Anyone have a Franchise?
Cleveland, OH · Member since 2017 · 69 posts · 12 votes
Anyone have a Franchise?
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes@Ben Patel
Old thread is right, but why not? I can only give you my experience. Between 1986 and 2000 I stated and built a small chain of 8 franchised locations in the automotive repair industry. I rented the property in5 of the locations and owned the real estate in three. I decided to do an analysis of where my profits came from, and where my time was spent. Over 75% of profits accrued from owning the real estate, yet the real estate accounted for less then 5% of my time. So in 2000 I sold all the businesses, and went into real property investment as a full time career. Since I have increased my net worth by 700%.
One takeaway is that for me personally, real estate investing is a much better fit than managing a small business. Interestingly, some of the tenants in properties I own or own a piece of are fast food operators. Seems like they are always struggling with high operating costs, high employee turnover, huge time commitments, large monthly payments on bank loans, and high lease payments, as well as increased competition keeping prices low. And if they are successful in raising revenues, our leases call for us to get a small percentage of the increased revenue. I work less, earn more, build more significant long term wealth, and enjoy what I do more investing in real property that operating small businesses. But that’s just my personal experience. Would love to hear from anyone else that tried both.
65 Replies
- Member since 2018 · 10 posts · 3 votes7y
Hair cutting - interesting. I looked at Great Clips & Supercuts. Both are essentially sold out (oversaturated in California). The Supercuts people tried to push me into a Roosters (higher end haircuts for men). Problem in California is labor is a killer, both from a financial and a regulatory point of view.
- 7yGiuseppe PavonePro MemberSpecialist · Orlando, FL · Member since 2015 · 183 posts · 83 votes
@Joe Berkowitz co-working office space was a serious consideration for us also when determining which franchise to invest in. We looked into a Venture X franchise in Orlando but ultimately decided to pass because of the larger investment required compared to Homevestors.
- Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes7y
Not really a franchise per se but a family member who is a prolific photographer decided to set up a SAFE shared office, conference area, mail drop & shared crèche etc for women who cannot justify the o/head for their own facility. Apparently she's booked solid.
- Member since 2019 · 7 posts · 0 votes7y
Originally posted by @Giuseppe Pavone:
@Joe Berkowitz co-working office space was a serious consideration for us also when determining which franchise to invest in. We looked into a Venture X franchise in Orlando but ultimately decided to pass because of the larger investment required compared to Homevestors.
That makes a lot of sense. What was the up-front investment for Venture X? I know that co-working concepts in general tend to have a larger up-front investment, but there's some niche co-working concepts popping up with a much lower investment.
- Greater Philadelphia · Member since 2015 · 28 posts · 2 votes7y
I don't get the co-working concept; I see a lot of instability in the revenue model. The Venture X investment is 500k to 4M for a turnkey option. That's a lot of $ with the uncertainty of revenue since most of the contracts are month to month basis.
If the concept is so successful why franchise it? I feel, most of the franchises have razor-thin profit margins that there is no such thing as a passive model. You or the partner personally need to be hands on to make franchise business profitable or have a good manager with skin in the game.
If you think you can open up next Dunkin, Subway, McDonald, Hampton Hotel, etc.. and be completely passive good luck! Your EBITDA is 12 to 13% then factor in your mortgage and you are left with 5 to 7% NET that is you finding an excellent location and if you end up doing above avg in sales. I'm speaking from a food and lodging business perspective, no knowledge in co-working aspect.
On the other hand, I would NEVER invest in upcoming concept with less than 500 stores minimum until then nothing is a solid, proven business model.
- Rental Property Investor · TX · Member since 2019 · 303 posts · 364 votes7y
I owned a food service franchise back in the early 2000's. All I can say is if you are considering a franchise, or if you own one, then you really need to read Rich Dad, Poor Dad again. You may think you are in the "B" quadrant, but you are actually in the "E" quadrant. A franchise is a liability, not an asset. You are making someone else money, even when you are losing money. The franchisor is the smart one here... not the franchisee.
Most important things to consider:
1) You pay royalties (and marketing fees) on your GROSS sales. I you don't make any profit, you still pay the franchisor.
2) The franchisor makes the rules (thousands of them), and if you don't follow them, you can lose your license.
3) The franchisor can change the rules whenever they want. (Try playing a board game where someone else can change the rules as you're playing the game.)
4) If the franchisor pulls your license, your capital investment is gone, and you are out of business. And there's not much you can do about it.
I would highly suggest that anyone considering a franchise read this article on Nolo.com.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Mike Bereck:
I know BP is mostly for RE, but does anyone here also invest in any franchises? Seems like it could be as profitable if not more as a Re investment. Also, could be a good way to diversify your investments and not put all of your eggs into one basket to say.
I've got a Farmers Insurance office. It does pretty well. Looks like a hard business to make profitable for the regular Joe though. For us it was a no brainer as it fits into our larger picture of up & down stream businesses. For the regular Joe tho I dunno. Their company plans & projections project that you'll need to run it for 5 years before turning a profit. That's a big risk for a relatively small business IMO.
- Greater Philadelphia · Member since 2015 · 28 posts · 2 votes7y
@Steve Hall - I couldn't agree more! Right on!
- Member since 2020 · 1 post · 0 votes6y
@Ben Patel and others
Can we revisit this question? I’m a newbie at this.
My husband and I have some savings and would like to finally invest in hopes of a well worth it return in the future. Not sure whether to take the franchise route or the real estate. Any new thoughts in 2020? We both know one thing: we don’t want to be in a food related business.
- Greater Philadelphia · Member since 2015 · 28 posts · 2 votes6y
Rita,
The franchise system is a great way to build wealth and an excellent way to lose it all. Wealth in the franchise is created by scaling fast. Your wise to not enter a competitive market (food). This industry is tough to make money and has a lot of moving parts. I would do whatever it is that gives you immediate cash flow, be it through a career or business, and pour that money into real estate. Anecdotally, the only real winner in the franchise industry is if your not able to scale quickly is the franchisor.
- China, ME · Member since 2014 · 3k+ posts · 4k+ votes6yBefore anyone decides to look into a franchise, pay a visit to http://www.unhappyfranchisee.c... While some franchises work out great, others don't. In many cases, you're just buying yourself a job. That's especially true if it's in a cash business, because you can't take your eye off the till for a minute or your trusted employees will steal you blind. (Ask me how I know this).
I previously owned a retail pack & ship store which wasn't a franchise. As I was first looking into it, I decided to also look at a The UPS Store, which was a direct competitor. I went through their franchise offering circular and was astonished at what I saw as extremely heavy-handed, one-sided terms. I just couldn't believe that anybody would sign that contract - but lots of people did.
The last I heard (probably 2014 or so) something like 60% of those franchisees were losing money. Show up to work every day in the required uniform. Service clients from behind the counter. Inhale your lunch if you can even do that. Close up at the end of the day, balance out the cash register, fill out your deposit slips and make an early evening drop in the bank's night drop box - hoping you don't get robbed.
Pay your employees, but no paycheck for you - because YOU'RE LOSING MONEY. In fact, you have to dig in to your savings every month, just to keep the doors open so you can continue to lose money next month.
Do your homework and maybe you'll find a good franchise, but like a toddler at a urinal, you have to stay on your toes. - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
Own the commercial real estate and HAVE THE TENANTS pay you the rent. Let them have the headache of lots of employees and working for yield.
Why do you think many businesses franchise? They know how hard it is to make corporate stores do very well with profit and the time it takes. So they make a system whereby maybe 10% are corporate store owned (typically the best and most profitable locations) and the rest franchisee. That way they get royalty fees, advertising fees, sell the commissary food at a markup, sell starter build out packages or reimaging packages. It's all about the residuals that suck the franchisee dry. That is why they take royalty off of the gross sales and not the net. They do not want to depend on the operator to turn a profit to pay them a fee. It's a way for corporate to off load food and labor with leases costs onto the franchisee. Some models allow a franchisee to have multiple locations and others only have one store. Some require owner operator and others allow absentee owners to own multiple units.
Unless you have scale you are working for money. I have seen some 50 unit operators with a profit margin gross of about 4.2 million. That's less than a 10% metric. The existing franchisees tend to have master area agreements where if a store is not built yet in a great area they have the rights to it. What is leftover is generally the junk locations where corporate tries to talk you into spending tons of money to open there. It can be a big ripoff.
People that build up businesses eventually retire and let next generation that has been trained up take over, sell out completely, or do a hybrid where they sell part of the interest to an equity group so they can retire today and let that equity group grow it faster and then get a bigger payoff down the line on the final exit.
Owning a business is just like real estate if you are not experienced or are not working with someone experienced to guide you then your clock can get cleaned. The sharks simply see the small fish trying to grow as easy prey.
- Specialist · Member since 2021 · 2 posts · 1 vote5y
I am a franchise consultant who specializes in home service concepts. Those brands have thrived thru covid!
- Investor · Ontario · Member since 2015 · 486 posts · 250 votes5y
@Ryan Ingram This is a great question. I own a business financing firm. I can help business owners purchase existing franchises that are already up and running. Food service is tough to finance at the moment. It is also safe to avoid that sector altogether. However being the most risky also makes it have the most potential for upside. If things return to a pre-covid level you are in a good spot. You can buy cheap equipment from businesses that are selling off equipment etc.
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