What are Franchise Royalties?

What are Franchise RoyaltiesAfter our last blog post we received some questions about franchise royalties. It is certainly an area that you should be deeply aware of when you are deciding between franchise opportunities. Today’s post is a general overview of Royalties, what you get for their payment and what you can expect in return. We’ll also work through an example.

First, what is the definition of a royalty? A royalty is the payment a franchisee makes to the franchisor for them to use their concept in an effort to generate for revenue and profit. Continue reading “What are Franchise Royalties?”

10 Steps to Opening a Franchise

In this Blog Post, I’m going to share with you the 10 Steps to Opening a Franchise.

Opening up a franchise or any small business can be daunting. There are hundreds of tasks that need to be completed most, within a certain time-frame. Risk increases with ignorance and to that end, its important to understand the big picture, the context of the entire sales and development processes. In this article I’ve outlined a high level overview of the how to open a franchise unit. Its important to note that this post is intended to be a road-map. The specific how-to’s for each task will be covered in a separate posts.

With just a few exceptions, this process can be used to open any small business.

Continue reading “10 Steps to Opening a Franchise”

What I Would’ve Done Differently – Episode 2

By Tiffany Toliver, P.E.

This story starts in the suburbs Atlanta, GA. I was working on a pad-deal in a prominent lifestyle center. The LOI was fully negotiated and executed and I was waiting on a lease draft from the Landlord. During this time, I had a local engineering firm doing some code research on the site so that I could accurately estimate a project schedule and permitting costs.

Continue reading “What I Would’ve Done Differently – Episode 2”

What Happens When You Don’t Pick A Tested Franchise

By Steve Slowey

Last week I was in Denver Colorado for a trade show; everything concept you could think of was represented there, from oil changing to cupcakes. As a potential franchisee,  seeing all these concepts, where do you even begin? Yes, some folks know what they want but there may have been several branded concepts representing the same niche, so again, where do you begin?

I had the opportunity to speak with a lot of people and as the show went on, I found myself asking people how much they knew about Franchising. Honestly, I found that they didn’t know exactly how it works or even what a franchise agreement was.

So how do you make a decision, or pick between so many concepts, when you’re making such an important choice? You don’t, you do your research,  remove all emotion, and realize this could be the best, or the worst decision, depending on how you approach it.

Franchises should represent a concept that has been tested and proven to increase the opportunity for a potential Franchisee to make money. This idea only holds true if the Franchisee follows the advice and direction of the Franchisor. Considering the length of time a franchise agreement represents (usually 10 years), a concept should not even consider Franchising until they are solid in every facet of their operation. While I don’t believe a concept needs to be operational for a certain amount of time before franchising, they better be able to prove they know what they are doing. Just because someone has an idea that seems unique today doesn’t mean it will be successful as a franchise.

Newer concepts rely heavily on the Franchisee to give them credibility and help them build relevance in the market. Every Franchise we see began somewhere, but believe me, they all went through some growing pains typically at the expense of some Franchisee.

Personally, I have been successful in some franchises and I have been financially hurt by others. With the ones I was hurt by, the Franchisor allowed me to open even when things weren’t exactly right. What risk did the Franchisor have, more than that, what did the Franchisor do to help me through the struggle and to ensure that I was successful?

If you buy a Franchise, you will be paying for the use of their branded name and what they consider proprietary information, that should help you to be successful. Remember, this is a big decision and you need to ask the right questions and get sound advice before you commit. Let us help you. We are not here to convince you to buy a Franchise, we are here to simply help you do it the right way.

 

What is the ROI and why is that important to me?

By Paul Giggi

Five Key Questions to ask a Franchisor – Question #2

If you haven’t had a chance to see our video on this topic I would like to suggest you do so for our conversational piece on this important topic. For this blog we will focus on Questions #2 of our Key 5 questions to ask.

During your introductory discussions with the Franchisor we have shared that there are many questions to consider asking in your discovery phase to help you to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The second of our Big 5 Questions to Ask:

What is the ROI?

Once you have received some of the financial data that you should expect to pay as a part of your investment, which is the focus of question #1; your next questions should be about your expected Return On Investment, or ROI, from your investment in, and operation of, the concept in consideration.

The Return of Investment can be measured in both time to recover your initial investment as well as the amount of money you make above and beyond your initial investment.

I would typically first want to look and the ROI on the basis of time to recover my initial investment.  As an example, if my initial investment is $1 Million and the business makes $100K per year, my ROI is 10 years; in other words it will take you 10 years to earn your initial invest back and this is not a desirable plan, particulary when you consider that you will more than likely be infusing additional monies into the business as you operate for items such as maintenance, updates, replacements, etc…  Typically, you should try to recover your investment within the first 4 to 5 years which would then give you the out years (years 6 – 10) to make your true profit on your investment. Generally, with a franchise restaurant, you will be required to sign a 10-year term for each site you wish to open and this term will match the lease (should you choose this approach to occupancy) as well as the term of your lender should you use debt financing, so all of your forecasting for the return is based upon that term. Therefore, an investment of $1M in which you receive back $200,000 per year would be a solid investment as you would recover your investment in 5 years and then be earning a return of 20% on your initial financial investment.

The amount of profit you make above your initial investment is the monetary return on your investment. For example, if your initial investment is $1.0 Million and after you have recovered your initial investment you are making 100 K/year then your monetary return is 10%. Understand that the Franchisor can not share what your expectations of your ROI but can direct you to how you can acquire the necessary information that will allow you to accurately forecast your return.

Calculating your ROI will also help you determine when you may be best positioned to sell your restaurant should this be something you have as a strategy in your business.

When you look at a franchise restaurant you want to add to your initial investment all of the items if cost to get started so don’t forget your Franchise Fee and any other start-up costs such as legal charges.  This can be an involved process so be sure to get sound advice on expectations and objectives.

What is on your mind?

By Steve Slowey

So I have written some blogs on various issues and I have talked about some of the challenges I have had in my career but I’d like your input on what you’d like to learn. 

I have made a lot of mistakes in my professional life and have learned from them. I have watched successful people and learned from them also. What do you want to learn? What are the challenges you are facing?

We (Paul, Tiffany and myself) have about 75 years of combined experience and it covers a broad spectrum; from being part of an existing franchise to starting a new concept. We have negotiated over 1000 leases and have owned more than 20 businesses. We could blog for years about running a profitable business, franchising, leases, and many other topics; but if there is a specific topic you’d like to hear more about, please let us know!

When I opened my first restaurant, I had no idea what I was doing. I would call the bank and get my balance and that’s how I knew I was making money. I did my profit and loss statement at the end of the year for tax purposes and learned the hard way about cash flow and taxable income. If I knew then what I know now, who knows?! But I do know now and I’m happy to help others that are currently in the position I was once in.

If you are considering leasing space and you have never done this before please let us know and learn from our experience. If you are considering a franchise let us know it is a huge decision that will contractually obligate you personally for the next 10 years. If you are struggling to make money in your business and don’t know what to do to turn it around then let us know.

I know there is tremendous value in my experience and would like to help you in your journey. I want this blog to be a service to you. Please comment below with any questions on franchising, leasing, construction, or running a profitable business.