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Franchises 101: How to Find, Fund, and Profit from Owning a Franchise

The BiggerPockets Money Podcast
44 min read
Franchises 101: How to Find, Fund, and Profit from Owning a Franchise

Want to buy a business? If so, you’ll need franchises explained. At first, franchises seem like something only for fast food, gas stations, or hotel chains. But, in reality, a whole world of businesses are up for sale that have proven track records and could put profits into your pocket faster than starting your own business. But first, you’ll need to make sure you’re ready to own and run a franchise, as it’s not always the passive income stream investors believe it to be.

When done right, franchises offer an almost irresistible offer to young entrepreneurs or those trying to escape the corporate ladder. You can trade in your soul-sucking nine-to-five, receive top-tier support and training, and get paid a salary, all while your business grows in the background. But before you start window shopping for which hair salon, water restoration, or pool cleaning business you want to own, you’ll need to talk to someone like Greg Mohr, author of Real Freedom: Why Franchises Are Worth Considering and How They Can Be Used For Building Wealth

Greg acts as a franchise consultant, helping match potential franchisees to a parent company that works best for their schedule, goals, and income-earning potential. You may think you know how a franchise works, what type you’d like to buy, and how much money you would make, but Greg’s in-depth, multiple-decade-long knowledge may tell you otherwise. So, if you want to run a business but don’t know where to start, Greg may be the perfect person to turn to.

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Mindy:
Welcome to the Bigger Pockets Money podcast where we interview Greg Moore and talk about franchises.

Greg:
So what we’re looking for is really to find out what kind of a lifestyle are you looking for? How do you want to spend your day? Do you like being in an office nine to five Monday through Friday? Is that something you enjoy and can really wrap your mind around? Or do you prefer being out and about? More schedule flexibility, more freedom to do what you want during the day? Or do you just want to invest in a franchise and you don’t want to do anything?

Mindy:
Hello, hello, hello, my name is Mindy Jensen, and with me as always is my one of a kind cannot be duplicated co-host Scott Trench.

Scott:
Copy that. Mindy

Mindy:
Scott and I are here to make financial independence less scary. That was a good one, Scott. Less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, or go on to make big time investments in assets like real estate, start your own business or own 100 Supercut franchises we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, today’s show is a little bit different. First, we’re releasing on a Wednesday. Second, we have a bit of a history lesson about the beginnings of franchises read by our esteemed producer, Kailyn Bennett.

Kailyn:
The first example of something resembling the franchise was introduced in 1731 by Benjamin Franklin, who partnered up with Thomas Whitmarsh to establish a printing business in South Carolina in order to print Franklin’s works. The way it worked was that Whitmarsh had the right to print and distribute Franklin’s work, but he did this independently. Whitmarsh purchased the printing equipment and paper from Franklin, but he had to maintain and run it himself. And he was responsible for the distribution of the printed work.
This was the earliest example of a franchise, albeit without some of the aspects of the franchise business that we see today, such as training, branding, and so on that is included in a franchise package. The first modern franchise that looks very much like the franchises that we have all come to know such as Dairy Queen, McDonald’s, and Burger King was established by Martha Matilda Harper, who was a Canadian American hairdresser. She established a franchise called Harper Method Shops in 1891. Harper developed what became the first effective modern shampoo, but she needed it to be an effective way to use and sell it in salons. We begin really seeing all the elements of a modern franchise in the Harper business, including the training, branding, marketing, advertising, insurance, and even some company field trips. This is where modern franchising truly begins, and the amazing thing about the Harper business is that it lasted for decades with 500 outlets. With the final one closing in 1972.
The franchise business began really growing in the 1920s and 30s. There were famous examples like General Motors selling a franchise to William Metzger of Detroit. The automotive industry is actually a very good example of why the franchise model works and why it became necessary in the first place.
As car manufacturing began growing car makers quickly realized that it was very expensive to fuel cars at a manufacturing site and then they had to ship them off to consumers. Now this is how we begin seeing the growth of gas stations. It quickly became cheaper to transport cars to local sellers across the country and then have them fueled on site where the consumers bought them.
Another great example of why franchising is a great business to save on costs is the famous Coca-Cola company, which struggled in the beginning with its transportation costs. Filling up all those glass bottles with Coke and then transporting them was running up huge costs even before the company sold the product. So what Coca-Cola eventually began doing was franchising its product to smaller outlets across the country. Franchises were required to fill up the bottles on site according to very strict instructions while keeping the formula a secret. Selling the product locally saved hugely on transportation costs, making Coca-Cola into the mega successful business it is today.
The franchise model really exploded during the period between the 1930s and into the 1950s, with the establishment of such major franchises as Kentucky Fried Chicken, Dairy Queen, and of course McDonald’s.
What really helped the franchise model was the introduction of the Federal Lanham Trademark Act in 1946. This allowed businesses to safely and legally establish licenses with third parties, which is an essential requirement of a franchise, and this is how the modern franchises operated ever since. Essentially, the franchising brand leases its products, it’s branding, and sometimes its promises to a franchisee who’s responsible for managing the business locally, which includes staff, production or even packaging on site and all other aspects of the business, including local taxes.
The franchisee gets to keep the profit, but the franchise owner makes money from franchise royalties or fees, and those can be as high as 20% of the sales, although typically most of them around five to 7%. The franchisee is also responsible for paying rent, staff wages, taxes, insurance, and all the other expenses that go along with running a business, plus the franchise fee. And that lets them use the product, the logo, and any additional marketing associated with the franchise.
If you’re potentially interested in entering a franchise agreement, you might be wondering what’s in it for the franchisee. Well, like everything else, this business model has its pros and its cons. The biggest advantage of venturing into franchises is that you’re not having to spend time and money developing your product. A lot of businesses and most new businesses actually fail in the first year. Then about another half of them fail in the first five years, and a very small percentage survive the first 10 years. So if you’re thinking of starting your own business from scratch, it’s actually very risky, especially if you’re in the food industry, which is notorious for having a very high chance of failure. With a franchise, the risk of failure is actually pretty much taken away from you. Over 90% of franchises make a profit. It is highly unlikely that as a branch owner of a franchise you’ll fail.
However, you will need to consider the fact that your profit may be small. It’ll definitely be smaller than if you were the sole business owner of a successful company. Those fees will inevitably eat into your profit, and you will also need to know that typically franchises are required to charge an initial fee for every franchisee that signs up. That initial fee can range from $10,000 all the way up to five million depending on the franchise. So you do need starting capital to buy a franchise. However, you are guaranteed a profit. You just need to work out whether that profit will be enough.

Mindy:
All right, Kailyn, that was awesome. Before we bring in Greg, let’s take a quick break. And we are back. Greg Moore, welcome to the Bigger Pockets Money podcast. I’m so excited to talk to you today.

Greg:
Thank you for having me, Mindy. I’m very excited to be here and I do appreciate it.

Mindy:
Greg, in your bio, the first line reads, Greg Moore helps people escape their jobs and reach financial independence through finding franchises that fit their life’s needs. What do you mean by this?

Greg:
It’s interesting, Mindy. When free people first come to me and they’re looking to get into a business for themselves, the first thing they think about is the brick and mortar type franchises, restaurants in particular. The things that you drive by all the time that you see and that comes first to mind. So a lot of them are thinking that they’re going to have to put out a lot of money, invest a lot of money into it, put a lot of time and effort into it.
And franchises are not just about the restaurants that you see. You always see the McDonald’s, the Taco Bells, the Burger Kings. There’s many different types of franchises. So helping people get into the right one is looking at what they really want to do. Where have they been? Where are they at now? Where do they want to be five to 10 years from now? And then introducing them to the fact that every industry, just about every industry out there that I can think of has a franchise opportunity in it.

Mindy:
Can you give us some examples of what industries you’re talking about?

Greg:
If we’re looking at, say the service industry for instance, which is one that not a lot of people know about, people don’t necessarily know you exist until they need you. Let’s say water damage, fire restoration. Those are really good ones that you can do. So 1-800 Water Damage part of the Belfor Group. The Belfor group helped clean up after Katrina, does all the major cleanups. These are things you don’t think of because you don’t necessarily need it.
Do you need a tutor? You’ve got Tutor Doctor that can come over there and they can send over a tutor to you on that one. Do mom and dad need help around the house? A Place at Home sends caregivers into mom and dad’s home to keep them there a little while longer so they don’t have to.
Are you looking to help people in sales? Sandler Sales Training will help people go out and help businesses become better sales people. And if you just look at the home itself, you’ve got your roofing, you’ve got your pest control, you’ve got your kitchen remodeling, you’ve got your garage remodeling, you’ve got your painting inside and out on that. If you’re looking at businesses, if you’re looking at building maintenance, you’ve got a person that can do building maintenance, building cleaning, huge businesses in those. Anago, A-N-A-G-O, great one for commercial cleaning, huge business that you can really build up onto that. Those are absolute beautiful ones.
A lot of those you can start from the comfort of your own home. So you are not necessarily having clients come to you at your home, you go out and visit with them. So it’s a lot less of an investment. You’re not looking at a million dollars for McDonald’s, you’re looking at a hundred thousand, you’re looking at 150,000, maybe a small office on that one. So many, many different things out there, Mindy,

Scott:
Greg, it sounds like there’s a lot of options to become a franchise owner. What is the process for narrowing those options and becoming a franchise owner and selecting a good investment for you?

Greg:
Oh, great question Scott. The first step in the process is really to get ahold of a good franchise consultant out there that can help you through that process. The way I started it, I started it by just looking around to see what different franchises were out there and just started clicking on everything to get information on them. Kind of went click happy on the internet. And that produced a lot of people calling me, a lot of salespeople from different franchises calling me and just saying, yeah, this is the greatest franchise since sliced bread, you got to get into this one. Yeah, you got to get into this one. And then I had to figure out, okay, are they even available in my area? Is it really what I want to do? Is it going between time and investment money? So, many different things that I had to figure out on my own with all these people calling me at the same time.
It’s a lot easier to get ahold of a franchise consultant. Now I’d prefer you get ahold of me, but that’s not necessarily the thing to do. You can work with many different franchise consultants. There’s a lot of great franchise consultants out there. There’s going to be some basic steps they’re going to take you through. And this applies to me and anybody else that’s out there. One, get ahold of a great franchise consultant, one that’s been in the industry for a while, has been around the block a few times, knows what’s going on out there, knows information about the different franchises. What I’m going to ask you and what any good franchise consultant’s going to ask you is they’re going to go into your background. Where have you been? Where are you at now? Where do you want to be? What are you looking to put into your franchise time wise? What are you looking to put into your franchise money wise? What are you looking to get out of your franchise?
One of the things that we’re going to look at is your expectations. So if you’re looking to say, well, I want to get a McDonald’s and I want to be making a million dollars from one year, well that’s probably not a really great expectation right off the bat. It’s going to take a little bit of time to get to do these things on that. So what we’re looking for is really to find out what kind of a lifestyle are you looking for? How do you want to spend your day? Do you like being in an office nine to five, Monday through Friday? Is that something you enjoy and can really wrap your mind around? Or do you prefer being out and about, more schedule flexibility, more freedom to do what you want during the day, or you just want to invest in a franchise and don’t want to do anything?
There are those possibilities as well. And as far as the time amount, different franchises will require different things. Some will require you to work that franchise full-time, they want you to be owner operator. That doesn’t mean working in the franchise itself. Most of the time it’s going to be working on the franchise where you’re building up that business. Somebody else is actually going to be doing the work for you on that. So don’t be thinking that if you get into a restoration type franchise where you’re doing mold, fire, water, smoke, damage, repair, don’t be thinking that you’re going to be the one doing that. They’re going to teach you how to do it just so you’ve got a good feel for it. But you’re going to have somebody else doing that as well. So franchises, some of them want you to work there full-time, to be their owner operator, executive operator working on that.
Some of them you can do passively, or semi-passively, I should say. Semi-passively, those are going to be the ones where you hire a manager to do everything and your role then is to manage the manager and manage the profit and loss statements. 10 to 15 hours a week. And then there’s a few franchises where you can run absolutely passively where the franchise is going to do everything for you. You pay about a 5% management fee for that. They do it all and you just invest in it. So you could stay with your job that you’re doing now, can stay with the business that you’re doing now and have the franchise do everything for you. You just pay them to do it. So when you’re coming to that franchise consultant, what we’re going to be doing is we’re going to be asking all those questions, what are you really looking to do?
What do you really enjoy? What kind of time do you want to invest in that franchise? What kind of investment that you’re looking for for a franchise? And then we’re going to go through the different industries and see which ones that you like, which ones you don’t like, which ones that when you get up in the morning, you really feel good about doing that. So we’ll start off with just a simple phone call to get to know each other, make sure that you know, like and trust me to some extent and then we can move on, And with any good franchise consultant, I make certain that your expectations are, somewhat reasonable, that we could find you a franchise that fits those expectations. After that phone call, I send you out a questionnaire, and any good franchise consultant should, where they’re going to go over a few more details with a little background of yourself, brag about yourself, tell us about yourself.
Then we get into another call, and we’ll sit down then for about an hour, however long it takes two hours sometimes. And we’ll go through that questionnaire. I’ve got a little matrix of business types that shows you the different types of businesses that you can get into, whether it be sophisticated retail, simple retail, automotive, the brick and mortar. And then I use all that information from having a couple talks with you and that questionnaire to go through, and I compile all that together and then I start looking and thinking, okay, what franchises will be a good fit for this person?
And I might come back to you about five or 10 different opportunities. And then our next call, what we’ll do is we’ll go through there and we’ll go through those opportunities together and we’ll go through them in a little more detail as far as what your role is going to be, how it fits in with what you are telling me that you want out of your life and that you want out of that business. And then we’ll narrow that down to maybe two or three franchises that you take a look at and say, you know I could see myself doing that and that fits my criteria that I’ve given you already on that one. And then we go into the franchise investigation process together and we go through that whole process together and I stay with them the whole time.

Mindy:
What does a franchise consultant cost?

Greg:
The best part about it is that we don’t cost our clients anything. We are free. So we get paid if and when you decide to invest in that franchise and the franchisor then pays us a referral fee, kind of like a staffing type agency or that sort of thing. And by law, the franchise can’t charge you anything more for the franchise fee if you use a consultant or if you don’t use a consultant. They actually really like it when you use consultants because we pre-qualify you for that franchise.
So from the franchisers point of view, what we’re doing for them is a lot of their upfront work. So they have certain qualifications for each one of their candidates that come in there. They have background qualifications, they have financial qualifications, the timeframe, what you want to work. So all of those things, franchisors tell us, this is what we’re looking for in a great candidate. This type of person will be successful in our franchise. So we don’t bring anybody to them that does not fit their criteria. And conversely, from our client’s point of view, we don’t bring them any franchise that they wouldn’t necessarily qualify for.

Scott:
Could you give us a couple of examples of clients who maybe like three different personas, somebody who really wanted to hustle and grind and build a business, somebody who wanted to semi passive franchise and somebody who wanted a totally passive, I don’t want to do anything experience, and how you might guide those three people or outcomes that you’ve done in the past to those effect.

Greg:
Yes, all right. So I had one gentleman that came to me. We had a bunch of Supercuts that were being sold at one point in time, corporate owned locations. And he came to me and he said that that sounds pretty great because he goes into Supercuts, gets his hair cut all the time. He said, “I need to pick up one of those corporate locations. I love those.” So we went through his process together. We did as we went through and found out what it is that he was really trying to do. And I think the biggest thing I got from it is that he just really wanted to partner up with his dad to do something on that. Well it turns out his dad really didn’t get into haircutting too much. So we narrowed it down and we kind of eliminated the hair styling industry and we actually put him into a Handyman Connection franchise on that one. But that’s going through the process of figuring out what his goals were, what he wanted to accomplish on that.
Let’s see, another gentleman, he moved from the East Coast over to Oklahoma. He was an IT person and he was looking to get into an IT franchise because that’s what his background was. So he said, “I’m not getting paid as much as I did back on the East Coast, Greg, can you help me find an IT franchise that I can do here in Oklahoma that I can get paid the same or more obviously than I was getting in back on the East Coast?” So again, I still go even though they tell me I want it, I don’t just throw these franchises at them. I still got to go through and say “Okay, what’s your real goal? What are you really trying to accomplish here? What do you really like doing? I mean is that your dream job that you’ve had all your life is IT or just because it pays good?”
So we went through that whole process, found out what his background was, what he liked doing, what he really enjoyed out of life. So we ended up putting him into an automotive franchise on that. I forget which one it was [inaudible 00:20:03] or something like that, where that’s what he really enjoyed doing. I mean he liked the IT because it was paid good, it was a good job, but his real passions were he really liked working with cars and he really liked working with vehicles. So we went through that whole process and found him that one, very happy. He’s had that one now for many, many years on that.
And then I’ve got another gentleman that, back to the Supercuts example, he was a doctor and he wanted to help out people who were not able to afford doctor services but he needed a way to pay for it on that one. So we started looking at the Supercuts and he said, “Well how many can I get?” I said, “Well it just depends on how many you want.” He goes “I want a hundred of them.” I was “All right, well that’s a big chunk. Let’s take it a little bit at a time and let’s see what we come up with.”
So we put him into 20 to begin with on that one. And again we went back and his goal was to create an income source where he could help people who could not afford doctor services to help pay for that. So it wouldn’t necessarily come directly out of his pocket. So we got him into 20, then we got him into a few more and right now I think we’ve got him up to about 80 of them at the moment. So his goal is a hundred on that one. But he is just as happy as can be because now he’s got that money coming in that he can use to help out underprivileged folks get the doctor’s services they need.
So it just comes down to really looking at what each one of these individual person’s goals were, what they’re really looking to try to accomplish and find a franchise that fits into that mold that can help them get to where they wanted to be five to 10 years from now.

Mindy:
How do you know if a franchise is right for you and who is a franchise not a good fit for?

Greg:
Going with the second part, I think my true entrepreneurs are some of the more challenging people that I come across. Because the true entrepreneurs that have come to me, and I get a couple of different varieties there, they’ve already done it themselves. So the challenge for them for the true entrepreneurs when you’re getting involved in a franchise, is that the franchise has already set everything up. They’ve already done everything in the past for you.
They’ve got that plan of action laid out. They’ve got the processes, they’ve got the procedures and they want you to follow those because those are their proven methods. They’ve done it, they’re duplicating it. That is why you get into a franchise. So you don’t have to come up with all of that. So some of my true entrepreneurs aren’t real good franchisees and we’ll find that out as we go through the process because I’ll be telling them that you can’t just go in there and say that, “Oh I see some things that you can do differently, let’s start making changes right away” because the franchise is just not going to go for it.
Conversely to that though, some of the entrepreneurs that have been around for a while and have done things themselves, started up their own businesses come to me and say, I don’t want to go through all that again. I know what it takes to build that business up to where I want it to be. I don’t want to do that again. I want to go with a franchise because it’s a much simpler model and I can get to where I want to be two to three years quicker. So who a franchise is not necessarily good for is somebody who cannot follow those directions and wants to do everything themselves and go in their own direction and do things the way they see fit. It’s good for people who are looking for that structure or looking for that proven model and can follow that and are trainable and are coachable to become what the franchises are laid out for you to become.

Mindy:
You know what I’m thinking, Scott, I’m thinking former military is perfect for franchise. I was just talking to my friend Liz and she was talking about, she’s getting ready to go to officer training and she’s like, they make you do all of these things, she has to give up coffee. I’m like, why do you have to give up coffee? She’s like, they do it to make sure you can follow rules. I’m like, that seems so awful. I would never want to do that.
And now I’m thinking, ooh, maybe franchises is not the right choice for me because I don’t want to follow somebody else’s set rules. It doesn’t sound like there’s a lot of opportunity to go out and try new things. And as I’m thinking that to myself, I’m like, well when I go to Taco Bell, I don’t want to try my local Taco Bell’s brand-new item. I want to go there for the thing that I’m going for the nacho fries. I expect them to be there and I expect them to be just like the one across town and just like the one in Oklahoma and just like the one I had last week in California. And that’s the reason you go to the franchise is because it’s the same thing over and over and over with food.

Greg:
That’s correct up to a point on that one. So let’s take your Taco Bell example for instance. So at some point in time somebody had to come up with the Taco Supreme and somebody had to come up with the Burrito Supreme. That’s where the franchisees come in. They might, after working it.
So you start a franchise, you don’t want to just go in there and start jumping around and say, let’s make changes because I see things that could be better. However, after you’ve been a franchisee for a while, you might be looking at things for them to improve on then you go to the franchisor, start bringing those things up. So some of those things that you see at Taco Bell have been started by franchisees. They came up with that idea. They might have a couple of test restaurants that they’ll start them out with and then if things look good, if they get a good feedback from it, then they can build up on that. So you do have some amount of creativity available to you after you’ve learned the system and you start working together on that. So you’re still there for some creativity. Absolutely.

Scott:
Walk us through the, I know it’s going to vary dramatically, but what are the financial returns of this, right? If I’m thinking about this as someone considering buying a franchise, I want to do one of several things at minimum. I want to make more money than I can make in a corporate job because I’m going to be essentially almost a business owner, not quite, a franchise owner with all this. I want to turn my initial investment and return that probably within one to two years, especially if I’m working hard all day long. I really want to pay that back quite quickly and I want the opportunity to scale in some format. Can you give us a sense of proportion there? How long does it take to pay things back? Is this a two-year payback, a 10-year payback? What are some income stories and what are some success stories?

Greg:
Correct. So on that one, first off, a lot of people ask me how much can I make with a franchise system? So to begin with, a long time ago in a land far, far away here in the United States, when the franchising first came out, the franchise development people, the salespeople said, you get into this franchise, this is how much money you’re going to make. As it turned out, it didn’t happen all the time. And it didn’t happen enough from what they were telling them, for the Federal Trade Commission to step in and say, if you don’t have that information you cannot give that information. So you’ll find that information in the franchise disclosure documents under item 19, the financial disclosures. As a franchise consultant, I just can’t come out and tell people this is how much you’re going to make because that is breaking the Federal Trade Commission rules.
Now they’re not going to throw me in jail or anything like that, but if the franchise doesn’t make the amount I told him it would, he could come back and sue me. And it’s just not a good business practice. However, to your point Scott, of how much can you make on this? That’s one of the things we’ll look at. There’s some of the things that I know but I can’t necessarily tell my candidates. But when they tell me what they’re looking to make, I can point them in the right direction. So for instance, some of those hair salons out there, they’re great businesses, simple to run, that cost about 250 to build up. You’re not going to be running it yourself, you’re going to be doing it semi absentee, but you’ll probably be netting about 50,000 a year on those. You won’t be doing much work.
It’s a good place to park your money. So five years return on something like that is what you’ll be looking at. And that’s not a earnings claim by the way. So disclaimer there. Services industry is probably one of your better ones to be looking at there because now what you’ve got is a lower investment level. So you’re looking at a hundred thousand, 150,000 on that. Quite a few of those services industries are million dollar businesses. And if you go and look under VIS buy sell for instance, and you look at franchises that are selling, you’ll see quite a few of those that are selling in the services industry $4 million or $2 million and they usually sell them for three times net on there. So they built that up into a good business. So services industry, especially when you get into restoration, senior care businesses, those are ones where you can easily build up.
A franchise is going to give you a territory size with 30,000 seniors. You put about, let’s say 50 seniors in there, something like that. You’re probably bringing in a couple hundred thousand to the bottom line, somewhere in that vicinity. So that’ll probably take a couple years to get there. But now you’ve only spent for that business to invest in it a small office all total of $150,000. So three years a payback is easily done. Something like that considering that you’re a go-getter and you go out there and do it. So it’s going to vary. I would say Scott Services industry is going to be your best bet if you were looking for a two to three year return. Various ones of those have better returns, quicker returns than others.
You can also get into the business quicker if you’re looking at the brick and mortar. You’ve got to find that real estate location. You’ve got to do that build out and that’s going to take you six, nine months to get all that done. So you’ve invested your money and you’ve got another year until you’re opened up or maybe a little bit less. So that’s going to extend your time-out. Plus you have that overhead but you’re going to do it. So some of those might be four or five years on that one.
One of the ones and this surprises the heck out of me is if you like animals and you love working outdoors, you can go and clean up after other people’s animals. Scooping poop of all things. And that one I’m thinking about, those are like million dollar businesses. It just boggles my mind.

Scott:
That smells sick.

Greg:
Yeah. Boggles goes my mind but some of those businesses that you don’t think about actually bring in quite a bit of money. So yeah, services industry two to three years you can get it back. Brick and mortar is going to be extended out a little bit more on that one. But a lot of it really has to do with you and how much you really go out and go get that business or hire a great manager that’s going to go get that business for you.

Mindy:
Okay, that brings up a couple of questions. Let’s talk about separating from the franchise if you decide that you no longer want to own this. So how do you sell a franchise and how do you value that? I would assume that an existing franchise that is successful is going to be worth more than buying into a franchise that you then have to set up and do all of the work for yourself.

Greg:
Great question Mindy. I get that quite often when people come to me because they’re looking at resale type franchises versus a new one. So the difference between them right off the bat on that one is that starting up a new franchise is going to be a lot less of an investment than getting a resale franchise, an existing one to go in there.
So to start off with that part of the equation, you are going to be looking at probably investing around three times net. I do a lot of resales on that one, but I usually see them going for around three times net, plus any equipment that you have in there. They’ll usually start the price out around four or five times net, but it comes down to about three times net. So if you’re buying into that existing business, you’re paying for that income.
So if you’re paying three times net, you’re already looking at a three-year payback period. Now that’s not considering that maybe you’re going to still go out there and increase that business and bring more business in so that you increase your net profits even more. That’s a possibility. But that is going to be an extra investment where you’re paying for that income on that. Whereas with the new franchise, you’re not paying for that extra. So if you want a business that’s making a hundred thousand dollars a year, you’re going to be paying 300,000 for it. Or you can start from scratch at a hundred thousand dollars and then build it up over two or three years to that 300,000. So it’s kind of a give and take on that one. Now the other part of your question, how do you sell that franchise when you’re doing it?
But the first thing that you do is you tell your franchisor that you’d like to sell the business. Now you have a contract with them. The contract’s generally going to be for five or 10 years on that, but there’s going to be in the franchise agreement a way for you to sell at any time you want throughout that time. You just tell the franchisor. The franchisor will tell the different consulting groups that they’re with like myself that we’ve got this franchise that wants to sell this business. So now you’ve got a few hundred people across the United States trying to find people to help you sell that business.
You can get in touch with your local business brokers over there and the franchise owner’s usually going to put it out, I’d say most of the time they’ll put it out on their website that they’ve got to resale in this city and this is what it’s going for there. So it’s actually a pretty simple process to sell that franchise at any time you want to for a good profit once you built it up.

Scott:
I wonder aloud if a franchise is a great option for somebody who is maybe a little younger in their career, not reaching their peak earning yet, wants to accelerate that to some degree, but they don’t have a hundred grand to drop on a franchise or 50 or 250 or whatever it is. Have you ever worked with partnership situations where somebody who has capital buys the franchise and somebody else runs the franchise and the profits are split?

Greg:
Yes, quite often. Usually though, what happens in that situation there is that those two people know each other. I generally have never had anybody where I’ve had two strangers come together do that. So yes, I’ve had that with people who know each other. Somebody who’s younger, got the energy, got the experience, maybe not had too much experience, but has got the energy and got the time to go out there and do it. And somebody who’s a little older, has the money but they don’t necessarily have the time. So quite a few of those partnerships come into play there.
And any age is great. Franchising is a great way to get some good experience without necessarily having to go to college or go to school. Because the franchisor is going to teach you everything you need to know. They’ve done it before they know what to do. You just have to follow their instructions. Military people Mindy, perfect example, great people to do it. The franchisor will allow you to drink coffee while you’re doing the franchise. So that part’s good. But they’re going to teach you everything you need to know. So it’s a good way to become a business person without necessarily having to get a business degree on that. So yeah, partnerships are great, young people are great. Go ahead Scott. Sorry.

Scott:
Any tips on structure for those partnerships?

Greg:
I would say=

Scott:
How does the investor protect their capital, for example, and how does the hustler, who’s going to run the thing, make sure that they get paid and have good upside.

Greg:
I have some fantastic CPAs and lawyers that I will send them to on that to get that done, on that one. Business structuring and laws, not necessarily my expertise. I know a lot, I’ve done a lot, but I generally put people in touch with folks who do that for a living on that one. LLC is probably the simplest thing, Limited Liability Corporation. Maybe a C corporation if they want to go that route. You can do a C corporation, use your 401K money to make a C corporation, but I’m not an expert in that field so I turn them over to experts.

Mindy:
Let’s talk about mistakes to avoid when selecting a franchise,

Greg:
So in my book, Real Freedom, why franchises are worth considering and how they can be used for building wealth, I do go over that on that one. So when you’re looking at franchising and the mistakes to avoid with doing that, there are a few different things that I tell people that they should be looking at there. So one of the first things is to make sure you understand the business or industry before getting started in there on that one. So you don’t necessarily have to be an expert in that industry, you don’t necessarily have to know that industry, but if you’re going to go into an industry that you’re not sure about, you should start investigating that and understanding the industry before you sign that franchise agreement in there. A franchisor is going to help you with that. I’m going to help you with that, but understand the business and the industry before getting started into it.
Number two is not figuring out how much the franchise actually costs. So quite often out there when you’re starting clicking on things and starting looking through things, you’ll see advertisements for this franchise is $50,000. This franchise is $35,000. That’s the franchise fee itself. That’s not the total investment.
So all franchises, almost all of them, are going to be around a $50,000 franchise fee itself. Now that’s what you pay the franchiser to get trained, to get to know all the systems, all the processes on that. There’s going to be the total investment. That total investment’s going to vary. Not only by franchise, so if you’re looking at a brick and mortar like Mindy and I were talking about earlier with a McDonald’s, a million dollars to build something like that out, they can’t give you an exact number because if you’re building something out here where I’m at in Lincoln, Missouri, it’s not going to really cost you much.
But if you’re in the middle of New York City, yeah real estate’s going to cost you some if you’re looking at something there, it costs some money. So keep that in mind. Always find out the exact cost. Easiest way to do that is not only with the franchise disclosure documents, but as you’re going through the franchise investigation process is talk to the other franchisees, as many as you can, who have done this before and find out from them what was the total cost. The franchiser’s going to lay it out for you, but if you get enough or talk to enough of the other franchisees, then you get a good idea from them. What did they actually pay? Were there any incidental costs that maybe the franchisor or I didn’t mention or that you found that you needed to do? So total investment of the franchise, get that down.
Just because it’s a hot franchise does not necessarily mean it’s for you. Just because it’s a hot business doesn’t necessarily mean it’s for you. Some people they go in and they see Burger King, Dairy Queen, McDonald’s, all those places, they’re hopping, they’re cruising. But keep in mind that you’ve got to be into that sort of thing, working with those people that you’re going to be working with on there. So those are going to be, not only your customers, but you’ve got to consider the employees that you’re going to have. Do you want to be working with younger people? So if you’re getting into a fast food place, I mean that’s where I got my start at Taco Bell. So when I was a manager at Taco Bell, I mostly hired young people, I had high school students, I had college students.
Do you want to manage those people? If not, maybe that hot McDonald’s franchise isn’t for you. Consider who you’re working with, what type of industry that you’re in. And just because it’s hot doesn’t mean it’s for you. Because also if you get into a Chick-fil-A, that one’s a hot one. You like Chick-fil-A? Chick-fil-A is great, busy all the time. Wonderful, absolutely stunning. You’re working full-time Monday through Saturday. End of story on that one.
If you don’t want to work full-time Monday through Saturday, you always get Sunday off. Great people to work with Chick-fil-A’s wonderful folks, but if you don’t want to work Monday through Saturday, if you want more scheduled flexibility, that one’s out. Got to get you into something else. So consider that when you’re looking into a franchising. And as we talked about before, as Scott mentioned, how much money you’re going to make.
Thinking that you’re going to be rich in a year or two, well if you’re a real go-getter, there’s a possibility. But generally speaking, no you’re not going to be rich in a year or two. You’re going to be doing what you enjoy doing, you’re going to be having a good time at it, you’re going to be loving that business because it is the franchise for you, but you’re not necessarily going to be rich in a year or two.
And you’ll figure that out. Again, talking with other franchisees as you go through the investigation process, finding out from them how much did you make? When did you start making it? What did it take to get there? You’re going to get a good feel for that as far as not only can you picture yourself doing what they’re doing to get to that level, but is it at the level that you want to be at on there?
Funding, mistake number five. Quite a few of my people, especially my investors, always like using other people’s money to invest in a franchise. Some people don’t. Some people want to use their own money, some people don’t want to go into debt. But look at funding, see if it’s right for you. I did not want to go into debt, I don’t like debt. That’s just me. Most of my investors are like, I’m not using my money, I’m using somebody else’s money. Go get me a loan and let’s make certain that franchise is going to service that debt so I never have to put my money into it. I used the rollover for business, the 401K rollover, created a C corporation, used my 401K money and never went into debt, never took out a loan. I went that route. But some of my investors think I’m nuts. And they say, always use other people’s money. That’s how you get rich.
So personal opinion on that one. But always look into funding for your business. And as I just talked about there, mistake number six is talking to existing franchisees. So before you get into that franchise, you need to talk to as many franchisees as it takes until you start getting feedback that is the same over and over again. Now we’re hoping that feedback that you’re getting from those franchises is good positive feedback over and over again. If it’s not, we’re out of there, we’ll move on. Generally speaking I get involved, not generally speaking, I always get involved in all this. Generally speaking, the franchisees I’ll introduce you to are going to get, for the most part, good positive feedback from their experience. We want to know if you had to do it all over again would you? But you need to talk to as many franchisees as it takes to get a good feel for the business.
And that goes into another question that we go over early on is when you’re looking at a franchise, how large of a franchise system do you want to look at? Do you want 20 franchisees in it, 10 franchisees in it, a thousand franchisees in it. That’s going to make the big difference. Do you know that of the, I would say four thousand plus franchises out there in the United States today, only about 5% of them make it to a hundred franchisees or more. So if you want to be in one that’s one of the top franchises, then you’re going to want to look at a franchise that got a hundred franchisees or more in it because then you’re already in the top 5% of that. Now conversely, if you’re looking at something to get in on the ground floor of, then you may want something that is more of a startup franchise, five or 10.
So if you got into Orangetheory back when it was only five or 10, you obviously got into something really good. So that’s going to be your risk level that you’re going to be looking at there and what we’re going to be talking about.
Number seven, make use of free experts. The Score Team, S-C-O-R-E that you have in your local area. Great people to talk to on there. Talk to funding experts. Talk to franchise attorneys. Always make use of all those experts before you sign on the dotted line and get that franchise agreement in there. And of course franchise consultants, always talk with them because we generally have the insights and outs. We get paid when somebody gets into a franchise. So we have to not only make certain that we do just that absolute perfect matchup, but most of our business after we’ve been in the consulting world for a while comes from referrals.
So our people not only have to get into a good franchise that they enjoy, but they have to continue to enjoy it to where they’re sending people to us after they’ve been in the franchise for a while. Greg put me into a great franchise. Go talk to him if you want to get into it. So we have to make certain that we put people into franchises that we know are good franchise systems. But always take advantage of free experts. Again, Score chapter, talk to the Chamber of Commerce, get involved with them, good CPAs, good franchise attorneys and good funding people show you learn all the ins and outs.

Scott:
Can we go dive, those are a phenomenal list of mistakes there, I’d love to dive a little bit deeper into funding the franchise. And off the top of my head, I can think of my cash savings, 401K loan, home equity line of credit. Can I use other things like small business loans? What are the common ways that folks finance the franchise investment?

Greg:
So usually probably I would say four main different ways that they use to fund that. So if we go through the one that I did and the one you mentioned there Scott, the 401K. So if you don’t want to go into debt on that and you’ve got a 401K plan from a previous employer, not the one they’re at now where you got the money for, what you can do with that is what they call a rollover for business. So you take that money out of your 401K, you put it into a self-directed 401K plan. Now it’s self-directed because then you can buy stock in any corporation you want to. So then you go and create a corporation, Greg’s Corporation, Greg’s C Corporation, you create that. And Greg’s C Corporation now has a checking account. So this is all basic. You just take this money out of your 401K self-directed plan, you send it over to Greg’s C Corporation checking account and Greg’s C Corporation then issues stock in it.
And as I say, you do it but you don’t actually do it. So what you’re looking at there is there’s couple great companies out there that’ll do it. Tenant Financial, Benetrends, FranFund. We’ve got a few different ones that do it and they do it all for you. So what you’re looking at to do that generally speaking is $5,000. What they charge for, they’ll create that C corporation, they’ll create those stock certificates, they’ll create everything for you. It really doesn’t take that much effort on your part. Then they’re going to monitor that.
So they’re going to keep you in compliance with the IRS. So you’re looking at probably about $150 a month from then on to monitor that plan and to make certain that you’re in compliance with it. Lot of good things about that. The bad things that I hear is that it is your retirement money. So it is more of a personal view on how you want to do that. If you want to use your retirement money for it, CPAs, kind of 50/50. CPAs, not all of them like you using your retirement money for that sort of thing. So your CPA might kind of push back on that. Great way to invest in your business if you don’t want to go under debt and you don’t mind using that retirement money.

Scott:
If I buy a business or a property or anything inside of my retirement account, regardless of how I structure it with all this stuff, my understanding is that I then can’t take the proceeds of that business out and spend it on groceries next week without paying taxes and a penalty if it’s a tax deferred account for example. Is that a consequence of doing it this way or is there a way around that?

Greg:
So more details about good and bad points about that. One is that you’re now a C corporation, okay? Since you’re a C corporation now you’re going to be taxed twice. So you got your C corporation taxes and payroll. So Scott, if you want to take that money out and start paying groceries for it, then you’re going to be paying yourself a salary. So you’re going to be paying that money. So you just take that out as salary on that. That’s how you do that.
When I was taxed it was as a C corporation and taxed then as a salary as well on that one. So good and bad points. You can put money into it. One thing that I found that was really fantastic is that when I got to the point where you had so much money in your checking account in your C corporation, you can continue to put some of that back into the 401K plan. Because now you’ve got obviously your own 401K plan that you put money into and depending on your age you can put so much back into it. But when I dissolved that C corporation and switched over to an LLC, all the money that was left over in the checking account then just went into my 401K plan and I wasn’t taxed on it and it just got stuck in there.

Scott:
So this is an option. It seems like you would really have to have no other sources of funding, no cash, no home equity, no other accessible options, but if you and had your money in a 401K you could use this option. It’d be expensive to set up. You’d have a C corp and have all these other issues, but it could be done. This sounds like a less favorable option than some of the other ways to finance the franchise though.

Greg:
Depending on your point of view. You’re not going into debt, you have zero debt, you’re investing in yourself. And there’s a lot of good advantages to having that 401K plan, but it is your retirement money. I think that’s the biggest negative on that one.
So it’s not a bad option, it’s just, you got to give the give and takes on that one. And it is quick. It is quick. So if you want something that’s quick, do that. Now, if we go into the loans, the SBA loan, Small Business Administration loan for example, that’s not quick. So if you don’t mind waiting for a while you can get an SBA loan. I’m not too sure what the rates are right now for that one, but the rates are generally fairly good for that one. They generally take a good amount of time depending on the business. Some of my lenders can get it done within a month, but sometimes it takes two or three months on that one.
Always a good way to go for that one. Pretty simple process for that as far as you just fill out a whole bunch of paperwork and send it on in and then you get a loan for that.
So quite a few people I’ve done, probably 25% of my people will do the 401K rollover. The rest of them are doing loans when they get it. SBA loans are a good strong one for that. Generally speaking, if you’re looking at a brick and mortar, then you get a 7(a) loan on that and then they just give you the money as you need it to build that up. 10 to 20% down is what you’re looking at there. I believe the SBA also wants you to put up your house for collateral, so they’re going to want some collateral on that to show that you can do it, that you can pay that back, and that’s going to vary a little bit.
And then you can get an express loan for something that’s like a service industry. That’s going to be a little bit easier to get a pretty quick loan on that one. You can also do home equity line of credit, obviously, or home equity loan. Those are pretty simple. Again, you’re putting your home up for that. And then you can also go with the term loan on that one as well. The rates are going to be quite as good as the SBA type loan, but they are a little bit quicker on that and you may not have to put up as much capital or collateral, excuse me, as usually you are on some of the others. And again, I have experts on that. Always good to have experts in that field. So I’ve got a few different funding people that will definitely go over the different options and which is best for you based on your situation working with your CPA on that as well.

Scott:
Well Greg, this has been phenomenal. We’ve learned a tremendous amount about franchises here, top to bottom. I had no idea that the process starts with a franchise consultant. I had no idea that there’s four thousand options out there and that most of our many household names are franchises. And you can really get into it any which way. Funding it, there seems like a lot of creative ways to fund it. It seems like a really good option for some folks who want to kind of go in that in between space, between owning their own business and working their full-time job that they have currently. So really cool option here that I think is unknown to a lot of people. Thank you for sharing with us today.

Greg:
My pleasure, Scott. Thank you, Mindy.

Mindy:
Thank you, Greg. I didn’t even know franchise consultants were a thing and it sounds like that’s a really great option for somebody who doesn’t know exactly what they want. If you know you want to get into McDonald’s, great, just reach out to McDonald’s. But if you’re not sure, you think you want a franchise but you’re not sure which one, or you’ve listened to this and you’re like, hey, I didn’t even know that Supercuts was a franchise, because I did not. Greg, where can people find you?

Greg:
[email protected] M-A-V as in Victor E-N .com. Find me there on my website or just give me a call 361 772 6401, anytime.

Mindy:
Ooh, I think you’re the first person who’s ever given out their phone number on our show.

Greg:
I’ll let you know how it works.

Mindy:
Yeah, let us know. Greg, thank you so much for your time today. Scott, that was awesome. I could have easily talked to Greg for another 17 hours. I learned so much about the concept of franchises. I don’t know if you know this, but back a hundred years ago I was considering opening up a franchise for a little company called My Favorite Muffin. Mostly because they made the best muffins I’ve ever put in my mouth, but also because their franchise fee was really, really low. It was like $13,000 or something like that. And then I had a Jimmy John sandwich and I’m like, ooh, I want to open up this franchise as well.
I really like the concept of franchises. I just don’t want to actually work in them. So I was super excited that Greg has opportunities for you to not actually have to work in them as well. I learned a ton from this episode and I am so excited that we talked to Greg today.

Scott:
Yeah, I mean think franchises are a really interesting model. I imagine that this is something like really any business that you want to start, that you’re going to have to put two at minimum, but probably three, four, five, seven years into building them out to a point where they’re passive or mostly passive and can support a really, really nice, comfortable lifestyle for a very long period of time.
But if you’re willing to do that, I think there’s some good questions out there. Why not maybe transition out of that corporate job at some point and buy a couple of franchises and begin that pipeline in the next couple of years and get to that stable point. You’re at least working on an asset. You know there’s a resale market, likely two or three times net cash flow, that kind of stuff, that can help you value those things. So it’s a really interesting wealth building tool that I haven’t really considered at all.
I also have some questions that popped up after we finished recording with Greg that I’ll just leave hanging there. One is, if franchises come from these companies that really it’s a replicable model, you’re following the playbook, all that kind of good stuff, then estimating things should be achievable. You should be able to estimate demand, costs, those types of things and profits with a higher degree of certainty than starting a new business, for example.
That means financial engineering comes into play. How we leverage the business. Those types of things can really make a big difference. And then one other question I throw out there is if I own one Supercuts and I want to sell it, we learn probably two or three times cash flow is going to be the type of the price point that I’d sell at franchise for. What if I own all 50 in the metro area? All of a sudden, does that go for four, five, six times because I have a monopoly on that market? So is there multiple arbitrage there for creative entrepreneurs? So those would be some questions. I’ll leave dangling. I don’t know the answers to them, but might be fun for somebody to explore.

Mindy:
I think that those are great questions, Scott. I think that maybe that would be the monopoly. I mean if somebody is looking, he had somebody that was looking for a hundred, that might be a really enticing offer to him. He might also decide that no, he doesn’t want all of those. That’s an interesting puzzle and I think the answer is it depends. It depends on who’s buying. Maybe that peaks his interest and maybe it doesn’t or her interest, we’re not sexist here, even though I always say he, which makes me sexist.

Scott:
For the record, I go to Great Clips. Should we get out here, Mindy?

Mindy:
Bigger Pockets does not endorse Great Clips over Supercuts or Supercuts over Great Clips. Find your own haircuttery that you enjoy best. All right, Scott, yes, we should get out of here. That wraps up this super fun episode of, or great episode. I guess I’m almost endorsing Supercuts over Great Clips because I said super instead of great. That wraps up this super great episode of the Bigger Pockets Money podcast. He is Scotch Trench and I am Mindy Jensen saying, don’t forget to floss, albatross.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
Bigger Pockets Money was created by Mindy Jensen and Scott Trench. It is produced by Kailyn Bennett, research and writing by Anna [inaudible 00:57:29]. Additional research and writing by Kailyn Bennett, editing by Exodus Media Copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.

 

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In This Episode We Cover

  • The history of franchises and why buying a business often beats building one
  • The true profits of running a franchise and how much an owner can expect to make
  • How much franchise consultants cost (much less than you’d think), and why you need one
  • Most common franchise mistakes to avoid and why you should never look at JUST the franchise fee
  • Funding a franchise and how to use retirement accounts, HELOCs, and more to buy businesses
  • Business partnerships and who should join forces to buy a franchise together
  • And So Much More!

Links from the Show

Books mentioned in this episode

Connect with Greg

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.