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Evaluating Franchise Investments

Millions of people dream about owning their
own business. Having the independence thatWill the nature of the business allow you to
being your own boss brings, the security thatwork a normal five-day, fourty-hour work
no one can fire you, enjoying a good income -week? Life is too short for the seven-day,
and for the most successful - thesixty to eighty hours a week, workaholic
accumulation of wealth and prosperity.lifestyle,that can destroy health, family and
Unfortunately, the cards are stacked againstpocketbook. Financially, the true hourly rate
a new small business making it big - orfor franchise owners who work these
making it at all. An endless stream ofworkaholic hours is often less than minimum
problems makes competition from large,wage.
sophisticated chains just too intense. Most
new  start-ups  end  as  failures.Minimum  Number  Of  Employees
Franchising represents a more viable approachCan you operate the business with five or
to business ownership. For a price, thefewer employees? Managing dozens (or hundreds
parent company teaches its proven businessin the case of some fast-food operations) of
methods to the franchised-operator whominimum-wage teenagers who are constantly
shoulders all operating and financialquitting or simply not showing up for work is
responsibilities of the outlet. Thea  sure  formula  for  stress.
statistics are impressive: over 40% of all
U.S. retail sales are through franchisedLeasing  And  Location
establishments. While giants like McDonalds,
H&R Block, 7-Eleven and Radio Shack areFor most retail franchises, the triple net
familiar, household names, franchises arelease of the location is the biggest
available in a wide range of industries. Thefinancial commitment, larger than the total
list of 3,000-plus franchise companies spanfranchise investment. Yet, the typical real
over 100 different categories. But just asestate lease and its ramifications are not
franchising represents a chance to get rich,required disclosure in any Franchise Offering
it's also a chance to get stung. An alarmingCircular (FOC). For example, an estimate that
number of franchised operators make less thanyou'll need 2,000 sq. feet of space with
the minimum wage, working seven days, sixtyexpected rental of $5 to $10 a foot per month
to eighty hours a week, pursuing an expensiveis normally disclosed in the FOC's initial
and elusive American Dream that turns into ainvestment table as Leased Real Estate
nightmare.$10,000 to $20,000. A footnote to the
investment table may say "assumes 2,000 sq.
What follows is a bottom-line check list offt. at $5 to $10 a foot." But, that's only
tips compiled from leading franchise expertsthe beginning of the story. The lease is
that will help you eliminate 95% of thenormally a 5 to 10 year triple-net lease. So,
companies you are considering. Then, you canthe financial commitment made when the lease
concentrate your efforts on the 5% "cream" ofis signed is at least $600,000 (at $5/foot
the crop" companies that deservefor 5 years) to $2,400,000 (at $10/foot for
consideration. This check list assumes the10 years). And this doesn't include
franchise company: (1) has itselfsubstantial, additional obligations to pay
successfully operated the concept beingall of the landlord's yearly property taxes,
franchised for at least five years atinsurance, common area operating expenses,
multiple locations; (2) is not plagued byetc. Key questions to ask here: (a) is the
litigation or complaints from disgruntledfranchise you're considering one that can be
franchise owners; and (3) has a balanced,operated in a low rent commercial business
fair  franchise  contract.zone? Avoid franchises requiring the costly
expenses and triple-net leases of a visible
Industry  Trendretail storefront and the extravagant rent
associated with areas of high foot traffic,
Is the franchise in a cutting-edge industrylike shopping malls or strip centers. You'll
that is doing well currently and is projectedsleep much better at night. (b) What's your
to do well in the future despite any economictotal financial commitment under the lease?
slowdown? Education and home-improvement(c) Do you have sufficient liquid assets (or
services are stable categories. Food isa willing, sufficiently liquid third party
over-saturated generally, and except inguarantor) to meet the landlord's lease
exceptional circumstances, is not worth thequalification standards? If you don't, you
high investment, headaches and marginalmight as well forget about investing in the
income.franchise. Or even worse, getting involved in
a questionable franchise, realizing you've
Total  Initial  Investment  Requiredmade a big mistake - only to discover you're
on the hook for a $500,000+ lease obligation.
In general, don't expect a franchise that
requires a five-figure initial investment toImage  And  Lifestyle
produce a six-figure income. As with most
things in life, you get what you pay for. IsHow does flipping burgers, scooping ice cream
the total initial investment range (includingor cleaning restrooms fit the image of what
working capital) $125,00 or less; and theyou want to do for a living? Investing in a
maximum investment less than $200,000? Youfranchise will be the most important
can find solid companies in this investmentpsychological and financial decision you ever
range if you're willing to look around. Don'tmake. Does the typical working day of the
forget to consider long-term financialfranchise you are considering fit your
commitments, particularly the real propertypersonal  image  and  desired  lifestyle?
lease (see discussion below under "Leasing
And  Location").Franchise  Brokers
Real  BusinessDoes the franchise company have its own
in-house marketing department, or does it
Is this a legitimate retail business, asutilize outside franchise brokers? The use of
opposed to a "work out of your home"franchise brokers is a definite red flag.
operation? The vast majority of work out ofFirst, it indicates the franchise company is
your home concepts produce marginal income atnot very serious about who it lets into the
best.franchise network (or even worse, they're
desperate to sell franchises). Second,
Management  Expertisefranchise brokers receive a substantial
commission up to 50% or more of the franchise
Does the management team have executives withfee you're paying the franchise company. They
demonstrated past achievement and experiencedefinitely do NOT have your best interests in
in operating other franchise companies? Ifmind and will do whatever they can to close a
not, this is a big RED FLAG. Many companiesdeal. This accounts for the common
enter franchising and fail to realize theyobservation that franchise brokers tend to
are in a brand new business - one requiringgive glowing recommendations for all
entirely different management skills andfranchises they represent. A detailed
abilities. If the management team lacksanalysis often reveals these highly touted
strong franchise credentials, you might asfranchises produce mediocre or even below
well take a trip to Las Vegas with the moneyminimum wage financial performance. Yet
you're intending to invest. Your chances offranchise brokers won't mention this, and
making  vs.  loosing money are roughly equal.individuals continue to rely on their
recommendations, believing the broker
Normal Working Hours And Days; Sufficientrepresents them. Nothing could be further
Income  Levelfrom the truth.



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