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Buying a Franchise*Understanding Your Options - Articles Surfing
So you*re considering buying a franchise. Whether you*ve found a particular franchisor to work with or you*re just drawn to the notion of having a franchise, looking at all your business ownership options is a critical step in your process of due diligence.
Besides the obvious - product(s), marketplace, competition and site selection - there are many other considerations that must be weighed in determining the right business for you.
Here are some of the initial questions I asked myself when I researched business opportunities:
* What are my income objectives?
* How quickly can I generate that income?
* What initial investment, or start-up capital, will I have to put up to get my business started?
* How much can I expect to pay in overhead costs?
* How much can I expect to pay in stocking inventory?
* How long can I survive financially without seeing a profit?
* What is my financial position; can I get financing?
* How much risk am I assuming by entering into a particular business?
* What are my areas of expertise?
* Will I be restricted by a particular territory in which I can do business?
* How much personal sacrifice will be required of me and my family as I build my business*how committed am I?
Let's be honest here. Business ownership isn*t for everyone. And some are better equipped than others to deal with the myriad of challenges which will inevitably arise throughout the life of any business.
In this article I will focus on one particular segment of research I conducted while investigating various business ownership options; the comparison I made between buying a franchise and the particular alternative I ultimately chose - becoming an independent distributor with a direct sales organization offering big-ticket information products with high profit margins.
The aim of this article is to share with other prospective franchise buyers my experience with this particular direct sales option as an extremely viable and cost-effective alternative to purchasing a franchise.
While individual franchisors may make income claims, I have learned there are no known studies that examine the return on investment in franchising as an industry. It is safe to assume the franchisor's income projections will be optimistic. Speaking with individual franchisees about their individual experiences is critical in establishing realistic projections with which you can work and upon which you can depend.
It should be noted that several years ago, franchisors regularly quoted on the success rate in franchising in comparison with independent businesses. Quotes of these old statistics are rarely now seen due to their flawed nature and the determination they simply were not valid. In fact, a few years ago the International Franchise Association went as far as making a recommendation that franchisors stop using those debatable statistics.
That being said, while no exact figures are known it is generally believed that the annual gross income for a typical franchise is somewhere in the range $75,000 - $125,000 (before taxes).
Although I can*t speak to the income potential for the entire direct sales industry, I can speak for the direct sales opportunity I selected. At a minimum $1,000 commission per transaction * and as much as $10,000 commission per transaction * with minimal business and overhead expenses, income potential is substantial. Most distributors are qualified and in an income earning position within a couple of months; some in a matter of days. Many individuals, in periods of less than 2 years, have experienced income of six figures per month. Many more individuals have quickly (within 1 to 2 months) achieved five figure monthly income levels.
The average initial franchise investment is $250,000, not including real estate. Part of that investment is your initial franchise fee. As stated in the FTC's A Consumer Guide to Buying a Franchise, **your initial franchise fee, which may be non-refundable, may cost several thousand to several hundred thousand dollars.* Paying this fee generally allows the franchisee to use the franchisor's name and business system for a specified period of time.
Conversely, when I started as a distributor with the direct sales organization I chose, I was only required to pay a distributor fee of $99 per year. Paying this distributor fee gave me the right to act as an independent distributor for the company, while being in business for myself. It also provided me with administrative service, training and support for my business.
Serious direct sales distributors (I consider myself among them) for the company I represent choose to invest in their businesses. Initial investments within my direct sales organization, including marketing, advertising and product ownership, generally run between $2,000 and $20,000. This range is a significantly smaller investment than required in a typical franchise situation.
Overhead & Operating Costs
When purchasing a franchise you can expect significant expense to build your store, or at the very least build out an existing structure.
Other considerations with franchises are signage, furniture, d*cor and office equipment. If signage is required it may require special zoning approval by your city government, which can be an additional expense in time and money * not to mention a major hassle.
Additional franchise costs to consider are special insurance, operating licenses and royalties fees. Royalties fees alone will cost 4-8% of your total sales every month (regardless, of course, of whether or not you*re yet seeing a profit in your business). These expenses can easily add up to tens of thousands, to hundreds of thousands of dollars depending on the franchisor's requirements.
In the case of the direct sales option I selected, there is little overhead cost involved and there are no unusual insurance, operating license or royalties fees requirements. I am able to conduct my business from an office in my home (which, of course, I write off on my taxes) or from anywhere in the world where I have access to the internet, using a dedicated phone and fax line and a personal computer. And I must repeat * there are no royalties fees.
Stocking inventory for a typical franchise opportunity can, again, cost in the range of tens of thousands to hundreds of thousands of dollars. The cost of warehousing that inventory can range anywhere from a couple dollars per square foot to hundreds of dollars per square foot, depending on whether your inventory will be located onsite in a high-rent district or offsite in an industrial location * and also depending upon your local real estate market.
Because in my direct sales business I offer an information product, there is no inventory involved. There are no lotions, potions, pills, books, CDs, tapes or DVDs to inventory - or to ship, for that matter. The products are offered online and delivered online. Not only does this make for an extremely convenient business, it offers the distributor an extremely high profit margin from which to draw a very attractive commission.
How Long Can You Survive Without Profits?
As a franchisee, if we look at the example with an average investment level of $250,000 and an assumed annual gross income of $75,000 - $125,000 (before taxes), your *break even* would happen around 3 years. Obviously, in the meantime you would need to have enough cash to sustain yourself, your family and your business.
Conversely, with the direct sales opportunity I chose, all you need to do is get past your first two initial sales and you*re making money right away ($1,000 to $10,000 per transaction).
Your Financial Position & Getting Financing
Among the very first considerations to be made when considering a franchise is your own financial position. Dealing with financial *skeletons in the closet* ahead of time can save you a great deal of time, hassle and disappointment.
For example, do you know your credit score? Are you intimately familiar with the specifics of your credit record? How much personal capital do you have available to invest in your business?
Once you*ve chosen a particular franchise it will be necessary for you to put together a business plan that you can bring, along with a draft copy of your franchise agreements, to your lender(s) of choice. Your business plan will include such subjects as your venture's goals and objectives, your financial projections, the background of management, and a market analysis describing your products, services, competition and projected business life cycle.
Fortunately, the direct sales avenue I took requires very little financial commitment. While some business owners are able to fund their businesses themselves, others needing to borrow the initial cash required - from lending institutions, family or friends - have found the small initial investment ($2,000 to $20,000) quite effortless to raise (even when there have been *skeletons*), certainly in comparison to raising franchise funding in the neighborhood of hundreds of thousands of dollars. Typically, financing in this range will not require a business plan.
A franchise agreement is a lot like a prenuptial agreement, in that it describes in detail the nature of the franchisee's relationship with the franchisor * including under what circumstances that relationship can be terminated.
However, keep in mind that the franchise agreement is primarily designed to protect the franchisor * not you, the franchisee. And more often than not there is an uneven balance of power involved * with the weight of power being on the side of the franchisor (not you, the franchisee). In fact, while most franchise agreements allow the franchisor to easily terminate their relationship with the franchisee if certain obligations are not met, most franchise agreements make it very difficult, if not nearly impossible, for a franchisee to terminate the relationship.
Other risks involved in buying a franchise include the potential of defaulting on the sizable loan you'll likely need in order get your business off the ground, additional financial requirements for third-party leases or sub-leases of property, as well as the simple reality of cash and inventory theft, in some cases by employees.
My direct sales business carries very little risk, if any at all. My distributor agreement requires that I conduct myself ethically, professionally and with integrity. No problem there. It requires that I not misrepresent the company or its products. No problem there either. For those of us who choose to fund our businesses with loans, the principal amounts we*re talking about (between $2,000 and $20,000) are insubstantial in comparison to loans for operating a franchise. Because we operate our businesses from our homes, we needn*t enter into third party leases or sub-leases of property. And theft is simply not a factor * because we don*t have employees and we don*t have physical inventory!
Expertise & Professional Assistance
When choosing to buy a franchise, mistakes can be especially costly. As such, professional guidance is critical. Identifying your strengths and weaknesses early in the game will help you determine the specific areas in which professional assistance will be necessary and what this assistance will cost.
For example, what is your business experience and background? Do you have experience managing people? If so, do you enjoy this aspect of running a business?
And unless you are a CPA, you will absolutely need an accountant. Similarly, unless you*re already a lawyer, you'll need professional legal advice * preferably from a lawyer specializing in franchise law.
The beauty of the direct sales option I selected is that it requires no business expertise whatsoever. We follow a simple business system directed by our company which, when followed, allows pretty much anyone with any background to build a successful business.
Unless you plan to work 120 hours a week juggling the responsibilities of your franchise, you will need employees. The type of employees you'll need will, of course, depend on the franchise. You may need employees with management experience, employees with specific skills or just high school students getting minimum wage.
Whatever kind of employee you need, you can count on a few things. First, as dedicated and professional as an employee might appear, they will not run the business as if it were their own (so you'll really need to keep a close eye on things!). Second, as I mentioned above under *Risk*, whenever there are employees there is also theft (sad, but true). Third, whenever there are employees, there will be employees who call in sick, employees who simply don*t show up when scheduled, and employees who quit (or get fired) unexpectedly. Fourth, whenever there are employees there is Workers Compensation insurance.
This is another area in which I came out ahead by selecting the direct sales opportunity I chose. No employees. Period.
Most franchise agreements involve some sort of territory designated in which you can operate. Some will have provisions for exclusivity within that territory.
On the contrary, the direct sales opportunity I chose has absolutely no designated territory. The entire globe * wherever there are telephones and internet access * is my marketplace. Because the product we offer has *mass appeal*, and is accessed and distributed via the internet, this makes for a huge, long-term business opportunity for distributors like me.
Last, but certainly not least, how much personal time and energy are you prepared to invest in your franchise?
Unless you*re prepared to hire management staff right from the start, your franchise is likely to require many hours of your personal time for an extended period of time. From time to time, it is also likely you will find yourself covering for employees during unexpected absences and during times of employee turnover.
It is extremely important to have realistic expectations of the personal sacrifice that not only you, but your family, will have to make in order for your franchise business to get up and running * and ultimately reach a point of profitability.
It is advisable to plan in advance by arranging an emergency family support *network* to cover minor unexpected family emergencies as they arise. Thinking ahead about who will transport a child to and from a weekend Little League game or from daycare during the week will reduce family stress on a day-to-day basis. That being said, keep in mind there will be times when your emergency family support network will be unavailable to come to your aid.
It was for these very reasons that I chose the particular direct sales business I joined. I choose the number of hours I work per day on a schedule that works for me. I do this from the comfort of my home, with no employees to worry about * I have complete flexibility for my family and I make virtually no personal sacrifices for the sake of my business (except for a cluttered office!).
I considered business ownership for many, many years. But, I like to sleep at night. I realize I haven*t covered all of the pitfalls that must be considered in purchasing a franchise. But, these are primarily the ones that kept me awake at night, ultimately causing me not to act.
But, there's good news*What it comes down to is this: There are alternatives to entering into encumbering franchise agreements, tying up large sums of cash, carrying massive debt obligations and committing countless hours of precious time and lost sleep in the interest of creating a substantial income-producing business.
While there is no *one-size-fits-all* business model, the direct sales business I selected offers the executive level income opportunity I desired without the worries and uncertainty involved in purchasing a franchise.
Today I have what is best suited to me: I am an independent business owner representing a high integrity company offering quality, practical information products * with that I can enjoy a fantastic income, flexibility and freedom of time, virtually no risk * and most importantly, peace of mind.
I wish you well in finding what is best suited to you.
I hope you found this report useful. I*m very interested in your feedback concerning this report, as well as any related experiences you wish to share. You may contact me at 978/358-7108 or email me at firstname.lastname@example.org.
Wishing you much success!
Copyright © 1995 - Photius Coutsoukis (All Rights Reserved).
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