“How sweet an emotion is possession! What charm is inherent in ownership!” – David Grayson (Adventures in Contentment, 1907)
Have you ever considered buying a franchise? I have. There is a certain allure to the idea. You buy one shop, set it up, hire a good manager, and then let it run itself. You drop by every week or so for free food and conversation. At the end of every month, you get a big, fat check in the mail.
Every year, you buy another franchise. Before you know it, you’ve got a dozen of them and you’re making more than a million bucks a year. You’ve hired a manager to supervise your little chain of stores, and you hardly spend an hour a day thinking about them anymore. Mostly, your time is spent playing with your grandkids and golfing.
I know a guy who did just that. He lived across the street from me when I lived in a fancy, gated community in Boca Raton. He made his fortune investing in McDonald’s franchises. Before he retired, he owned (I think) 24 of them. I foolishly never took the time to pick his brain clean on the subject, but I did instigate enough casual conversations to get a sense of what he did and what he learned about franchises.
First, established franchises are very expensive. The rate of return you’ll get on your investment — after all is said and done — will probably be much less than you think. If you opt for a less-developed franchise (and maybe this interior-design franchise would be a good example), you’ll pay less but the risk will be greater. Every other day, another franchise goes bankrupt in America. And when you own a franchise store, you can’t survive if your franchise doesn’t.
Second, you’ve got to work very hard. You’ll spend countless hours in the beginning getting your business up and running. You’ll be forever struggling to get and keep good people, particularly management personnel. When you finally get one store going, you’ll be ready to start over again on another. And so — if you really want to get rich from running franchises — you’ll be working just as hard as you do in any other business.
Third, the secret to making a franchise work is different than the secret to making a personal business work. My friend’s friend may be successful in his business, because he is skilled at interior design and great with customers. But to make a franchise operation work, such skills won’t cut it. Franchise businesses have all the charm and personality built into them. What they need from you — if you own one — is the ability to make a positive bottom line.
Achieving profitability in a franchise is a matter of relentlessly cutting expenses and promoting the business — and training everyone who works for you to do the same. Developing this financially valuable and valued skill may not be what my friend’s friend really wants to do with his life, but, if he’s going to be successful in the franchise business, that’s exactly what will be needed.
We are talking about three very different businesses:
1. When you own your own business, you are an employee in a very unique enterprise that is a reflection of your own particular interests, talents, and skills. Your chances of making a ton of money in such a capacity are very slim, but there are plenty of other rewards that may be more important to you.
2. When you invest in a franchise, you are two things. First, you are an investor in a business you have some control over. Second, you are a profit-center manager for a corporation you don’t control. As an investor in a business whose employees you can hire and fire, you have a better-than-average chance of making a good return on your money (more than, say, 9%, the long-term stock-market average). As a profit-center manager for a large corporation, you’ll be sure to experience all the frustrations and difficulties of any employee in a similar role.
3. When you start your own franchise, you replicate your original business and then get someone to buy and run a second one, a third one, etc. You are no longer an employee of anyone. You are running the type of business that has the greatest chance of making a lot of money. You spend all your time showing your product (the business) to potential investors/employees and getting them to sign up. The experience of your workday has very little to do with the actual product or service your business provides. But if you are good at selling, you can make an awful lot of money.
That’s the short of it. I know some ETR readers are franchise investors and at least one is a franchise owner. Maybe they can chime in and help out my friend’s friend.