| So you're considering buying a franchise. Whether | | | | necessary for you to put together a business plan that |
| you've found a particular franchisor to work with or | | | | you can bring, along with a draft copy of your |
| you're just drawn to the notion of having a franchise, | | | | franchise agreements, to your lender(s) of choice. |
| looking at all your business ownership options is a | | | | Your business plan will include such subjects as your |
| critical step in your process of due diligence. | | | | venture's goals and objectives, your financial |
| Besides the obvious - product(s), marketplace, | | | | projections, the background of management, and a |
| competition and site selection - there are many other | | | | market analysis describing your products, services, |
| considerations that must be weighed in determining the | | | | competition and projected business life cycle. |
| right business for you. | | | | Fortunately, the direct sales avenue I took requires |
| Here are some of the initial questions I asked myself | | | | very little financial commitment. While some business |
| when I researched business opportunities: | | | | owners are able to fund their businesses themselves, |
| • What are my income objectives? | | | | others needing to borrow the initial cash required - |
| • How quickly can I generate that income? | | | | from lending institutions, family or friends - have found |
| • What initial investment, or start-up capital, will | | | | the small initial investment ($2,000 to $20,000) quite |
| I have to put up to get my business started? | | | | effortless to raise (even when there have been |
| • How much can I expect to pay in overhead | | | | "skeletons"), certainly in comparison to raising franchise |
| costs? | | | | funding in the neighborhood of hundreds of thousands |
| • How much can I expect to pay in stocking | | | | of dollars. Typically, financing in this range will not |
| inventory? | | | | require a business plan. |
| • How long can I survive financially without | | | | Risk |
| seeing a profit? | | | | A franchise agreement is a lot like a prenuptial |
| • What is my financial position; can I get | | | | agreement, in that it describes in detail the nature of |
| financing? | | | | the franchisee's relationship with the franchisor - |
| • How much risk am I assuming by entering | | | | including under what circumstances that relationship |
| into a particular business? | | | | can be terminated. |
| • What are my areas of expertise? | | | | However, keep in mind that the franchise agreement is |
| • Will I be restricted by a particular territory in | | | | primarily designed to protect the franchisor - not you, |
| which I can do business? | | | | the franchisee. And more often than not there is an |
| • How much personal sacrifice will be | | | | uneven balance of power involved - with the weight of |
| required of me and my family as I build my | | | | power being on the side of the franchisor (not you, the |
| business…how committed am I? | | | | franchisee). In fact, while most franchise agreements |
| My Objective | | | | allow the franchisor to easily terminate their relationship |
| Let's be honest here. Business ownership isn't for | | | | with the franchisee if certain obligations are not met, |
| everyone. And some are better equipped than others | | | | most franchise agreements make it very difficult, if not |
| to deal with the myriad of challenges which will | | | | nearly impossible, for a franchisee to terminate the |
| inevitably arise throughout the life of any business. | | | | relationship. |
| In this article I will focus on one particular segment of | | | | Other risks involved in buying a franchise include the |
| research I conducted while investigating various | | | | potential of defaulting on the sizable loan you'll likely |
| business ownership options; the comparison I made | | | | need in order get your business off the ground, |
| between buying a franchise and the particular | | | | additional financial requirements for third-party leases |
| alternative I ultimately chose - becoming an | | | | or sub-leases of property, as well as the simple reality |
| independent distributor with a direct sales organization | | | | of cash and inventory theft, in some cases by |
| offering big-ticket information products with high profit | | | | employees. |
| margins. | | | | My direct sales business carries very little risk, if any at |
| The aim of this article is to share with other | | | | all. My distributor agreement requires that I conduct |
| prospective franchise buyers my experience with this | | | | myself ethically, professionally and with integrity. No |
| particular direct sales option as an extremely viable | | | | problem there. It requires that I not misrepresent the |
| and cost-effective alternative to purchasing a | | | | company or its products. No problem there either. For |
| franchise. | | | | those of us who choose to fund our businesses with |
| Income Potential | | | | loans, the principal amounts we're talking about |
| While individual franchisors may make income claims, I | | | | (between $2,000 and $20,000) are insubstantial in |
| have learned there are no known studies that examine | | | | comparison to loans for operating a franchise. |
| the return on investment in franchising as an industry. It | | | | Because we operate our businesses from our homes, |
| is safe to assume the franchisor's income projections | | | | we needn't enter into third party leases or sub-leases |
| will be optimistic. Speaking with individual franchisees | | | | of property. And theft is simply not a factor - because |
| about their individual experiences is critical in | | | | we don't have employees and we don't have physical |
| establishing realistic projections with which you can | | | | inventory! |
| work and upon which you can depend. | | | | Expertise & Professional Assistance |
| It should be noted that several years ago, franchisors | | | | When choosing to buy a franchise, mistakes can be |
| regularly quoted on the success rate in franchising in | | | | especially costly. As such, professional guidance is |
| comparison with independent businesses. Quotes of | | | | critical. Identifying your strengths and weaknesses |
| these old statistics are rarely now seen due to their | | | | early in the game will help you determine the specific |
| flawed nature and the determination they simply were | | | | areas in which professional assistance will be |
| not valid. In fact, a few years ago the International | | | | necessary and what this assistance will cost. |
| Franchise Association went as far as making a | | | | For example, what is your business experience and |
| recommendation that franchisors stop using those | | | | background? Do you have experience managing |
| debatable statistics. | | | | people? If so, do you enjoy this aspect of running a |
| That being said, while no exact figures are known it is | | | | business? |
| generally believed that the annual gross income for a | | | | And unless you are a CPA, you will absolutely need an |
| typical franchise is somewhere in the range $75,000 - | | | | accountant. Similarly, unless you're already a lawyer, |
| $125,000 (before taxes). | | | | you'll need professional legal advice - preferably from |
| Although I can't speak to the income potential for the | | | | a lawyer specializing in franchise law. |
| entire direct sales industry, I can speak for the direct | | | | The beauty of the direct sales option I selected is that |
| sales opportunity I selected. At a minimum $1,000 | | | | it requires no business expertise whatsoever. We |
| commission per transaction - and as much as $10,000 | | | | follow a simple business system directed by our |
| commission per transaction - with minimal business and | | | | company which, when followed, allows pretty much |
| overhead expenses, income potential is substantial. | | | | anyone with any background to build a successful |
| Most distributors are qualified and in an income earning | | | | business. |
| position within a couple of months; some in a matter of | | | | Employees |
| days. Many individuals, in periods of less than 2 years, | | | | Unless you plan to work 120 hours a week juggling the |
| have experienced income of six figures per month. | | | | responsibilities of your franchise, you will need |
| Many more individuals have quickly (within 1 to 2 | | | | employees. The type of employees you'll need will, of |
| months) achieved five figure monthly income levels. | | | | course, depend on the franchise. You may need |
| Initial Investment | | | | employees with management experience, employees |
| The average initial franchise investment is $250,000, | | | | with specific skills or just high school students getting |
| not including real estate. Part of that investment is your | | | | minimum wage. |
| initial franchise fee. As stated in the FTC's A | | | | Whatever kind of employee you need, you can count |
| Consumer Guide to Buying a Franchise, "…your | | | | on a few things. First, as dedicated and professional as |
| initial franchise fee, which may be non-refundable, may | | | | an employee might appear, they will not run the |
| cost several thousand to several hundred thousand | | | | business as if it were their own (so you'll really need to |
| dollars." Paying this fee generally allows the franchisee | | | | keep a close eye on things!). Second, as I mentioned |
| to use the franchisor's name and business system for | | | | above under "Risk", whenever there are employees |
| a specified period of time. | | | | there is also theft (sad, but true). Third, whenever there |
| Conversely, when I started as a distributor with the | | | | are employees, there will be employees who call in |
| direct sales organization I chose, I was only required to | | | | sick, employees who simply don't show up when |
| pay a distributor fee of $99 per year. Paying this | | | | scheduled, and employees who quit (or get fired) |
| distributor fee gave me the right to act as an | | | | unexpectedly. Fourth, whenever there are employees |
| independent distributor for the company, while being in | | | | there is Workers Compensation insurance. |
| business for myself. It also provided me with | | | | This is another area in which I came out ahead by |
| administrative service, training and support for my | | | | selecting the direct sales opportunity I chose. No |
| business. | | | | employees. Period. |
| Serious direct sales distributors (I consider myself | | | | Territory |
| among them) for the company I represent choose to | | | | Most franchise agreements involve some sort of |
| invest in their businesses. Initial investments within my | | | | territory designated in which you can operate. Some |
| direct sales organization, including marketing, advertising | | | | will have provisions for exclusivity within that territory. |
| and product ownership, generally run between $2,000 | | | | On the contrary, the direct sales opportunity I chose |
| and $20,000. This range is a significantly smaller | | | | has absolutely no designated territory. The entire globe |
| investment than required in a typical franchise situation. | | | | - wherever there are telephones and internet access - |
| Overhead & Operating Costs | | | | is my marketplace. Because the product we offer has |
| When purchasing a franchise you can expect | | | | "mass appeal", and is accessed and distributed via the |
| significant expense to build your store, or at the very | | | | internet, this makes for a huge, long-term business |
| least build out an existing structure. | | | | opportunity for distributors like me. |
| Other considerations with franchises are signage, | | | | Personal Sacrifice |
| furniture, décor and office equipment. If signage is | | | | Last, but certainly not least, how much personal time |
| required it may require special zoning approval by your | | | | and energy are you prepared to invest in your |
| city government, which can be an additional expense in | | | | franchise? |
| time and money - not to mention a major hassle. | | | | Unless you're prepared to hire management staff right |
| Additional franchise costs to consider are special | | | | from the start, your franchise is likely to require many |
| insurance, operating licenses and royalties fees. | | | | hours of your personal time for an extended period of |
| Royalties fees alone will cost 4-8% of your total sales | | | | time. From time to time, it is also likely you will find |
| every month (regardless, of course, of whether or not | | | | yourself covering for employees during unexpected |
| you're yet seeing a profit in your business). These | | | | absences and during times of employee turnover. |
| expenses can easily add up to tens of thousands, to | | | | It is extremely important to have realistic expectations |
| hundreds of thousands of dollars depending on the | | | | of the personal sacrifice that not only you, but your |
| franchisor's requirements. | | | | family, will have to make in order for your franchise |
| In the case of the direct sales option I selected, there is | | | | business to get up and running - and ultimately reach a |
| little overhead cost involved and there are no unusual | | | | point of profitability. |
| insurance, operating license or royalties fees | | | | It is advisable to plan in advance by arranging an |
| requirements. I am able to conduct my business from | | | | emergency family support "network" to cover minor |
| an office in my home (which, of course, I write off on | | | | unexpected family emergencies as they arise. Thinking |
| my taxes) or from anywhere in the world where I | | | | ahead about who will transport a child to and from a |
| have access to the internet, using a dedicated phone | | | | weekend Little League game or from daycare during |
| and fax line and a personal computer. And I must | | | | the week will reduce family stress on a day-to-day |
| repeat - there are no royalties fees. | | | | basis. That being said, keep in mind there will be times |
| Inventory | | | | when your emergency family support network will be |
| Stocking inventory for a typical franchise opportunity | | | | unavailable to come to your aid. |
| can, again, cost in the range of tens of thousands to | | | | It was for these very reasons that I chose the |
| hundreds of thousands of dollars. The cost of | | | | particular direct sales business I joined. I choose the |
| warehousing that inventory can range anywhere from | | | | number of hours I work per day on a schedule that |
| a couple dollars per square foot to hundreds of dollars | | | | works for me. I do this from the comfort of my home, |
| per square foot, depending on whether your inventory | | | | with no employees to worry about - I have complete |
| will be located onsite in a high-rent district or offsite in | | | | flexibility for my family and I make virtually no personal |
| an industrial location - and also depending upon your | | | | sacrifices for the sake of my business (except for a |
| local real estate market. | | | | cluttered office!). |
| Because in my direct sales business I offer an | | | | In Summary |
| information product, there is no inventory involved. | | | | I considered business ownership for many, many |
| There are no lotions, potions, pills, books, CDs, tapes or | | | | years. But, I like to sleep at night. I realize I haven't |
| DVDs to inventory - or to ship, for that matter. The | | | | covered all of the pitfalls that must be considered in |
| products are offered online and delivered online. Not | | | | purchasing a franchise. But, these are primarily the |
| only does this make for an extremely convenient | | | | ones that kept me awake at night, ultimately causing |
| business, it offers the distributor an extremely high | | | | me not to act. |
| profit margin from which to draw a very attractive | | | | But, there's good news…What it comes down |
| commission. | | | | to is this: There are alternatives to entering into |
| How Long Can You Survive Without Profits? | | | | encumbering franchise agreements, tying up large |
| As a franchisee, if we look at the example with an | | | | sums of cash, carrying massive debt obligations and |
| average investment level of $250,000 and an | | | | committing countless hours of precious time and lost |
| assumed annual gross income of $75,000 - $125,000 | | | | sleep in the interest of creating a substantial |
| (before taxes), your "break even" would happen | | | | income-producing business. |
| around 3 years. Obviously, in the meantime you would | | | | While there is no "one-size-fits-all" business model, the |
| need to have enough cash to sustain yourself, your | | | | direct sales business I selected offers the executive |
| family and your business. | | | | level income opportunity I desired without the worries |
| Conversely, with the direct sales opportunity I chose, all | | | | and uncertainty involved in purchasing a franchise. |
| you need to do is get past your first two initial sales | | | | Today I have what is best suited to me: I am an |
| and you're making money right away ($1,000 to | | | | independent business owner representing a high |
| $10,000 per transaction). | | | | integrity company offering quality, practical information |
| Your Financial Position & Getting Financing | | | | products - with that I can enjoy a fantastic income, |
| Among the very first considerations to be made when | | | | flexibility and freedom of time, virtually no risk - and |
| considering a franchise is your own financial position. | | | | most importantly, peace of mind. |
| Dealing with financial "skeletons in the closet" ahead of | | | | I wish you well in finding what is best suited to you. |
| time can save you a great deal of time, hassle and | | | | Your Feedback |
| disappointment. | | | | I hope you found this report useful. I'm very interested |
| For example, do you know your credit score? Are you | | | | in your feedback concerning this report, as well as any |
| intimately familiar with the specifics of your credit | | | | related experiences you wish to share. You may |
| record? How much personal capital do you have | | | | contact me at 978/358-7108 or email me at . |
| available to invest in your business? | | | | Wishing you much success! |
| Once you've chosen a particular franchise it will be | | | | |