If you’re not hesitant about buying a franchise, you may want to have a trained specialist check your wiring. After all, safety first!
(A trained specialist)
Now I’m not saying buying a franchise is dangerous or bad. On the contrary, franchising can be good (for the right person).
But when you’re talking about investing a couple hundred thou into something…in this case, a franchise business, you shouldn’t throw caution to the wind. Feel me?
In this post, I’m going to go over a few things that may be causing you what I call “franchise buyer hesitancy.”
In addition, I’m going to provide some ideas on how to conquer your hesitancy…your fears, so you can become the owner of a franchise if you so choose.
A Reminder About Why You’re Looking At Buying A Franchise
Before I share some of the things I know you’re hesitant about, I need to remind you of something.
You’re thinking of doing this because you want to become your own boss.
To that end, every time hesitancy (fear) comes into the picture, go back to the beginning, and remind yourself why you started down this path.
Because as paths go, very few of them are smooth and straight.
A Few Things You May Have Franchise Buyer Hesitancy About
Here are some things that may be contributing to your hesitancy to go the franchise business ownership route.
1. Things you hear.
A few examples:
1. “Joel, I keep hearing that once you sign your franchise contract you’re locked in for years-with no way out.”
2. “I hear that the franchisors make all the money.”
3. “I have heard people say that franchising is just a pyramid scheme where the folks at the top make the real money.”
4. “I’m afraid that franchising may just be one big scam.”
Is that so?
I need to get this off my chest.
When I hear people say, “people say” it reminds me of him. He says that a lot.
But who are the people “saying” it?
Exactly. Nobody knows.
That said, I’m going to address the 4* items people say about franchising.
*There are more than 4. Some of them are included in my two-part post on franchise myths.
The Absolute Truth About Franchising
Let’s get to the truth.
1. The Truth About Franchise Agreements
While it’s true that franchise agreements are 5,10 or even 20 years in length, it’s important for you to know that in most cases, you are allowed to sell your franchise business anytime you want. So you’re not “locked in.”
However, the franchisor needs to approve the buyer, and you may be charged a transfer fee.
2. The Truth About Who Makes The Money
In a perfect world, both the franchisees and the franchisors make good money. But the business models are vastly different.
Specifically, franchisees earn their profits from the revenue their individual store or stores bring in. And part of their revenue (typically 4% to 8%) goes to them (the franchisor).
On the franchisor side, there are normally several profit centers. These include:
The upfront Franchise Fee* (which averages around $35,000 or so)
*Note: in most cases, only a small portion of the Franchise Fee is profit. The majority of the money goes back into the company.
Next are the royalties. And those royalties are where the real action is for franchisors. Why?
Because of math.
Simply stated, if you have 200 franchisees paying a percentage of their revenue to the franchisor…every single month, the numbers get big.
200 franchisees paying 6% of their revenue…let’s say they’re doing $25,000 a month in sales on average, means each franchisee is paying the franchisor $1500 a month in royalties. All. Year. Long.
(6% of $25,000 = $1500)
And $1500 X 200 franchisees = $300,000.
= $3.6 million a year.
In addition, the franchisor may earn profits from the goods and services they sell to the franchisees (if applicable)
In any case, while the numbers are much higher for the franchisor, it’s not because they’re ripping off franchisees. It’s because of the business model. The same model that allows everyday people to own and operate their own businesses. Businesses that can potentially enjoy having great market share in their geographical area.
3. The Truth About Pyramid Schemes
The business model of franchising isn’t even a cousin to a pyramid scheme.
That said, you should know what a pyramid scheme is, just in case you decide not to go the franchise route and you’re presented with an “opportunity.”
From The New York Attorney General
“A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of ‘investors.’ The initial promoters recruit investors, who in turn recruit more investors, and so on. The scheme is called a ‘pyramid’ because at each level, the number of investors increases. The small group of initial promotors at the top require a large base of later investors to support the scheme by providing profits to the earlier investors.” More
There’s another scheme that’s sometimes mentioned when the word “franchising” comes up. It’s called Multi-Level-Marketing (MLM)
Blood pressure…blood pressure…watch your blood pressure, Joel.
I hate MLM. Hate it. Here’s why.
According to the Federal Trade Commission (FTC), “Most people who join legitimate MLMs make little or no money. Some of them lose money. In some cases, people believe they’ve joined a legitimate MLM, but it turns out to be an illegal pyramid scheme that steals everything they invest and leaves them deeply in debt. Read more on MLM’s and what they are.
Finally, here’s a trick I learned on how to quickly determine if you’re about to get suckered into buying into a MLM scheme.
If (out of the blue), you get a call or email from someone who you haven’t seen or heard from in 20 years, who offers to get you in on a “business opportunity,” and when you ask what it is, the person won’t tell you until you “meet” or are willing to listen to a “presentation,” it’s an MLM. So make like an airplane and take off.
4. The Truth About Franchising And Scams
Franchising, as a business model, is not a scam.
That’s not to say that there aren’t any scam artists in franchising. Every industry has its share of bottom-feeding grifters.
That’s why it’s important for you to do thorough research on the franchises you’re interested in. But how, given that you’ve never invested in a franchise before? Seriously. How are you supposed to know how-to do-good franchise research?
Because my Franchise Research Guide will teach you how to spot scams-and the scam artists who profit off today’s potential franchise owners. And so much more…
Again, franchising is not a scam.
But you need to learn how to determine which franchise opportunities offer the best ROI along with the best chances for success. Let’s continue.
Another area of the franchise industry that contributes to a person’s hesitancy has to do with franchise business reviews. Or rather their hesitancy to believe the reviews they run across on these “review” websites.
In a nutshell, there are online businesses that exist solely* for the purpose of providing reviews of franchise opportunities.
*Hah! These businesses aren’t “solely” in business to provide reviews.
To be blunt, they’re only in business to make money.
Stay with me. This is where it gets weird.
As I stated in this in-depth article on franchise reviews, “Companies that provide franchise reviews are not non-profit companies.”
In fact, it’s all about profit. But here’s the thing.
A typical consumer can’t tell the difference between a paid review and a non-paid, legitimate review. Especially if they need to decipher the carefully coded words used on some of these websites.
Tip: please click the link above to read my take on franchise business review websites. Doing so will give you a better understanding of franchise reviews, franchise “grading,” and how they may actually be undisclosed paid reviews.
Finally, if I was seriously looking at a franchise to own and read some great reviews on a franchise business review website, I’d be more likely to go forward with my investment. And I would have had no idea that the reviews I read were most likely purchased in some hard-to-find way.
Other Things That Can Cause Franchise Buying Hesitancy
There are a few other things that cause today’s potential franchise owners pause.
Let’s start off with your fear of losing money on a franchise. That’s always #1 on the hit parade. And it should be. Not that franchising is bad.
On the contrary, for the right person, who has enough money, who’ll follow the rules, and who has the support of her loved ones, owning a franchise can be a wonderful thing.
Of course there’s no guarantee that you won’t lose your money on a franchise. It can happen. Again…doing great franchise research lowers the chance of that happening to you.
You need to decide how much risk you’re willing to take.
One way to do that is by setting a budget.
In other words, come up with a figure that represents the most you’ll invest in a franchise-and stick to it.
Finally, you need to have money set aside for your personal expenses, as it’s going to take a while for your new business to break-even and become profitable.
Another thing that causes hesitancy revolves around finding the right location for your business. Sleepless nights, too. Why?
Because “Location, location, location,” the right location, can increase the chances of your franchise business being a successful one. And that’s something that a lousy location can’t do.
Lastly and most importantly, would you believe me if I told you that the “location” part of buying a franchise tends to work itself out in a good way?
Well it does. Have some faith!
Tip: you need to make sure the franchise you choose has a top-shelf real estate department! To that end, the best way to do that is to include a question or two about the real estate department when you’re talking with existing franchisees.
The last thing I’m going to talk about is the legal stuff. Important legal stuff. The “stuff” you’ll find in the Franchise Disclosure Document or FDD. The franchisor will send it to you at the appropriate time-although sometimes they don’t. And that’s a problem. Read why here.
With that in mind, today’s FDD’s are 300+ printable pages of complex legal jargon, combined with sometimes difficult to decipher math tables, along with way too many paragraphs that include sentences that end with “is the responsibility of the franchisee.”
Are you picking up what I’m putting down? I hope so.
Be that as it may, the good news is that while some of your fears…your hesitancies concerning the legalities in franchising are well-founded, there is a way to eliminate some of those fears.
In other words, don’t try this at home.
This isn’t the time to tell yourself “I don’t need a lawyer.”
Because YES YOU DO.
Here are a few important reasons why you need a franchise attorney by your side before you sign ze papers.
You Have A Right To Be Hesitant
To summarize, you have a right to be hesitant about investing your hard-earned money in a franchise business. If you weren’t experiencing some level of fear I’d worry. But here’s the thing.
There are plenty of excellent resources that can help you be confident in your decision to become a franchise business owner. You just need to find the best ones.
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The ones who speak the truth.
The ones who go out of their way to make sure you’re making a smart, informed decision on a franchise to own.