I’m supposed to be working on my 6th annual “Top Franchise Trends” article for Small Business Trends.
But, I can’t now. Not after reading something that just stopped me in my tracks.
Please don’t tell Anita that I had to hit the pause button today on the franchise trends article. Okay?
A Cockamamie Franchise Idea
I’ve been in franchising long enough to hear my share of nutty ideas.
I won’t bore you with them now, because I can’t type these words in fast enough concerning a cockamamie franchise idea I just read about that has to do with funding start-up franchises. Check this out…
A Thousand Bucks To Become an Owner Of Forever Yogurt
Nice headline. It got my attention.
It also got my super-skeptical-this-must-be-some-type-of-scam radar fired up, too.
So, I scanned the article-looking for the small print…
The Premise For This Cockamamie Franchise Idea
For only $1,000, you can own a piece of a frozen yogurt franchise.
- You get to have a say in the business
- You get a percentage of the profits
- You get to tell your friends and relatives that you’re an “owner”
So far, so good, right?
Then there’s this:
Each investor will have to get a copy of the Franchise Disclosure Document. (FDD)
That means if 250 people each pony up $1,000, all of them will have to (or should) hire a franchise lawyer to look their FDD’s over.
Hold On There Franchise King
Before you start the “C’mon Joel, why would a person who’s only investing $1,000 in a franchise need to pay a franchise lawyer $500 to look the FDD over for them and give them recommendations?” stuff…
I have an answer for you:
I know…I know. Losing $1,000 on a business investment is really no big deal.
Unless the franchise business gets sued.
Before you say “Franchisees can only lose what they have put in,” are you sure about that?
I’m not a lawyer. So, I’m not sure if that statement is true or not.
There are (by law) 23 items that have to be included in the FDD. They are:
- The Franchisor, its Predecessors, and its Affiliates
- Business Experience
- Initial Franchise Fee
- Other Fees
- Initial Investment
- Restrictions on Sources Of Products And Services
- Franchisee’s Obligations
- Franchisor’s Obligations
- Patents, Copyrights and Proprietary Information
- Obligation to Participate In The Actual Operation Of The Franchise Business
- Restrictions on What The Franchisee May Sell
- Renewal, Termination, Transfer and Dispute Resolution
- Public Figures
- Earnings Claims
- List Of Outlets
- Financial Statements
- Franchise Contract
Call me crazy, but is sure looks to me that there’s a lot of crucial information in an FDD that every franchisee-no matter how much they’re investing, needs to fully understand. Plus, unless I’m just being paranoid (which has happened before) there sure seems to be an awful lot of potential liability here. In the future, too.
Some people may end up investing in this frozen yogurt franchise-and potentially other franchise concepts (because this guy has a crowdfunding company) just to be able to tell others, “I own a franchise.”
As cool as it may sound to some people, I wonder if any real value can be realized from owning a teeny-tiny piece of a franchise business unit.
By value I mean income.
A Fan of Franchise Crowdfunding
I’m not a fan of franchise crowdfunding. The math just doesn’t work-especially for single-unit opportunities. That’s because there’s just not enough money to go around-especially during the first couple of years.
Let’s say that a frozen yogurt franchise does a bang-up job in its first year and does $350,000 in sales.
The franchisor will probably receive 5% of that in royalties. ($17,500)
There are lots of expenses in food franchising; rent, inventory, supplies, payroll, taxes, professional fees, and several other assorted things the franchisee-or in the case, the franchisees will need to shell out.
How much is going to be left?
How much can each franchisee make?
Remember, these micro-franchisees only own a small piece of the franchise.
For a moment, let’s forget this cockamamie franchise crowdfunding idea.
Let’s pretend that this is a one-owner frozen yogurt franchise. If the owner had to take out a small business loan, and pay all the expenses I listed above, how much do you think there would be left after the first year in business?
Not much. If, anything.
But, things should get better in year 2, year 3, etc.
Maybe the franchisee can pull out $40,000 in year two and $60,000 in year 3. Maybe.
Based on that, 250 franchisees that each put in $1,000 would earn around $240 in year 3 of being in business.
Now, if they wisely sat down with a franchise lawyer who charged $500 to look over the FDD-and make some recommendations, the micro-franchisee still hasn’t made a dime.
Confession: I Only Made It To Pre-Algebra
I’m not a math whiz. Never was.
My junior high school math department refused to allow me to take any other math classes after I flunked out of pre-algebra.
So, my math skills are of the simple variety. So, maybe I missed something in my computations.*
*Please tell me if I did, and show me where I’m wrong.
I Got It!
I’m such an idiot. I really came late to this cockamamie party.
This franchise crowdfunding idea is nothing more than a publicity stunt designed to get the Forever Yogurt name out.
What was I thinking?
No one will actually be able to make any money doing this.
Except for the owner of Forever Yogurt.
Who just succeeded in his goal.
Of getting free publicity for his franchise.
What do you think about this idea?
Does it make sense to you?
Is my math correct?
Would you invest $1,000 in a franchise?
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"I was pretty focused on a particular franchise opportunity when I reached out to Joel Libava. In the course of a 1-hour conversation, Joel was able to ask questions and provide direct advice to help clarify the process for me and help guide me through the next steps in my vetting process. He even put me in contact with other professionals who were able to help educate me further in my particular industry. The time and money were well spent."
-Brian Grayson, Cincinnati