Start a Business or Buy a Franchise…Which is Better?

Start a business or buy a franchise?

Entrepreneurs: Should you start a business or buy a franchise?

As a qualified, well prepared and well-funded entrepreneur, there is no better vehicle for achieving goals than to be in business for yourself.  A business is simply a process designed to advance goods and services to the marketplace in order to create value and profit for owners and customers.  Of the many options posed for those entering business, prospective entrepreneurs eventually wrestle with our question: “Should I start a business or buy a franchise?”

 

The answer?  It depends upon your personality type, how much money you can muster up, your risk aversion and your skillset.  It also depends on your aptitude to plan and execute. Overall though, it depends upon your drive, determination and ability to persevere.

Obviously, millionaires are built on platforms other than franchises or traditional start-ups. Distributorships and MLMs are two examples.  MLMs are easy and inexpensive to set up, but success rates are horrible.  Distributorships are restrictive and can range from simple home based models to huge warehouse facilities. Furthermore, for a business prospect to be successful with a distributorship, you better hope that the brand you represent has staying power.  Ask some old Schlitz beer distributors about that!

Advantages and Disadvantages of Buying a Franchise Versus Starting a Business

They are similar in the fact that the US congress has set up the tax code to give advantages to both types of business owners.  Both require detailed business plans and adequate funding. The elements of recruiting, hiring and training are inherent to both.  Both require precise marketing plans, IT systems, experienced administration and some sort of invoicing and payment processing.  They seem pretty similar, don’t they? No to mention that if an office is required, both will have sites to identify, leases to negotiate, furniture,  fixtures, equipment and signage to install.  So far they both sound the same.  However, that’s where the similarities end.

I ran into an interesting article by Funders & Founders that showed a first time entrepreneur’s startup business success rate at less than 1 in 5.  Now, it did show a higher success rate as those same entrepreneurs continued to fail on their second at a rate of 5:1 but improved to about 30% with their third venture, IF it was backed by venture capital and went public to IPO.  Still less than 1 in 3…not too impressive!

Let’s take that same model one step further, since they included venture capital into the mix.  Earlier we had examined everything it takes to open a business from business plans to signage, that all costs money.  So, let’s take a very modest and conservative estimate of $100,000 for each new opening.  At that rate the average entrepreneur will have spent $300,000 to have a 70% shot at another failure.  Now that’s an expensive learning curve.  They will most likely have to try it again and risk another $100K .  Really?  Over my wife’s dead body!

So, are the odds of success better in operating a franchise?

Not being prepared to manage a business through the ebbs and flows of an up and down economy decreases the odds of success in any business. To increase the odds of success, there are a couple key things available to prospective franchisees that are not available with traditional business startups:  mandated disclosure and validation.

The selling of franchises is heavily regulated by the Federal Trade Commission in an effort to maintain a level of integrity and honesty in the process.  The FTC requires that every franchise maintain, and in some states submit for approval, a document called a Federal Disclosure Document or FDD (formerly called a Uniform Franchise Offering Circular or UFOC).  This is a cumbersome and wordy document strewn with legalese, but it discloses just about everything you would want to know about a franchise.  The document includes all costs (real or expected), a short history of the executives, any bankruptcies or litigation, franchisor expectations of new franchisees and what the franchisee’s expectations should be of the franchisors.   However, the most important disclosure required is a list of all current and past franchisees with contact information.

Before making the decision of whether to invest in a franchise or not, every savvy potential franchisee calls as many of the franchisees on that list as it takes to get a clear understanding of the true value of the franchise.  This is a game changer.

As a result of mandated disclosure and thorough validation, potential franchisees learn the true value of the franchise or their interest, including:

  1. Industry and public respect for name brand and trademarks
  2. Level of proven success behind the business model
  3. Effectiveness and franchisor commitment behind the training programs
  4. Reputation and effectiveness of plug and play IT systems for operations, sales and back office management
  5. Value of the franchise culture of support, evolution and teamwork

In conclusion, everything from the business plan to the signage is similarly required of any business. It stands to reason that finding a franchise that offers all the above at an affordable cost makes the decision of whether to buy a franchise or start a business an easy choice.

The Importance of the Franchise Financial Statements

Things potential franchisees should know about financial statements

Franchise Financial Statements are the track record of the franchise. They are provided for you in the FDD and contain important information about the franchisor’s financial status and strength.

The two most important financial statements you need to review:

  • Balance Sheet
  • Income Statement (3 years preferably)

 THE BALANCE SHEET

A balance sheet is a snapshot summary of how much a company is worth on any given day. It reports the financial condition (solvency) of the franchisor. Look for 3 year trends.

Balance sheet categories include:

  • assets – what a company owns: current, fixed, and intangible assets.
  • liabilities – what a company owes: current and long-term debt.
  • stockholders’ equity – the company’s net worth; it is the money the company has taken in from the sale of stock plus any accumulated profits
  • Stockholder’s Equity = Assets – Liabilities = Net Worth

Things you want to see on a franchisor’s balance sheet:

  • increasing assets
  • increasing stockholders’ equity
  • more cash than debt
  • amount of current debt < (less than) 1/2 of the total assets
  • amount of current debt < 1/3 of the stockholders’ equity

Business stability ratios (these measure the business staying power):

  • Current = (current assets/current liabilities) company’s ability to pay bills, Rule Of Thumb is 2:1
  • Quick = (cash+ AR/current liabilities) company’s ability to generate cash, ROT is 1:1
  • Debt to worth = (total liabilities/net worth) “bankers ratio” measures risk, ROT is better than 1.5:1

THE INCOME STATEMENT

An income statement reports a company’s profit or loss. It shows a company’s income, expense and net income—also known as the “bottom line” or earnings.

Other names for an income statement include:

  • Statement of income
  • Profit and loss statements
  • Statement of operation
  • Statement of earnings
  • Results of operations
  • Statement of consolidated income 

Income statement categories include:

  • revenues
  • costs and expenses: cost of sales, selling, general administrative, interest expenses
  • income before taxes
  • provision before taxes
  • net income (earnings)
  • net income (earnings) per share

Things you want to see on a franchisor’s statement:

  • a profitable franchisor!
  • increasing profit
  • more revenue derived from royalties and system income than from selling franchises
  • increasing revenue trends, usually > 15%
  • increasing net income trends, usually > 15%

The financial statements should be audited financial statements and contain three years of financial data.
*Suggest that these should be reviewed by a CPA

“Pain” Drives Many to Learn How to Start a Small Business

The American Dream, Most will never learn how to start a small business

More than 7 out of 10 people in the US today have a dream of learning how to start a small business. It’s more prevalent in younger people than older people, and more prevalent in men than women.  How about you?  It’s the American dream of being your own boss; big desk, receptionist, polished dark wood office, walls adorned with lighted paintings, a nice new Lexus, beautiful home…the dream of success.

The dream is real in this United States.  Many people have achieved it, and many more will.  But even if you are in the 7 of 10 who want to learn how to own a business, you probably won’t.  Why?  The fact of the matter is that just over 1 in 10 Americans are business owners.  They are the entrepreneurs and franchisees who have overcome the internal objections, rejected the naysayers and dared to be independent.

Question:  What motivates the 10% to learn how to start a small business?

Answer:  They felt the pain deep enough to take action.

Why not you?  The truth is, you probably haven’t felt the pain deeply enough to make it happen.  Yet.

In my industry, about 4 or 5 out of every 100 inquiries is a qualified franchise buyer.  However,  only about 1 or 2 end up turning their dreams of business ownership into reality.  My interest is not in the 95 or 96 who are really not emotionally prepared, don’t have the necessary liquidity or credit, or are truly just dreaming.  Don’t get me wrong. It’s good to dream.  My interest, though, is in the 4 or 5 who are qualified, have the funds, have the experience and the dream.  However, in the end only 1 or 2 will act on it.  What is it that inspires the 1 or 2?  Their pain.

I ask every prospective buyer I work with, “So what has happened recently in your life to make you believe that now is the right time for you to learn how to start a small business?”  The answer is their “pain,” and it varies with each prospective buyer.

This evil “pain” can come disguised in many ways.  For many in today’s new corporate economy it’s the realization, that after being laid off, riffed, retired, downsized or simply fired in their mid to late 50’s, they are nobody’s prime candidate for a job.  They are too expensive, don’t have a wide enough employment window and honestly may not possess the “new era” technical skills of the younger generation.  After working the network, the job boards and social media, the ugly Mr. Pain exposes himself in the reality that the burn rate could exceed the severance & savings if the job search continues too long.

For some,  the “pain” transforms into a burning desire to achieve the dream.

Their dream has probably been smoldering for years, tamped down by the comments of co-workers, bosses,  friends and even spouses who have casually doused the flame in negativity.  But it’s not the dream; it’s the fact that the burning desire is finally red hot enough to ignite the fire.  At 211 degrees water does not boil.

Pain can be as simple the yearning to buy back a life.  How many executives are never home to see their kids grow up? How many proudly boast of being 1K or Platinum or whatever other lofty designation they ascribe to those who spend too many nights in nameless roadhouses, dining on cheap expense accounts?

Pain is different for everyone, but without the pain busting through the “break glass in case of emergency” capsule  the American dream will remain unrealized.  For those 8 in 10 who “dream” but never “do,”  the pain remains encased.

I think the worst nightmare I could think of would be to see myself laying on my death bed and thinking… I could’a, I should’a, but I never did.  And now I’m finally feeling the pain… too late.


If you would like to talk to Sid Lee and get your questions answered, sign up for a short, pre-consultation phone call.  You’ll be glad you did.  Sign-up here…


 

Middle Class Squeezed Out of Buying a Franchise

Is the middle being pushed out of the franchising opportunity

Thinking of buying a franchise?

I think the single saddest reality I have learned since I qualified as one of the top franchise consultants is that “middle class” Americans save very little and mostly live paycheck to paycheck.  Unfortunately, the middle class seems to be largely squeezed out of buying a franchise.

The ideal candidate looking into buying a franchise in my franchise consulting business is:

  • 45-55 years old,
  • college educated (or has a Sr. level of business experience)
  • has $35,000 or more in savings
  • and has a credit score over 720.

When I got into the business, I honestly thought that sounded like most Americans.  The typical “middle class,” right?  Hardly.  And most of you reading this can probably relate.

It begs the question: What is “middle class?”

According to October 2015 Federal Reserve data the average American family also carries $7529 in credit card debt.  Some are fortunate enough to carry a $0 balance and that actually drives the average down! But when only those that carry a monthly credit card balance are considered, the average credit card debt jumps to $16,140.  That must mean that the vast majority of middle class Americans cannot save enough to sustain the family for 6 months between jobs.

OECD studies also show that Americans save about 4.5% of what they earn.  That is a very low rate compared to other developed nations, and even that rate is skewed by high earners who save at higher rates.  At 4.5% that means it would take over 22 years to save enough for one year in retirement at a current modest income.  Pretty sad indeed.

Now, there is some good news when 401k savings are reviewed. In an April 2015 article in Money Magazine, Donna Rosato reported that 401k savings had reached a record high.  Average Fidelity 401k balances for accounts over 10 years old had climbed to $251,600. Once again the average is skewed by high income earners…not the “middle class.”  According to a recent report by Boston College’s Center for Retirement Research,  the typical working household nearing retirement with a 401(k) and an IRA has accumulated a median $111,000 combined. This would yield less than $400 a month in retirement!

For households between ages 55 to 64 earning $40,000 to $60,000 a year,  the median balance in 401(k) and IRA accounts is just $53,000. For the same age group earning $138,000 or more, the median account is $452,000, according to CRR.  “Middle class?”  And these figures are from April 2015.  How has your 401k or IRA performed since then?

Who makes up the “middle class?”  The Pew Research Center has done many studies on the middle class, and there seems to be no universally accepted definition on what the “middle class” is.  But, whether it is defined through income, lifestyle, state of mind, or consumption, the typical middle class American is:

  • college educated
  • specifically skilled
  • employed in some level of management or sales
  • and constitutes somewhere between 25% and 66% of all American households.

Sadly, the following is the reality of the “middle class.”

I have discussed the fragile nature of U.S. employment in my book, “Pink Slip Paradise.”  When we strip away the facts, regardless of social status, the “middle class” American is:

  • college educated or has unique skills
  • in a semi-professional or management position
  • has tenuous employment (or hates the JOB)
  • has not saved enough money to sustain the family through a 28 week unemployment period
  • loaded with debt (we have not discussed college debt or mortgages)
  • lives paycheck to paycheck
  • not prepared for retirement.

Not a pretty picture.

So, since the Pew Research Center has already determined that up to 2 out of 3 of us fall into the “middle class” abyss,  it’s easy to understand why it is so hard to find an ideal candidate to qualify for and to learn how to buy a franchise.


 

Transitioning to the CEO Mindset

Transitioning to the CEO mindset

So who are those that transition to the CEO Mindset?

I saw a terrific quote in Forbes: “Behind an able man, there are always other able men.”

I have always believed that nothing of consequence was ever achieved alone and that typically great players make great coaches.  (Now that’s not quite like, “You didn’t build that!”)

Corporate America continues to skew younger in its focus on reducing fixed costs and improving shareholder value. In addition, our military continues reducing its human footprint.  As a result, many talented and experienced mid and senior level corporate executives and combat tested military veterans are now free agents.  They are hoping to utilize their skills and experience to get back into the civilian work force at levels equal to or at least close to the positions they left. The competition is tough, and landing those few jobs is a long shot at best.

So what are some other options?  For many of my military friends the option was simple.  They remained virtually at their same position, (sometimes even the same desk) and easily transitioned from US military to civilian government contractor.   For civilian corporate executives, the transition is not that easy and for many military veterans it can be a scary situation.

All successful business owners must adopt a CEO mindset.

One option available to those who dare to be different is to become a business owner.  That route takes a shift in mindset from being a loyal employee and doing exactly what you were told  (a “good soldier” so to speak), into a decision maker, a leader, a “the buck stops here”  kind of person.  The transition is not only physical, as you are exiting a relatively comfortable environment into one in which you might be very uncomfortable: self employment.  The good news is that most people who have already climbed the ladder, either in business or in rank, have already learned the skills they need to make the transition from the trenches to the penthouse.

The challenge for most is making that emotional transition from a support mindset to the decision maker mindset. The transition also includes a paradigm shift from an employee mindset of working for a paycheck to a CEO’s mindset of focusing on growing a business so that employees can be paid and the company earns a profit.

Many great books have been written on the CEO mindset.  Great universities study the psychology of leadership. Although worded differently, there are a few consistent themes in each of the studies:

  1. Be optimistic – Nobody wants to follow a person who is unsure of their future – a leader’s cup is always half full.
  2. Be willing to take risks – Leaders lead! You can’t be afraid of making a mistake. Great leaders process information and make a decision.  I have always lived by this adage:  Don’t be afraid to make the “right” decision.  Make the decision and then make the decision right.
  3. Communicate a clear vision – You must have a well calculated plan and be able to articulate it clearly to the team.  A very successful businessman once told me that if you have a well thought out plan and flawless execution, you have a very high chance for success.
  4. Be what you ask of your people – One of the greatest leaders I have ever known always taught, “What you do speaks so loudly that what you say I can’t hear.”  Think about it.  People will always follow a leader who has walked the talk and practices what he/she preaches.
  5. Be calm in the face of chaos – This can be the hardest emotional leadership trait.  It won’t always go according to plan. You must remain steadfastly confident,  yet willing to make a calculated change in course.
  6. Trust your teammates – Hire well, train well, develop your staff and trust that your team is ready. Great coaches are calm on the sidelines during the game, but meticulous, detailed and sometimes grueling in practice.

If you possess these qualities, you are ready for leadership.  As such, either traditional or franchise business opportunities could be the best path as you look for your next career.


If you’ve come to the conclusion that business ownership will be the best pathway for your future, schedule a pre-consultation call with our expert franchise consultant Sid Lee.  You’ll be glad you did.

Three Franchise Funding Sources

Franchise Funding, thefranchiseworkshop.com, the franchise workshop

The primary reason businesses fail in the US is not because the idea is bad or for lack of being mentally prepared, or even lack of experience.  It is for lack of full and proper franchise funding.

 

If you buy the most expensive car you can afford and then don’t have enough money to put gas in it, it probably wasn’t the right car for you.  The same is true for getting into business.  You’re going to need fuel for the vehicle.

All franchisors have financial requirements that all new franchisees must meet or exceed.  These requirements for liquidity and net worth are established to make sure the new franchisees have enough money to fully fund the startup of the business.  They must also have access to appropriate operating capital to fund the franchise business as it ramps up to profitability.

That does not mean that you have to empty out your hard earned savings or cash in your retirement accounts.  If you don’t have enough money to fully fund your new venture, or simply want to keep a rainy day fund, you’re going to need funding.  Where will you get it?

Never fear.  If you have guarded your credit score and have set aside enough money to pay the franchise fee in cash,  the funding is available.  Funding institutions will look for credit scores of 700 or better and $50,000 in liquidity as minimum requirements.  If you’re there, congratulations:  Your opportunities are limitless.

Here are 3 common ways to fund your new franchise venture:

Qualified retirement account funding: This is a program that has been approved by the IRS and the US Dept. of Labor for many years and is the fastest, most preferred franchise funding vehicle other than straight cash.

Very simplistically it works like this; after you are no longer employed by the company who offered your 401k or qualified retirement plan and while you are researching your new business, you will be thinking about which type of corporate model to establish to protect your new business.

You will need to set up a C-Corp because the IRS tax structure is different for C-Corps than other corporate classifications.  Then you will need to transfer your old qualified retirement account over to your newly formed corporation.

Don’t worry.  You don’t need to change brokerage houses;  just administrators and ownership.  If your retirement account was managed by Fidelity, for example, it can stay at Fidelity.   There is a small cost for setting up the new administration, but there is no penalty.  The advantages are many.

Retirement plans regularly invest in businesses.  Now it can invest in yours!  You can pay it back at your own schedule,  at your own interest rate,  and you can even fund your new salary and operating capital until your business has ramped up to the point where it can support you.  A high credit score is not required for this type of funding…it’s your money!

SBA (Small Business Administration) Guaranteed Loans:  Many lending institutions offer SBA loans.  Again very simplistically, these are government guaranteed loans.  The specific terms of SBA loans are negotiated between a borrower and an SBA-approved lender. In general, the following provisions apply to all SBA 7(a) loans.

  1. SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000.  SBA’s maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000 or 75%.
  2. There will be varying fees depending on the size and guarantee on the loans, and interest rates will be competitive.

Unsecured Business Lines of Credit:  UBLOCs are a great way to create credit lines to use for startup costs, operating capital or unexpected business expenses.  These are credit lines set up based on credit score and history anywhere from $50,000 to $150,000.

The advantages are that you only pay back the amount you use, and the interest rates are very competitive (many times 0% for the first year.)  The set up costs will vary depending on the amount of credit needed and the program used.


If you have questions about franchise funding sources, or any other question about franchising, call or email Sid Lee at:

phone:  703-392-9085   email:  sid@choicefranchiseadvisors.com


How to Overcome the Fear of Buying a Franchise

buying a franchise, overcome your fear, franchising, going into business for yourself, franchise, franchises, thefranchiseworkshop.com

Buying a franchise, or simply going into business for yourself, is a very scary endeavor.  It is not for the faint of heart and should not be entered into without some trepidation.  The term, “by yourself” literally means “alone,” nobody to lean on;  nobody to help you in areas you may not be confident in.  Of course you’re going to be scared.  Who wouldn’t be scared attempting something they have never done and with nobody to help?

Fear has been described as False Evidence Appearing Real

For most of us, however, the foundation of our fear is built from learned behavior; lack of internal confidence developed over years of trying to grab the brass ring and coming up short.  In addition, external pressure from those around you, friends, loved ones, and even bosses who have in some way told you that you cannot do it.  It’s that little voice inside your head telling you, “You can’t do this.”

The fear of success is real, and let’s face it: success can be much more demanding than failure.  Noted Author, Mark McGuinness, states that “on some level, it’s more comfortable to stay in a familiar situation, even if it doesn’t feel great on the surface.  But achieving success (however you define it) means you are entering uncharted territory.  You are putting yourself out there to be scrutinized and criticized, and exposing yourself to new pressures and demands.”

It’s only human to wonder whether you’ll be up to the challenge.  A small anxious part of you would rather not take the risk.  You could always just stay at a JOB and continue to be miserable, always wondering,  “Why didn’t I?”  “Why couldn’t I?”

Embrace fear, and don’t go it alone.

Fear can also be the greatest motivator to fuel achievement, confidence, and ultimately, success.  I tell my clients all the time, “If you’re not a little bit scared, maybe there is something wrong.”

The process of “becoming” is rooted in “overcoming” those fears, both internal and external.  In the franchising world there is an old idiom:  buying a franchise allows you to go into business for yourself but not by yourself.   To begin overcoming those fears, you will need to find a great franchise system and then diligently research the franchise until you are satisfied with the answers to 3 critical questions:

  1. Do the Unit Level Economics work?  Are other people making money?  Is this a proven financial investment?
  2. Do they offer a strong value for the fees they charge? Franchises live on royalties, advertising fees,  technical fees,  and other fees they charge franchisees for services provided to the system.  Strong franchise systems will provide services and support in exchange for the fees in training, administrative process and procedures, marketing collateral, IT systems, ongoing training and much more.  Find one that offers support in the areas you do not feel comfortable.
  3. Am I a culture fit for this business? Franchise agreements can run from 5 to 20 years and are very difficult to get out of.  Make sure you are comfortable with the leadership, the direction they are taking the business and how they handle franchisee/franchisor conflict.  Over the course of your agreement there will be conflict.  How will they deal with it?  Is there litigation against the franchise? Do they sue their franchisees?

With my clients I look for a franchise system that has been franchising for over 10 years with over 50 existing franchisees.  These are successful franchise systems, proven many times over to produce successful franchisees.  The answers to those 3 questions will become evident through many conversations with the franchise executives and validation conversations with existing franchisees.

Finding a proven franchise system and becoming comfortable with the answers to those 3 questions will go a long way toward pulling you in off the ledge and alleviating your fears.

And remember, success is the best cure for fear.  Don’t go it “alone.”


Masters/Area Development Types of Franchising Models

types of franchising, master and area development models

A Brief History of Franchising

Franchising as a concept has a mystical history,  but its roots have been traced as far back as the Roman Empire in the Middle Ages up through the rule of William the Conqueror in England.  It was carried on by Louis Xlll in France,  always associated with a granting of rights in exchange for something.

Today’s usage of the term as a business concept is widely accepted to be traced back to before the Civil War when two great US innovators designed systems to expand sales and service of their inventions.  Either Cyrus Hall McCormick,  with his mechanical reaping and harvesting systems,  or Isaac Merritt Singer with his new sewing machines,  are usually credited with its birth in about 1850.

Franchising is flourishing today.  According to the IFA’s most recent Franchise Business Economic Outlook Report,  franchise businesses will add 247,000 new direct jobs this year (a 2.9 percent increase to 8.8 million direct jobs over last year.)  The number of franchise establishments will grow this year by 12,111,  or 1.6 percent,  to 781,794. Economic output from franchise businesses is estimated to increase by 5.4 percent over last year to $889 billion. The gross domestic product of the franchise sector is projected to rise by 5.1 percent this year,  which is faster than the 4.9 percent GDP increase forecasted for the economy as a whole.  The franchise sector will contribute about 3 percent of the entire U.S. GDP in 2015.  I guess the Romans were on to something.

The Evolution of Modern Types of Franchising

Whether it be Singer,  McCormick or even Ray Kroc,  franchising has evolved to include many types of franchising development agreements;  Single Unit Agreements,  Multi-Unit Agreements,  Area/Regional Development Agreements and Master Franchising are the most common.  The one thing they all have in common would be a development schedule whereby the franchisee,  in exchange for fees,  is granted a license to develop one or more units within a defined period of time.  Although with each of these agreements the franchisor is growing its franchise footprint and regional branding,  typically the franchisee’s objectives as motivation to sign each type of development agreement will vary in many ways.

I would qualify Single Unit operators as investors mostly new to the industry and interested in “buying a job” or “testing the waters” of a new investment objective. Multi-Unit operators are more highly capitalized seasoned investors willing to accept a higher level of risk mitigated by more units and an asset rich exit plan. These are both operator driven models based on individual unit level economics whereby the owners are the operators of record.

Development Driven Models: The Best Kept Secret in Business Today.

Area or Regional Development models are popular and are used to quickly grow a brand footprint by selling large exclusive geographic development rights to sophisticated investors acting as sub-franchisors for their particular markets. These agreements are unique in the fact that they are sold only once.  and the motivation for these agreements varies from operator driven models.  As unit level success is paramount in both models,  developers are more interested in creating cash flow from the sale of initial franchise fees to offset their development fee and in long term residual income driven by the royalty share from the franchises they sell.

The profile of successful developers is typically entrepreneurs with proven business experience and substantial capital resources.  Often,  they have operated one or more franchises within the franchisor’s system or another franchise company.  They may also have organizational and financial resources sufficient to commit to a large-scale investment.  Historically that model has been used by franchisors in more capital-intense industries such as lodging,  restaurants,  and automotive rental.  Currently it is expanding into the senior/home care and even marketing industries.

The financial model works roughly like this in most cases. In exchange for a development fee based on a projected number of proposed units or on population demographics,  the developer would be granted the licensing rights to the number of units agreed upon or,  in some cases,  a non-capped number of licenses.  Normally,  they would share in the franchise fees for each new license sold and in the royalty stream produced by each of the units sold for the life of the agreement. Typically,  the Developer would be required to open and operate at least one unit to be used as a training hub.  The hub would be required to provide pre-opening training and ongoing support for the franchisees in his/her market.

This model can provide the developer with a steady cash flow and a residual income for twenty years or more.  The asset and income stream can have a huge terminal value as a valuable and sellable exit strategy.

Master Franchising: The Ultimate Best Kept Secret

Master Franchisees would negotiate for and ultimately buy the exclusive development rights for a brand in an entire business segment.  Geographic area could be nationally or even internationally,  and is used often to expand into new global markets.  These agreements could be sold for captive markets where the franchisor has restricted access.  They can also be used to leverage a franchisee’s practical knowledge of the competitive landscape and specific expertise within a market.

The best model would depend on the specific goals, business and market experience of the new franchisee.