What kind of person buys a franchise?

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knightrider
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What kind of person buys a franchise?

Post by knightrider » Mon Dec 19, 2016 1:55 pm

I have never met anyone who owns a franchise. But you can't throw a stone without hitting one in any city! I have always thought of them as very poor business models because of their huge licensing costs and restrictive operating procedures. It seems the only ones who will make money are the franchisee. To me they are just a step above a pyramid scheme.

So what kind of person throws down hundreds of thousands of dollars to buy a 80-hour/week job that has a 90% chance of failure in 5-years?

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Hub
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Re: What kind of person buys a franchise?

Post by Hub » Mon Dec 19, 2016 2:00 pm

The people that I know that have done well with them own more than a few and were never scared to get their hands dirty managing them. They also all took some lumps along the way. It's never looked appealing to me, but obviously lots of people do well with them. I assume the appeal is that it doesn't take imagination to get into one, only money.

gclancer
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Re: What kind of person buys a franchise?

Post by gclancer » Mon Dec 19, 2016 2:08 pm

Hub wrote:The people that I know that have done well with them own more than a few and were never scared to get their hands dirty managing them. They also all took some lumps along the way. It's never looked appealing to me, but obviously lots of people do well with them. I assume the appeal is that it doesn't take imagination to get into one, only money.
It's not as easy anymore, but you used to be able to fund the upfront costs with SBA loans which lowered the barriers to entry a bit. The folks that I know who operate them operate several (multiple locations and often more than one franchise in noncompeting industries) with shared back office overhead.

bigred77
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Re: What kind of person buys a franchise?

Post by bigred77 » Mon Dec 19, 2016 2:15 pm

I liken it a little bit to owning rental properties. It doesn't look like an attractive option to me (at least with current prices/rents in my city) but some people want to own them.

Some people will fail. Some will make some money on them. Some will be wildly successful with them.

I suspect those that are wildly successful are fairly savvy, get lucky with their timing, and grow to the point where they can achieve economies of scale.

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climber2020
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Re: What kind of person buys a franchise?

Post by climber2020 » Mon Dec 19, 2016 2:17 pm

Shaquille O'Neal bought a Krispy Kreme in Atlanta a few months ago.

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cheese_breath
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Re: What kind of person buys a franchise?

Post by cheese_breath » Mon Dec 19, 2016 2:21 pm

climber2020 wrote:Shaquille O'Neal bought a Krispy Kreme in Atlanta a few months ago.
I bought a Tim Horton's today. It was delicious when washed down with TH coffee. :D
The surest way to know the future is when it becomes the past.

wolf359
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Re: What kind of person buys a franchise?

Post by wolf359 » Mon Dec 19, 2016 2:22 pm

A franchise gives you the ability to own a proven and successful business model. They teach you how to operate and manage the business, but you still get the advantages and disadvantages of a small business. I have family members who had franchises for over 25 years, and were very successful in them. They, of course, knew other franchise owners, both within their own franchise, and owners of different franchises.

If you do it wrong, you're buying yourself a job that you can't quit (you have to sell it or take a loss.)

If you do it right, you buy yourself a business opportunity that is much less risky than starting one completely on your own. You get a store that already has customers, national name-brand recognition, a known pre-determined product line or service, and someone to teach you how to do it.
So what kind of person throws down hundreds of thousands of dollars to buy a 80-hour/week job that has a 90% chance of failure in 5-years?
Sounds like you're badly quoting what's known as THE STAT: "Some studies show that franchises have a success rate of approximately 90 percent as compared to only about 15 percent for businesses that are started from the ground up."

The Stat was based on an unscientific survey, and isn't actually true. There have been no scientifically accepted studies that come up with an accurate number that shows the relative survival rate between all new starts versus new franchise owners. Anecdotally, it's probably less risky for the reasons I cited above (can tap into previous experience/training from the parent company, established customers, established name recognition, known product/service that has already proven profitable.)
Last edited by wolf359 on Mon Dec 19, 2016 2:39 pm, edited 3 times in total.

hicabob
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Re: What kind of person buys a franchise?

Post by hicabob » Mon Dec 19, 2016 2:34 pm

Some folk do very well indeed from franchises. A few years back I rented a couple thousand feet of space in a nice tilt-up facility. The tenant next door had many exotic cars such as a Ford GT and a Lambo among others. Upon chatting to the frequent resident, I learned he was a private mechanic for a person who got wealthy by owning quite a few Burger Kings (6 if I remember correctly) and spent a bit of it racing expensive cars.

randomguy
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Re: What kind of person buys a franchise?

Post by randomguy » Mon Dec 19, 2016 2:51 pm

wolf359 wrote: The Stat was based on an unscientific survey, and isn't actually true. There have been no scientifically accepted studies that come up with an accurate number that shows the relative survival rate between all new starts versus new franchise owners. Anecdotally, it's probably less risky for the reasons I cited above (can tap into previous experience/training from the parent company, established customers, established name recognition, known product/service that has already proven profitable.)
A lot of the risk depends on the franchise. McDonalds and the like are at a different level of risk(and capital requirements) than say opening a doggy day care center.

Franchises are great for people who are good with executions and not so great with vision.

wolf359
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Re: What kind of person buys a franchise?

Post by wolf359 » Mon Dec 19, 2016 4:06 pm

randomguy wrote:
wolf359 wrote: The Stat was based on an unscientific survey, and isn't actually true. There have been no scientifically accepted studies that come up with an accurate number that shows the relative survival rate between all new starts versus new franchise owners. Anecdotally, it's probably less risky for the reasons I cited above (can tap into previous experience/training from the parent company, established customers, established name recognition, known product/service that has already proven profitable.)
A lot of the risk depends on the franchise. McDonalds and the like are at a different level of risk(and capital requirements) than say opening a doggy day care center.

Franchises are great for people who are good with executions and not so great with vision.
I agree that a lot of risk depends on the franchise. There ARE studies that show the risk of individual franchises. The numbers just can't be extrapolated to all franchises. The most successful franchises (in terms of lowest failure rates over time) are actually hotels.

I'm not so sure I agree with the last statement. A lot of McDonald's success came from their products, and a lot of the most successful products (e.g. Big Mac, Filet-o-Fish, and Egg McMuffin) were actually invented by the franchisees. I think it's more accurate to state it in terms of risk and reward. If you start a business on your own, you take more risk, but you get all the rewards. If you start/buy a business under the franchise model, you reduce risk, but you're beholden to that franchise owner who always takes their cut.

tim1999
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Re: What kind of person buys a franchise?

Post by tim1999 » Mon Dec 19, 2016 7:53 pm

I know a few and they all seem to have a personality type in which they are uncomfortable with or can't stand being subordinate to someone else in a corporate setting. Having control over a gaggle of low-paid staff gives them some kind of satisfaction. They all quit decently paying megacorp jobs to buy franchises earning probably half what they did before and working far more hours. However, I'm talking about franchises like frozen yogurt and fruit baskets, not McDonalds.

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Re: What kind of person buys a franchise?

Post by cherijoh » Mon Dec 19, 2016 8:23 pm

knightrider wrote:I have never met anyone who owns a franchise. But you can't throw a stone without hitting one in any city! I have always thought of them as very poor business models because of their huge licensing costs and restrictive operating procedures. It seems the only ones who will make money are the franchisee. To me they are just a step above a pyramid scheme.

So what kind of person throws down hundreds of thousands of dollars to buy a 80-hour/week job that has a 90% chance of failure in 5-years?
First off, I think the person buying the franchise is the Franchisee. I believe you mean the Franchiser is the only one making money.

A friend's husband bought a franchise - I believe it was a Sport's Clips. He ended up selling it just a year or two later. Based on her stories, you don't want a franchise that is reliant on minimum wage labor (or anyone else who will switch jobs if offered $0.10 more per hour). I think you would do better if you buy a franchise that doesn't have much competition from big box stores (e.g., nothing craft-related due to Michael's and Joanne's) and doesn't have a saturated presence in your area (like massage/day spas). I must live in a high stress city based on the number of massage franchises around here. :wink:

I don't know how much money they are making, but I do know of several franchises with the same owners who have been around well over 10 years.

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Re: What kind of person buys a franchise?

Post by LarryAllen » Mon Dec 19, 2016 8:36 pm

If you pick the right franchise and execute the plan half way decently you can make good money. Dutch Brothers Coffee comes to mind. it would appear they print money with each new location.

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Re: What kind of person buys a franchise?

Post by rnitz » Mon Dec 19, 2016 9:27 pm

I've only known one guy. He was a Dad for a kid on my son's soccer team. He went to the local state school, working at Domino's as a grunt and eventually managing it. The owner saw he was dedicated and smart got him to manage several other of the other outlets. Eventually bought one of his own (after graduation, and still managing the others). When I knew him from soccer, he owned three and managed a handful of others. They recently moved to a $2M house and putting their kids through private school. A great guy, and a great story. Everyone's different.

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Re: What kind of person buys a franchise?

Post by smitcat » Tue Dec 20, 2016 2:36 pm

Interesting thoughts from folks that are curious about franchises.
They are not that different from any standalone business.
You are mostly on your own and need to do some very serious diligence and soul searching before doing either.

The experience is about as far away as you can get from a 40 hr a week job in both the ups and the downs.
With some hard work and decent research a business will do well with dedicated owners but can be overwhelming to some who have not had to deal with all aspects of a business.
We currently have franchises but have had stand alone business's in our past history as well as working for a larger company.
We do not typically work near the hours stated above and do very well - better than when we worked for corporate America.

If you plan on considering a franchise visit with as many current and past owners as you can to get the real scoop.
I am amazed at how little research folks have done that got into the same franchise as ourselves and am mot surprised at their resultant struggles.
Good luck and hope this helps

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Re: What kind of person buys a franchise?

Post by btenny » Tue Dec 20, 2016 3:07 pm

I think has a lot to do with timing and your willingness to work hard. And of course the main Franchisee must be successful. I know two people who did franchises. The first I met in college. He was a smart guy but disabled and wheel chair bound. He started working for McDonalds in college in late 1960s. He liked the job because it let him work with people and get paid for his labor. In those days a disabled person could not get many jobs so this was a great big thing to him. He worked hard. He stayed at the job and became a store manger in a few years. He bought his first store with company help in the 1970s. Then it just snow balled. He is really rich now and owns lots of stores.

The other person opened a Pollo Asado Mexican fast food place. This is the same food and concept as El Pollo Loco that exists today. They had a store right next to my mega corp offices. The store was a instant success as the food was good and fair priced and the service was fast. The couple ran it for 2 years or so and said they were trying to buy second store. They said they were making good money but working hard. They a few weeks later the store closed. The main franchiser brand name company went BK. So the couple got their store repossessed in the fall out mess from corporate. They lost everything.

So it depends. Sometimes thing work well and sometimes not. Just like normal business.

Good Luck.

danaht
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Re: What kind of person buys a franchise?

Post by danaht » Tue Dec 20, 2016 3:16 pm

My project manager at work just bought a Smoothie Factory. I think he ran the numbers and looked at the previous owners accounting statements - and it appeared to be a good deal for him. But I think he is extra tired now - because it's like having another full time job. So the type of person who buys one is probably one is going to work real hard. The franchise costs depend a lot on the company. Some are cheap, and some are expensive.

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Go Blue 99
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Re: What kind of person buys a franchise?

Post by Go Blue 99 » Tue Dec 20, 2016 4:49 pm

We are partial owners of 5 franchise restaurants (small Mexican fast casual chain). The key is having a good operator/manager. If you have someone that is truly dedicated to working hard and knows how to run it properly, you can make pretty solid profits. Our investment in that chain is doing quite well.

I also know people that run franchises (sandwich shops) as a day job.They say a well-run sandwich shop brings in $5k net a month.

My in-laws are all in the franchised hotel industry. Now that is where you make the big dollars- of course, much higher up-front costs.

fishmonger
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Re: What kind of person buys a franchise?

Post by fishmonger » Tue Dec 20, 2016 5:04 pm

As a CPA, I had a client that owned three Burger King franchises. The profit is there if YOU want to manage most of the day to day activity. Hiring a full-time, decently paid manager for each location basically comes straight out of your comp. As you can imagine, managing minimum wage workers is not for the faint of heart.

Funny this question popped up. I moved last week and had my first PODS experience. That is a concept that I think could kill it in the right territory. The initial investment is not as much as I anticipated (right around $1M per their website)

randomguy
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Re: What kind of person buys a franchise?

Post by randomguy » Tue Dec 20, 2016 5:59 pm

wolf359 wrote:
I'm not so sure I agree with the last statement. A lot of McDonald's success came from their products, and a lot of the most successful products (e.g. Big Mac, Filet-o-Fish, and Egg McMuffin) were actually invented by the franchisees. I think it's more accurate to state it in terms of risk and reward. If you start a business on your own, you take more risk, but you get all the rewards. If you start/buy a business under the franchise model, you reduce risk, but you're beholden to that franchise owner who always takes their cut.
There are over 5k McDonalds franchises. The dozen good ideas over the past 50 years means that most of the franchisees aren't coming up with new stuff. I don't mean this as a derogatory term. Being good at execution (picking a good location, hiring the right people,....) is very hard to do right. And yes having a partner is both a plus and a minus.

In the end a franchise is just another business. You can do well if you pick a winner (opening McDonalds in the 60s,70s, Pizza hutt/Dominoes in the 80s) but you can also back a loser (someone opening a RadioShack franchise is say 2000). Will you do better by opening say a five guys franchise versus trying to start you own burger place? Who knows.

ghudson
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Re: What kind of person buys a franchise?

Post by ghudson » Tue Dec 20, 2016 6:01 pm

A masochist? :D

Gropes & Ray
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Re: What kind of person buys a franchise?

Post by Gropes & Ray » Tue Dec 20, 2016 6:13 pm

I know one guy that personally owns a franchise in its entirety. He basically got it for free because the owners were failing and he assumed their risk. I expect him to fail (even thought I wish him the best) because the rent for his store is ludicrous and his product is subject to seasonal demand.

Everyone else I know is a limited partner in a limited partnership, which basically makes it a passive investment. The scenario is, 5 or 6 doctors put up the capital and a general partner with franchise experience runs the businesses. This often works for brands where you have to buy at least 4 franchises at a time.

DireWolf
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Re: What kind of person buys a franchise?

Post by DireWolf » Tue Dec 20, 2016 6:23 pm

The problem is getting the information you need to make an informed decision. It's very difficult to find out "the real scoop" on how local franchise owners are doing. They don't want to divulge that information.

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ClevrChico
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Re: What kind of person buys a franchise?

Post by ClevrChico » Tue Dec 20, 2016 7:59 pm

My dad managed a couple of franchise locations for an owner. The formula seemed to be: Put down a large amount of money + big loan = upper middle class income after a few years. Repeat process a few times and potentially become rich. (This was a top tier, expensive franchise.)

My understanding was one location made all the money, and two others broke even. The owner hired operating managers in each location, and I'm not sure if he even worked full time after things were up and running. Even with only one store being profitable there was a lot of money to be made.

You probably need experience to have a chance of being successful and need guidance from others that have already done it.

I always found my dad's stories of the operation fascinating.

This article cites the average net profit of a McDonald's @ $150k/year in 2015. If one has multiple stores, that is great money.

https://www.bloomberg.com/features/2015 ... ranchises/
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Bogle_Feet
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Re: What kind of person buys a franchise?

Post by Bogle_Feet » Tue Dec 20, 2016 9:13 pm

There are definitely no guarantees with franchises. Look at Quiznos. That brand fizzled big time. Subway seems to have saturated the market. You gotta analyze the market before taking the plunge.

carolinaman
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Re: What kind of person buys a franchise?

Post by carolinaman » Wed Dec 21, 2016 8:30 am

LarryAllen wrote:If you pick the right franchise and execute the plan half way decently you can make good money. Dutch Brothers Coffee comes to mind. it would appear they print money with each new location.
I agree with this. It is critical for people to do extensive research to understand what the deal with be. Franchises vary widely in what they require of the franchisees. Part of the research should be talking with people who own franchises with companies that you are considering. Some franchisers do an excellent job of training you and helping you pick a good location. Others not so much.

I only know 2 people who are franchisees. One owns a Jersey Mike's and the other a Chik Fil A. IMO, Chik Fil A is the closest thing you have to a sure thing in franchises. I have never seen one go out of business and they are always crowded.

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Re: What kind of person buys a franchise?

Post by miamivice » Wed Dec 21, 2016 9:52 am

rnitz wrote:I've only known one guy. He was a Dad for a kid on my son's soccer team. He went to the local state school, working at Domino's as a grunt and eventually managing it. The owner saw he was dedicated and smart got him to manage several other of the other outlets. Eventually bought one of his own (after graduation, and still managing the others). When I knew him from soccer, he owned three and managed a handful of others. They recently moved to a $2M house and putting their kids through private school. A great guy, and a great story. Everyone's different.

Just from my perspective, owning three Dominio's and managing a couple of others would not bring enough income to live in a $2 million house and put multiple kids through private school. I would suspect there was inheritance, a solid second income, or some other source of money besides Dominio's.
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miamivice
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Re: What kind of person buys a franchise?

Post by miamivice » Wed Dec 21, 2016 9:53 am

It would seem to me that one would do better being a stock picker and picking the next great up and coming restaurant than by trying to own a franchise.

smitcat
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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 10:02 am

"The problem is getting the information you need to make an informed decision. It's very difficult to find out "the real scoop" on how local franchise owners are doing. They don't want to divulge that information."

I speak to anyone who asks about the franchise business both good and bad. I can also think of maybe 10 ways to approach an owner and make it worth his or her time to candidly speak about their business. Finding out the information about the franchise is just one typical 'barrier' to owning your own business which will come up often - if someone is not comfortable solving these 'problems' then owning a business is likely to be a poor idea for their situation.

smitcat
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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 10:07 am

"Just from my perspective, owning three Dominio's and managing a couple of others would not bring enough income to live in a $2 million house and put multiple kids through private school. I would suspect there was inheritance, a solid second income, or some other source of money besides Dominio's."

My thoughts are that you have not completed enough research into what a stand alone business can produce. Multiply that by 3 units would yield quite a lot and while owning has many disadvantages there are also some significant advantages.
We have no inheritance at all, we left reasonably successful 'corporate' jobs and are much better off for leaving all things considered.
MY wife left the 'regular' job first and for a few years we had the franchise and my 'regular' job - it did not take too long before we could draw up the pros and cons of each.
As they say in some movies - Know your interests and capability and choose wisely.

smitcat
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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 10:13 am

"It would seem to me that one would do better being a stock picker and picking the next great up and coming restaurant than by trying to own a franchise."

Perhaps but as a stock picker I had little or no control into the results. I had little or no capability to research what was really going on with the company or its resultant performance.
I did not do well as a stock picker but if you can do that by all means that is an 'easier' path to take.

Again - most folks here are speaking/commenting about this subject but they have no direct experiences. I cannot stress the following to the OP enough:
1. Know your strengths and weakness's before opening any self owned business
2. Know that a franchise is very similar to any stand alone business with similar potential pros and cons
3. Do a huge amount of research and absolutely speak with as many current franchisees as possible in your proposed field

Good luck in whatever you do and have a great holiday

wolf359
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Re: What kind of person buys a franchise?

Post by wolf359 » Wed Dec 21, 2016 10:45 am

randomguy wrote: There are over 5k McDonalds franchises. The dozen good ideas over the past 50 years means that most of the franchisees aren't coming up with new stuff. I don't mean this as a derogatory term. Being good at execution (picking a good location, hiring the right people,....) is very hard to do right. And yes having a partner is both a plus and a minus.
"Franchises are great for people ... who are not so great with vision" sounds a bit derogatory. In any event, it's inaccurate. Business vision comes in many forms.

Professional players who realize that their sports income is fleeting sometimes use franchises to diversify their income streams. That's not due to a lack of vision.

One Baskin Robbins franchisee used the product with professional-level designers to supply wedding cakes and high-end products for conventions at high-end hotels in Honolulu.

I've observed that some individual fast food franchisees (ice cream, chicken, burger, cookies) have separately realized that selling really cheap sodas drove traffic to the stores, even when people don't come in for the primary product. Once you're used to going to the store daily for that cheap soda, you tend to buy something more once in a while.

The Pioneer Chicken franchisee in Indonesia was branded as "California Fried Chicken." He survived the closing of the parent franchise, expanded, and now has 200 locations throughout Asia.

Popeye Chicken franchisees will have their own specials and promotions based on their local market. Some of those get pretty creative.

A franchise is just another business strategy. It doesn't imply anything about the person who uses that strategy.

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unclescrooge
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Re: What kind of person buys a franchise?

Post by unclescrooge » Wed Dec 21, 2016 1:37 pm

From my experience (based on researching this topic on and off over the past 15 years), franchises are great for blue-collar workers. The benefit is substantially lower for white-collar workers, especially in places where rents/properties are exorbitant.

As a white collar worker in SoCal, it can take decades to save up to by a franchise, and then you're barely replacing a fraction of your income for twice as much effort.

However, if you already have substantial assets, it's a good place to park your money and get a decent rate of return. However, even with a MacD's, you're probably netting a 10% return on your money.

Two years ago, I spent a month calling about 30 owners in two different franchises ( one was sports/fitness and another was home-security related) across the country. Only 1 owner, based out of Texas was what I would call a success story. The rest were struggling or earning a blue-collar wage.

Needless to say, I was not inspired to invest in either one.

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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 4:30 pm

"As a white collar worker in SoCal, it can take decades to save up to by a franchise, and then you're barely replacing a fraction of your income for twice as much effort.:"

I am not a fan of categorizing folks into white or blue collar but if I read what you are saying here it seems you believe it is easier for someone to save more money if they make less money?

"The benefit is substantially lower for white-collar workers, especially in places where rents/properties are exorbitant."
My wife and I were both what you would call 'white collar" workers in an area of NY that is very expensive.

"However, even with a MacD's, you're probably netting a 10% return on your money."
Well selected and well run franchises are well above those % - 2.5 to 3.5 times that in many cases. Well selected and well run franchises have resell ratios anywhere between 2 and 5 times multiples or more for existing units (depends upon industry and the exact unit) - easy to verify with local websites and/or business broker data.

"Two years ago, I spent a month calling about 30 owners in two different franchises ( one was sports/fitness and another was home-security related) across the country. Only 1 owner, based out of Texas was what I would call a success story. The rest were struggling or earning a blue-collar wage."
Our initial research included over two dozen types of franchises only after we constructed an initial 'spec' for sifting out the ones to research. Perhaps 100 or so potentials went thru the 'spec' to select a couple dozen to research further.
After we got down to about 3 we then put in the real time and effort on checking owners etc. That was 14 years ago one year prior to us opening our first franchise which is still running well.

As with any personal stand alone business's there will be countless reasons why someone may NOT want to open one. That is why most folks do not own their own business as it is not for everyone.

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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 4:35 pm

"Franchises are great for people ... who are not so great with vision" sounds a bit derogatory."

IMO I agree with wolf359 in that this is not accurate , business does come in many forms and I never relate visions with a persons job or business selection. If I did follow this thought then the logical extension of that would be that a franchisee is less visionary than a stand alone business and a person who works for an employer has less vision that a franchisee.
Not at all accurate as I have seen in person while working for larger companies an gaining numerous patents while working alone and within interdisciplinary teams.

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unclescrooge
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Re: What kind of person buys a franchise?

Post by unclescrooge » Wed Dec 21, 2016 4:44 pm

smitcat wrote:"As a white collar worker in SoCal, it can take decades to save up to by a franchise, and then you're barely replacing a fraction of your income for twice as much effort.:"

I am not a fan of categorizing folks into white or blue collar but if I read what you are saying here it seems you believe it is easier for someone to save more money if they make less money?

"The benefit is substantially lower for white-collar workers, especially in places where rents/properties are exorbitant."
My wife and I were both what you would call 'white collar" workers in an area of NY that is very expensive.

"However, even with a MacD's, you're probably netting a 10% return on your money."
Well selected and well run franchises are well above those % - 2.5 to 3.5 times that in many cases. Well selected and well run franchises have resell ratios anywhere between 2 and 5 times multiples or more for existing units (depends upon industry and the exact unit) - easy to verify with local websites and/or business broker data.

"Two years ago, I spent a month calling about 30 owners in two different franchises ( one was sports/fitness and another was home-security related) across the country. Only 1 owner, based out of Texas was what I would call a success story. The rest were struggling or earning a blue-collar wage."
Our initial research included over two dozen types of franchises only after we constructed an initial 'spec' for sifting out the ones to research. Perhaps 100 or so potentials went thru the 'spec' to select a couple dozen to research further.
After we got down to about 3 we then put in the real time and effort on checking owners etc. That was 14 years ago one year prior to us opening our first franchise which is still running well.

As with any personal stand alone business's there will be countless reasons why someone may NOT want to open one. That is why most folks do not own their own business as it is not for everyone.
I'm glad you've found success in your ventures.

That has not been the norm in my experience. The few white-collar professionals I personally know who did start a franchise sold it within 36 months and went back to there day jobs.

The few successful owners I've met, either got their start through family money, where they bought 10 subways at one go, or were managers at a subway and became owners through partnerships with the owners.

Would you be willing to share what sort of businesses have worked for you, the price ranges, and which part of country you're in? Or are you just going to tease us? :mrgreen:

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Re: What kind of person buys a franchise?

Post by miamivice » Wed Dec 21, 2016 5:02 pm

This is my Boglehead answer.

I haven't thought much about owning a franchise but the posts above got me thinking. The question to me is - what would I be able to do to make a franchise run more effectively than other franchises? Both those that sell the same product (other franchise owners) and those that sell competing products.

With a franchise, you only have limited decision making power. (I'll list restaurants because that is the franchise I am most familiar with). Pricing, menus, offerings, decorating the store, uniforms, are all fixed, decided by the parent company. You have freedom is how much to pay your staff, but everyone pays near minimum wage so that's pretty much fixed too. You can have a certain management style.

I see an incredible downside potential. If I am a pizza franchise owner and I do badly, customers don't return. But if I do extraordinarily well at what I do, there are only so many pizza sales that can be made in a given area, no matter how great my management style.

I might pick a great location. But if I am good at picking locations, I could just buy the land and lease to a franchise rather than running the franchise myself. I might pick a great company to start a franchise with. But I could pick random stocks in the market.

When I think about what I can do to make a profitable franchise, I feel that my hands are tied. For example, my family had a Pizza Hut pizza last night. I thought it was gross (too greasy). We will eat Papa Johns pizza in the future (less grease). If I told the management, they could not respond to my concern even if they thought a lot of people shared it because how to make the food is fixed by the parent company.

No, franchise running is not for me.

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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 5:59 pm

"That has not been the norm in my experience. The few white-collar professionals I personally know who did start a franchise sold it within 36 months and went back to there day jobs."

Perhaps you personally know some folks who started a stand alone business and that was successful unlike the franchises. If that is the case then you have at least one good lead for a potential business. If not, then you might just know folks who are not compatible with owning and operating a business.

"Would you be willing to share what sort of businesses have worked for you, the price ranges, and which part of country you're in? Or are you just going to tease us?"

I had posted above that we are in NY very close to the metro area in a high cost area. Business that we have owned included a couple of routes and a lawn care business that we ran while working full time for someone else. We worked for larger defense manufacturers for much of the time but also worked for a larger database and mailing company as well. The best place to sort through an initial look for possibilities is on the web on sites such as bizbuysell(dot)com. For us we did not pursue any of the many 'food' franchises available but each person has a different interest and strength. The price ranges to buy and existing running unit as I posted above is typically 2.5 to 3.5 time multiple. I have found that starting from scratch is much harder to guess at without knowing very detailed data but mostly it is not too far from the 3- 3.5 times operating multiple after ramp up.

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Re: What kind of person buys a franchise?

Post by leonard » Wed Dec 21, 2016 6:04 pm

All the work of starting and managing a business - without the bother of keeping all the cash flow.
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Re: What kind of person buys a franchise?

Post by smitcat » Wed Dec 21, 2016 6:06 pm

"I haven't thought much about owning a franchise but the posts above got me thinking. The question to me is - what would I be able to do to make a franchise run more effectively than other franchises? Both those that sell the same product (other franchise owners) and those that sell competing products."
Miamivice - I do not disagree that there are downsides and that franchising does not fit most folks just like owning a business does not fit all folks.
I agree with you 100% on all of it.
Many people only buy a 'branded' product - not all buy many.
Don't ask me why folks like Dunkin coffee but they really do it gobs of buckets.
So in some cases to capture the clients that prefer a well known brand to a local similar competitor the Franchise will be one answer.
Again - not far all and not so different from any stand alone business.
Which business area did you end up opening in was it in the food service or did you end up somewhere else?

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Re: What kind of person buys a franchise?

Post by Grt2bOutdoors » Wed Dec 21, 2016 6:23 pm

What kind of person? I know such a person, twenty years ago, ponied up $100K for his two sons who were unable to find corporate employment to establish a new Dunkin Donuts location on a well trafficked strip that did not have one decent coffee place unless you went to a sit down diner where you had to tip someone and they gave you the "look" because all you ordered was coffee. The two sons had to attend Dunkin Donuts university up in New England for about two weeks, then they began construction on the place - it was like a hole in the wall, it was so small, in the span of two years, the two sons paid back the father and had another $100K in the bank, a year after that they bought and established another Dunkin Donuts location about a mile and half from the first one, this location was also heavily trafficked and was much larger with parking spaces. Fast forward to today, they own muliple locations and are seriously loaded. That's the kind of person. They had family backing them, otherwise $100k twenty years ago was pretty serious dough for two unemployed guys to obtain.
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Re: What kind of person buys a franchise?

Post by nova1968 » Wed Dec 21, 2016 6:32 pm

I considered Purchasing a Signal 88 Security Franchise in South FL, it sounded appealing at first, It was a very high tech security firm with a good professional reputation. I did my due diligence, read the Uniform Franchise Offering Circular, and did the numbers. The top Franchise locations earned around 400K, after a 10% franchise fee, wages, and fixed costs I concluded I could make 10% if I was lucky. There appeared to be many restrictions and various clauses for litigation, Additionally, the desirable locations seemed to taken. As much as the industry interested me, and my dream of becoming a Business Owner the numbers and restrictions were not feasible. I could not see working 80 hours a week for 1/3 of my current salary.
I also looked into an Orange Theory Franchise, They provided an interesting concept to the fitness industry but the prime locations were snapped up quickly.

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Re: What kind of person buys a franchise?

Post by Toons » Wed Dec 21, 2016 6:51 pm

climber2020 wrote:Shaquille O'Neal bought a Krispy Kreme in Atlanta a few months ago.
Does he work in the store :mrgreen:
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Re: What kind of person buys a franchise?

Post by abuss368 » Wed Dec 21, 2016 6:52 pm

They may be unbelievable business models. Look at McDonald's. No other cash flows are close.
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Re: What kind of person buys a franchise?

Post by abuss368 » Wed Dec 21, 2016 6:53 pm

Grt2bOutdoors wrote:What kind of person? I know such a person, twenty years ago, ponied up $100K for his two sons who were unable to find corporate employment to establish a new Dunkin Donuts location on a well trafficked strip that did not have one decent coffee place unless you went to a sit down diner where you had to tip someone and they gave you the "look" because all you ordered was coffee. The two sons had to attend Dunkin Donuts university up in New England for about two weeks, then they began construction on the place - it was like a hole in the wall, it was so small, in the span of two years, the two sons paid back the father and had another $100K in the bank, a year after that they bought and established another Dunkin Donuts location about a mile and half from the first one, this location was also heavily trafficked and was much larger with parking spaces. Fast forward to today, they own muliple locations and are seriously loaded. That's the kind of person. They had family backing them, otherwise $100k twenty years ago was pretty serious dough for two unemployed guys to obtain.
Approximately 70% of Dunkin Donuts model is coffee (and not the donuts).
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Re: What kind of person buys a franchise?

Post by abuss368 » Wed Dec 21, 2016 6:56 pm

randomguy wrote:
wolf359 wrote:
I'm not so sure I agree with the last statement. A lot of McDonald's success came from their products, and a lot of the most successful products (e.g. Big Mac, Filet-o-Fish, and Egg McMuffin) were actually invented by the franchisees. I think it's more accurate to state it in terms of risk and reward. If you start a business on your own, you take more risk, but you get all the rewards. If you start/buy a business under the franchise model, you reduce risk, but you're beholden to that franchise owner who always takes their cut.
There are over 5k McDonalds franchises. The dozen good ideas over the past 50 years means that most of the franchisees aren't coming up with new stuff. I don't mean this as a derogatory term. Being good at execution (picking a good location, hiring the right people,....) is very hard to do right. And yes having a partner is both a plus and a minus.

In the end a franchise is just another business. You can do well if you pick a winner (opening McDonalds in the 60s,70s, Pizza hutt/Dominoes in the 80s) but you can also back a loser (someone opening a RadioShack franchise is say 2000). Will you do better by opening say a five guys franchise versus trying to start you own burger place? Who knows.
I would have never purchased a Radio Shack do to the technology risks. There is always a need for fast food and they do even better in economic downturns.
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Re: What kind of person buys a franchise?

Post by stoptothink » Wed Dec 21, 2016 7:03 pm

abuss368 wrote:They may be unbelievable business models. Look at McDonald's. No other cash flows are close.
McDonald's is #2, and a very distant second to Chick-Fil-A, in this regard. The average Chick-Fil-A grosses well over $3m/year.

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Re: What kind of person buys a franchise?

Post by randomguy » Wed Dec 21, 2016 8:30 pm

wolf359 wrote:
randomguy wrote: There are over 5k McDonalds franchises. The dozen good ideas over the past 50 years means that most of the franchisees aren't coming up with new stuff. I don't mean this as a derogatory term. Being good at execution (picking a good location, hiring the right people,....) is very hard to do right. And yes having a partner is both a plus and a minus.
"Franchises are great for people ... who are not so great with vision" sounds a bit derogatory. In any event, it's inaccurate. Business vision comes in many forms.

Professional players who realize that their sports income is fleeting sometimes use franchises to diversify their income streams. That's not due to a lack of vision.

One Baskin Robbins franchisee used the product with professional-level designers to supply wedding cakes and high-end products for conventions at high-end hotels in Honolulu.

I've observed that some individual fast food franchisees (ice cream, chicken, burger, cookies) have separately realized that selling really cheap sodas drove traffic to the stores, even when people don't come in for the primary product. Once you're used to going to the store daily for that cheap soda, you tend to buy something more once in a while.

The Pioneer Chicken franchisee in Indonesia was branded as "California Fried Chicken." He survived the closing of the parent franchise, expanded, and now has 200 locations throughout Asia.

Popeye Chicken franchisees will have their own specials and promotions based on their local market. Some of those get pretty creative.

A franchise is just another business strategy. It doesn't imply anything about the person who uses that strategy.
Professional players buying franchises are notorious for going broke. It is a toss up if they lose more money with that or real estate investing:)

You are looking at the exceptions not the rule. Compare the vision required by the franchise and the solo person. Pretty much every "vision" thing the franchisee does, the solo person has to do. And then the solo person has to do all the work of the franchising company as far as sourcing materials, developing menus, building brands, and so on.

I don't consider it derogatory for people to recognize their strengths and weakness and make choices that optimize there strengths. A lot of people have this concept that ideas are valuable. There are very,very few ideas that are so good that they are enough even with poor execution.

The franchise model is designed to try and eliminate both (they give you a product and a plan to execute). But delegating execution is a lot harder in my experience.

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Re: What kind of person buys a franchise?

Post by randomguy » Wed Dec 21, 2016 9:02 pm

abuss368 wrote: I would have never purchased a Radio Shack do to the technology risks. There is always a need for fast food and they do even better in economic downturns.
hey in 1980 that was the reason to buy a Radio Shack. You would ride the Color Computer/Trs-80 to huge riches. RadioShack was 20 years ahead of Apple in opening stores to sell PCs:) If memory serves most RS locations were actually corporate owned so they might not be a great example but it is the largest recent flameout that I can think of a chain that has been around for 50+ years. The failure in trendy markets (see the Cupcake bubble of ~2010-2014, some of the various exercise trends) is a lot higher.

The list of fast food chains whose names have been lost to history is extensive. See https://en.wikipedia.org/wiki/List_of_d ... ant_chains . Most of them are gradual flameouts (i.e. they grow to say 200 stores and then start closing stores until they hit a death spiral point). The tough part is the franchise and the franchisee's fates are not directly linked. In 1970 or so you might have done ok opening a Hardees instead of a McDonalds even though one company grew much faster. Or you could have been the McDonalds franchisee who happened to pick the worst location in the United States and failed even as the franchisee soared.

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Re: What kind of person buys a franchise?

Post by LadyGeek » Wed Dec 21, 2016 9:26 pm

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