Let’s start with a basic question: How important is money? Most people will say that money is pretty important, and they should. Money after all can bring comfort and freedom. But let’s face it, once you’ve got the basic essentials covered (food, housing, healthcare, clothing, etc.) more money doesn’t necessarily make you happier. So just how much money is enough? We’ve been researching franchise businesses, and we’ve learned a thing or two about investing in a financially successful franchise. Here are five key points to keep in mind when looking for a profitable franchise business.
1) Passion Rules!
The most successful franchise owners are always extremely passionate about the businesses that they are growing. If you’re just chasing money, you will probably never be happy. Look for a business concept that gets you really excited. Talk with franchise owners and identify the companies with positive and professional corporate staff and passionate franchisees. Life is short. When you discover the right business – one that gets you really excited – you’ll find it easy to wake up every day to make success happen!
2) Satisfaction Matters
High owner satisfaction drives high performance—and vice versa. While there are thousands of franchise companies you could invest in, two-thirds of those franchise businesses are simply average or below-average investments. Every franchise company will tell you that they are above average. Your job is to ask them to prove it.
When you do your franchise research, ask companies to see their Franchisee Satisfaction Report from Franchise Business Review. Your potential success as a business owner is significantly better with an award-winning franchise brand behind you.
3.) Top Line Doesn’t Always Trickle Down
Many franchise companies will brag about their “top line” or gross sales/revenues. And while a healthy top line is important, it’s the bottom line (net income/profit) of the business that really matters. When you’re talking with franchise companies, collect as much financial information as you can to gain a solid picture of the typical gross sales of the business, common expenses, cost of goods, and profit margins. Start to put together a business plan based on realistic financial projections. Then talk with franchisees and confirm your financial estimates are “in the ballpark.”
Business profitability varies widely from industry to industry and business owner to business owner. Even the most successful businesses commonly take a year or more to start generating meaningful profits. Many franchise companies don’t do a good job of explaining all the details of their franchise costs, and the time it can take to grow revenues and profits
When talking with other franchise owners, ask how long it took for their business to ramp up and start generating profits. Be sure to budget accordingly, and have a solid cash reserve in the event that your business takes a little longer, or costs a little more to get off the ground—because it probably will.
4.) Think and Plan Long Term
Business ownership is a long-term investment strategy. If you’re hoping to turn a big profit in just a few years, franchising is probably not the right path. That said, many people have built significant wealth over time through owning and operating franchise businesses.
It’s also important to distinguish between income and equity. If you’re lucky enough to have a profitable business, any profits you personally take out of the business are considered income. On the other hand, equity is the long-term value of the business itself that hopefully grows over time. Many business owners build much of their wealth in the equity in their business, and cash-in on the equity when they ultimately sell the business.
As a potential new business owner, it is always a good idea to begin with the end in mind. Have a clear understanding of your investment goals and objectives. Put together a long-term plan and hire a good accountant and franchise attorney to help review your plans before investing in any franchise business. Life will always throw you a few curveballs, but having a solid, long-term plan will give you a strong foundation to build your new business on.
5.) Success Requires Hard Work
While franchising offers many great opportunities, it’s important to understand that owning and operating a successful franchise business requires a lot of hard work. Buying a franchise is not a silver bullet to overnight riches. The successful franchisees we talk with every day have all worked really hard to get to where they are.
“It’s important to have realistic expectations of what business ownership is all about,” explains Eric Stites, founder and CEO of Franchise Business Review. “Most franchise businesses—like any new business—require several years of hard work before they start to really take off. Many franchisees tell us that building their franchise business was the hardest, but most rewarding thing they’ve ever done.”
It’s important to be honest with yourself before investing in a franchise business. Are you truly passionate about the business? Are you and your family committed to at least five to ten years to build and grow a successful business? Are you really willing to put in the hard work to make your new business a success? These are the questions only you can answer.
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