than if you’re renting.
What’s the most important thing you learned as a franchise owner?
I guess I would say that I learned how to run a business, with the safety of having the franchisor’s guidance for major processes. But, in a sense, I learned how to run a business by doing it myself.
Are there any other words of wisdom you’d like to offer or resources you suggest?
A successful franchise that’s been in business for a long time, more than likely, has good processes in place to make the franchisee profitable. If you have enough belief in the franchise to invest, use their processes.
Another Strategy to Acquire Commercial Real Estate
While doing this interview with Bob, the real estate question did strike a chord with me. While Bob leased/leases the properties for his franchise, a unique strategy for acquiring commercial real estate would be to do the McDonalds, CVS, or Wawa model. These franchises use the proceeds from their business to fund the property. Even if for some reason they went out of business, they have the safety net of owning prime commercial corners in highly populated areas.
Photo Credit: El Gran Dee