Avoid These Franchise Mistakes | Franchise Fridays with Jeff Dudan #170

Hey, everybody. Jeff Duden here. And welcome back to Franchise Fridays. For anybody that's looking at a franchise for a franchise or is just interested in the franchise industry, Franchise Friday is a great place for you to get educated and to get inspired. Maybe you'll take an action. Here's something people don't realize. Franchise businesses open at a rate of 300 new locations every single day in the US that is sourced from the International Franchise Association. It's not a FAD. That's a $1 trillion system people are using to build wealth, to build freedom, and to create a legacy for them and their families. But here's the truth. Not every franchise is a great opportunity. They are not all created equal. And asking the wrong questions up front could get you into a bad situation down the road. It could cost you money, and more importantly, it could cost you time, which is the most important thing that we all have. So today I'm giving you five most important questions you must ask before you buy a franchise, Maybe even before you go too far down the path of investigating a franchise. These are the exact questions I've used for decades as a franchisee, as a franchisor, investor and trusted advisors to many franchise brands. Stick around to the end because I will reveal the number one reason people fail before they even open their doors and how to avoid it. If you want to explore franchising deeper, click in the link in the notes to see what we're building at Homefront Brands and how you can start your franchise journey right away. Let's get into it. Question number one, who's involved? This matters way more than you might think. Franchising isn't just buying a business, it's partnering with people. Before anything else, you need to know what is these people's experience? Do they have a track record not only in the widget in the business, whether it's restaurant, fitness, fences, whatever it is, they've got to have expertise in the business of the business. But franchising is a completely different business. It's an adult learning business. It's a community building business. It's a marketing and advertising business. And you need to know that these people have experience in both franchising and and both the industry that the business operates within? Number two, do they have credibility? Success leaves clues. Look at how they have handled challenges and relationships over time. Are these people that you can trust? Which is the third thing? Do you like and trust them? Are these people that you'd want to call when challenges hit? Do they share your values? Are they your tribe because it's the tribe that builds the vibe. There's lots of franchise opportunities out there, over 4,000 to choose from. But who you want to go through life with, the older you are, the more important that that becomes. If your leadership doesn't pass the test, the people that own the brand, the people that run the brand, and the people that are going to be working with you on a day to day basis, I would suggest you keep looking. Big question number two, who is the customer? I actually hate the question. If you watch Shark Tank, the and anytime somebody comes and says, you know, oh, we're in a 20 billion dollar network, Mark Cuban says, I immediately will not do that business. But you do need to know who the customer is, how many customers are actually in the market and is this a customer set that will be using the product and service in the same way ten years from now? Because that's the average length of a franchise contract. The average length, the typical length, 10 years and maybe two five year renewal. So if you're buying into a contract to service set of customers to provide products and services, like are they going to be there and how many are there? The second part of who is the customer is how much are they willing to pay to solve the problem that your business addresses. Is there durable demand or is it something that AI or automation could wipe out? And the third thing about customers you need to know is how do you find them, how do you reach them, how do you connect with them? And what does it cost to acquire a customer? Is the marketing supported by the franchisor or is it all on you? Without clear answers to the questions about the customer, you're not buying a business. You're gambling. And it's one of the most important things that you need to know. Because not all businesses are created equal. And you would be surprised how big or how small some markets truly are. And with respect to customers, there may be some differences between an urban business and a rural business. So you really need to understand the customer set and then you need to take that learning and you need to apply it to your specific market that you're looking at. And you have to be comfortable that there will be customers there for you to serve and that there's enough of them for you to get your fair share. Big question number three, what is the potential of this business? Look, if you're going to trade time for dollars, then you want the minimum amount of time for the maximum amount of dollars. So what is the real revenue potential in your territory? What does the item 19 which is the financial performance representation in any franchise disclosure document tell you about what other people have been able to achieve. Now that doesn't mean that, that anything, it might be a newer brand and the people are growing. So that doesn't mean like that's the most you'll ever do. But generally it will give you some indications about how people enter the market, how they scale and what revenue people have been able to achieve within that system. Does growth mean more locations to you? More ad spend or bigger teams like every business? If it's a location based business, like a fitness business or something like that, then your revenue might be capped in a single location. And to get more revenue, which is your goal every year, to grow your business, to build into that potential, you might have to add additional studios, you might have to buy additional territories. If it's a service business, how, what, what market share is attainable? Can it just get bigger and bigger every year? If you're willing to spend more dollars on ads to acquire customers, if you're willing to build capacity and hire teams. So like, what is the real revenue potential in your territory? Number two about potential, what are the margins? All businesses are not created equal. After your cost to operate, after your labor, after your royalties, like what is left over? What's the gross margin? I look for certain gross margin profiles in businesses because I know that like if the gross margin is a certain amount, then it's really up to me as the operator to manage what's called the middle of the P and L. So your insurance, your rent, your staff, your administration, all of those types of things, those all have a very real cost. If there is not enough gross profit margin, then you're going to struggle to get the net profit margin that you're looking for. And another question I would ask about potential. You. If you looked at the system and you decided you want to be the number one top dog, top operator, is there a path to get there? So you're not just buying today's income, you're buying into potential for tomorrow. It's going to take some hard work, it's going to take some time. But you have to know where the ceiling is to understand if it's going to be worth your time and energy and money to get involved. Which leads to big question number four. What is the return on investment profile of this business? I want to look at this in three ways. Okay, Number one, cash on cash. So let's just say you're getting into a business that's $250,000 and you're going to put in $50,000 of your own cash, how long is it going to take you to generate profits back to you for that first $50,000? That's your cash on cash return. The business is servicing the debt, it's paying the monthly loan payment and all of that. So that's not your total return on investment, but it's just your cash on cash. So if you can finance, the more you can finance a business and the more that you can make that loan payment tucked inside the normal operating of the business, then your cash is, you're gonna have less cash in the business. And here's what first time business owners don't really realize. Your cash has a cost. It has an absolute cost to it. It might be 6%, it might be if you put it in munis, guaranteed muni return, tax free municipal bonds, or that you're going to get 4 or 5%. So the minimum cost of your cash is 4 or 5%, it's not zero. So when you take your cash and you send it out on the street to work for you, whether it's in your business or in the stock market or anywhere else, like what's the, what's the opportunity cost of that cash coming out of an investment, a secure investment, versus the opportunity cost of investing in a business and betting on yourself, you need to think about that. And the second thing you need to think about in return on investment is what's your total cost? Roi, the goal in a business, in a franchise business. And this is what people look for that know what they're looking at is a 30 month payback. So what that means is every bit of cash, the entire cost of the franchise loans, everything you borrowed for, can you realistically, if your startup cost is that $250,000 within 30 months, can you generate back a complete 100% payback of that $250,000 over 30 months? Now a lot of people get into a franchise business and they say, I'm expecting to make money right away. Well look, some of that is semantics. Some of that is how you do your accounting, right? I mean, can you generate a profit the first month? Is that reasonable? If you started your own business and you went out and had to go banging on doors and buy equipment and buy vehicles or, or rent a place and do all that, are you realistically, you have no customers in your own business, are you realistically going to start making money in the first month? Maybe, but probably not likely. I mean, when people start a business, you hear it's Hard in the beginning. Franchise systems do traditionally create more speed to revenue and it's where you focus. You're not focusing on building systems or operating manuals or figuring out the marketing plan or building websites. All of that has been done for you in that low upfront investment. So now you can get right to the business of the business and, and generating customers. So you're going to look at first that cash on cash payback, how quick is that going to be? And then you're going to say, all right, if my total investment is $250,000, have I made that back? You know, and then you got to figure out about your owner's benefit, your salary, is it 250 on top of my salary that pays me back for my time and then the business has paid back the cost of the business, probably the way I would look at it, but 30 months, you need to work backwards from that and you need to be comfortable that whatever business you're getting into, you can make the total investment back within 30 months. And most importantly, under the what's the. My return on investment question is what's the return on your time? You know, you can never get more time. It's the most. Time and love are the two most valuable assets that you have to, to, to invest into this world. And will this business give you your return on your time in terms of lifestyle, in terms of freedom, in terms of flexibility, and in terms of what's your time worth on a per hour basis? So if the payoff doesn't justify the hours, if the payoff doesn't justify the effort in terms of your time and your return on time invested, then you need to take a hard look at that business. All right, last big question. And honestly, this is the one that most franchise candidates ask first. It is, what do I have to do to be successful? Is this an owner operator system? Is it an owner operator model forever? Or can you build a team and step into some sort of an executive role? The business needs to scale. And you know, when you, when you get back to talking about potential and you get back to talking about return on investment, it has to be able to scale because for you to get anywhere, you've got to, you've got to have growth every single year on the year for as long as you're going to be in that business. So if you're going to be an owner operator to start the business, many people then move towards an executive model where as time goes on, they're able to hire people underneath them. But this is where point number two comes in is who's got the Somebody shirt on? Because when something breaks, not if, because it always will, you're going to have people involved, they're going to get sick, they're going to leave, something's going to break down. You're going to have a problem on a job or a project or with a customer. You've got the Somebody shirt on. You own the business. So what do you have to do, assuming something breaks? And what do you have to be available to do? And what do you have to be willing to do to make sure that that business gets back on track? Because remember, anything left to itself will always go from bad to worse. Every business demands leadership. Every business demands community building. Every business demands team building. So if you're not ready for that and you're not willing to do that, you're not willing to be the face of your business. Especially today, when personal brand is so important, even within your community, then maybe business ownership isn't for you. But you should go into it with eyes wide open. You should know and understand what the daily life looks like being a franchisee in that system. You should understand, like, what are the daily activities that you absolutely must do? What are the skills that you have to get mastery in to do it? Now, here's something interesting. The easiest way to ride a horse is in the direction that it's already going to. So oftentimes, people, if people look at a business opportunity and they already have the skills and they already have the abilities and maybe they already have connections and they don't have to change that much, that's when I see people being more successful faster. Not to say that you can't come from a completely different industry and get into another industry, because you can. But for example, our very, very tippy top, top rail fence franchisee, guess what? They did. They were in the fencing business before. So the learning, you know, you have to consider when you're thinking about, like, what do you have to do to be successful? You have to take into consideration the learning curve. Like, do you have these skills? Is this the way you already operate? Do you already have connections within your marketplace? Do you already have complimentary businesses that you know that that will help you build this business? So again, if it's already what you're doing, and now you can take your skills, capabilities, your confidence and your resources and put them into a proven, powerful franchise business model? Success is early and often. All right, there you go. Those are the five questions that separate smart franchise owners from those who get stuck. Those are the questions that you need to do to evaluate what your next season of life is going to look like. And if you can't answer those questions confidently, as you're working with the franchisor and you're working through the process and it's not apparent, you might want to pause, you might want to step back, and you might want to recalculate. You got to do your homework. The right franchise can build your future, and the wrong one can delay it or drain it. If this helped you, and I really hope that it did, here's what to do next. Click on the links below to learn more about franchising and what we're building at Homefront Brands. You can go to homefrontbrands.com or you can go to jeff duden.com I've got content that's there specifically for you. Explore real opportunities in durable, scalable home and property services@homefront parents.com or with me, Jeff Duden. And of course, there's a link below to grab your free copy of my book Discernment the Business Athletes Regimen for a Great Life Through Better Decisions, where I show you how to make better decisions in business and life. Franchising is not for everyone, but that doesn't mean it's not for you. And if it is for you, it can change the slope of your line. You can be the one in your family that can start embarking on a new future of entrepreneurship and make a great life for you and everybody that you care about. I'm Jeff Duden. Thanks for tuning in to Franchise Fridays. Stay sharp, Take action. I'll see you next week.