The Key Advantage Of A Franchise Is … (2024)
Patrick Findaro here, co-founder at Vetted Biz. In today’s video, I’m going to go through one of the key advantages of a franchise. And this is after working in the franchise and investment industry for over 10 years partnering with my brother and business partner that worked at iconic brands like Burger King, as well as Tim Hortons, and have advised hundreds of clients to invest in franchises in the United States. So in today’s video, we’re going to go through one of the key advantages of a franchise.
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Predictability
Now, there are many advantages why someone might want to own a franchise, as well as franchise a business model. I’m going to talk from the perspective of a franchisee. So not why the franchisor might want to take advantage of the franchise business model, but I’m talking about why a prospective business owner might want to take advantage of the franchise business model.
The beauty of the franchise business model and the one key advantage of a franchise is predictability. Now that means when you go to analyze a franchise, you have the data, you have the information. It’s not buying an existing business where you don’t really know where you’re getting into until you pay an accountant $3,000, $4,000 to do a formal due diligence. With a franchise, it’s federally regulated. You have the data, you know how many locations are opening, closing, what the estimated investment amount is going to be. From the franchisor and the FDD and the Item 19, you should have the franchise financials. If you don’t, you’re going to have to talk to 5, 10 franchisees to get those franchise financials, understand the unit-level economics so you have the data to make a decision pretty fast, predictability.
The importance of time
After you make a decision where to invest, and yes, you should have a franchise attorney, an accountant, different advisors to help you throughout that process, but instead of buying a business, which could take one, two years to buy that ideal business, even with the best accountant and best corporate attorney, with a franchise, it could be done in two, three, four months with the right advisors. So you have predictability and less time for buying the business. Predictability in the time it takes to open up the location. If the franchise already has 10, 20, 30, 1,000 locations, they know based on their track record if it takes one month or six months to open up the business and what that standard deviation is.
So what percent of franchisees are opening in three months or the first six months from the time they sign the franchise agreement until they take the first customer? So that’s a big item if it’s taking longer for you to open.
Because that's capital that you're just spending time that you're spending and you're not making money on that effort.
The key advantage
After you open, how much time does it take to break even? And again, a franchise system with a proper franchisor and talking to multiple franchisees, you’re going to have that next key metric, which is the point to break even, how long it takes you to break even. Now after break-even, how long does it take you to hit that income replacement level? And that’s going to vary for everyone, but essentially, how long does it take to hit $50,000, $100,000, $150,000 in earnings on an annual basis? So with a franchise, it’s predictability. That’s the key advantage of a franchise.
How much time do you need?
How much time it should take to analyze a franchise? With the proper data, with legitimate brands, with the right advisors, three to four months.
How long does it take to open up the location? It’s going to vary a lot depending on the brand, as well as the industry, anywhere from 1 to 12 months. For a preschool, it might be up to two years. But generally, you’re going to know before you make that investment how long it’s going to take to open up. How long it’s going to take to break even. That might be one to, again, two years to break even, really going to depend on the brand.
Where a service franchise that’s giving you the leads and you just have to service the customers, that could be breaking even in one, two, three months, where on the other side of the spectrum, if you’re doing a staffing business that it takes a while to get those contracts, it could take 12 months, 18 months to break even where you’re just putting more working capital in the business without breaking even and making any return.
Income replacement
And then the next point is in income replacement, how long is it taking you to make a reasonable income that basically replaced what you were making at your job, or if you had another business, what you were earning at your prior business? That’s tough to say because it’s going to be more personalized. But what you can figure out is the time to break even to hitting $50,000, to hitting $100,000 in earnings. You can get that information from many franchisors that will disclose that in Item 19. Always have to verify the information you see as well as conversations with franchisees.
Conclusion
In summary, a key advantage of a franchise is predictability. The time to make an investment decision, to buy the right franchise, the time to open up that franchise, the time to break even, and the time to hit income replacement, where you’re making a good amount of money to support your family, or at least meet your goals if it’s a franchise that you’re not working full-time in. I hope you like this video. Thanks.
