“How much money can I make if I open such and such a business. I won’t hold you to it, it’s just between us”.
This might be the most common question/statement in the world of franchising and entrepreneurship. It happens to be a great question. Unfortunately the the answer to which is much broader and requires significant thinking and planning . We expect that everyone should have a handle on this question before they invest before they invest with us. Getting that answer may take a bit of homework, especially if you are a newcomer to the industry. At the end of the day there are a few key variables to consider that should guide your investment decision. Here are a few I would consider:
- How much money do I really need/want to make on an annual basis? Have you calculated your actual annual fixed and variable personal expenses. What is the minimum cash flow requirements to meet your obligations? What are the important additional expenses such as having funds set aside for medical emergencies, repair and maintenance of your vehicles and home, college funds etc.. What are the longer term wealth building goals as they relate to cash flow and net worth expectations?
- What level of risk/reward am I comfortable with? If the business fails, how do I exit and what are my long term obligations? It is absolutely imperative to know up front what you will do if you need to exit the business for any reason due to business reasons or unforeseen personal circumstances. Generally speaking the level of risk and reward move in direct proportion to one another.
- How much wealth am I looking to acquire and does the business supply a suitable exit strategy that aligns with those expectations? The old adage of starting with the end game in mind applies here. While you may own the business for many years, and may even pass it along to future generations, you will eventually want to monetize the equity you have built up in your business. How and when this can be done is important to understand up front. I have a close friend that has been very, very successful in the restaurant industry over the past 20 years or so. Today, he owns a very large private equity fund involved in multiple sectors yet remains incredibly dynamic within the restaurant space as well. He always told a story of when he was growing up and sitting at a private airport when a beautiful private jet pulled up. Out walked a noticeably young man that peaked my friends curiosity. My friend introduced himself and asked the young man if he would mind sharing how he had built his success at such an early age. The young businessman told him he was a large multi-unit Pizza owner. This king of shocked my friend because he didn’t realize such wealth could be built up in the franchise industry. That same friend turned in a college paper in which he laid out how he planned to build his restaurant franchise company. As the story goes he received a rather low grade on his business paper. Undeterred, my friend went t on to build one of the most successful multi-brand franchise companies in the history of the restaurant industry. It all started with a vision and a plan he developed early in his career, and never gave up on.
- Do the current gross revenue and expense averages meet your needs /wants on an ongoing basis? There is a distinct difference between building your net worth and building cash flow. For instance, owning the real estate in which you operate may not enhance your cash flow and may even detract from it in the short term. While in the long term, building a real estate portfolio of prime commercial properties can greatly enhance your wealth. The are always numerous factors to consider including the tax obligations and advantages in these scenarios.
- What are the revenue & expense trends? What does a reasonable 5 year financial proforma look like? I believe that having a realistic 5 year proforma is an essential in formulating your business plan. Anything less than 5 years is to short of a timeline, and anything longer brings in to many variables that are probably unknown that far out. Every successful entrepreneur I and business person I know today has a firm grip on the financials of their business. They know down to the penny what they expect to make how they are actually doing on a real time basis. Technology today allows up t literally follow individual transactions as they occur with the business. This level of insight and awareness can be the difference between building great wealth and failing miserably. We have one of our newer franchisees that recently joined our brand come visit us about 8 months ago. He had already built up a huge business in another industry, and had began successfully investing in the restaurant industry a couple of years prior. He was looking for an opportunity to take his restaurant enterprise to another level, and he had heard a lot of good things about us and our brand. Since that time he has already launched his first two restaurants, has two more opening in the near future, and has indicated he wants to add aggressively to that plan. His secret of success is really no secret at all. He runs all of his businesses as a tight ship. He reviews budgets and financial statements in depth with his management teams on a weekly basis. He is always up early getting a jump on the day and making sure he stays ahead of the game and the competition. He is a great guy and his people love working for him. He repays their loyalty and hard work by providing great opportunities to help them reach their personal goals.
- Do I have or can I hire the management expertise needed to successfully run and grow the enterprise? Who will directly manage the business day to day? Different businesses require different levels of day to day expertise, time and attention. The gross revenue that your business can be expected to generate will partially determine what layers of management can be supported by the business assuming operating expenses are reasonable. In other words, if you aren’t generating enough gross revenue throughout the enterprise than you simply can not afford to hire professional management and should probably plan to be the day to day manager of the business. The staffing plan may be done in phases whereby you start off as the day to day manager and then plan to bring in additional support as the business grows.
- What is required build this into a multi-unit or high volume enterprise? How many others have done so in the past with this same company? Is the business best suited to mom & pops that keep their overhead low, or are other large multi-unit operators getting involved and making it work? The simple fact is that their are not many secrets in our business. Everyone knows where the great sites are, what businesses are thriving and growing and which are stumbling or failing. By reading the industry journals, blogs, web sites and attending all of the industry events possible, you are best positioned to be ahead of the curve as new opportunities develop or problems arise.
- What are my lifestyle expectations as compared to the daily management requirements for running a successful enterprise in the industry? Running your own business usually requires a full commitment beyond of your time, energy and resources, and even those of your family in order to drive success in the early years. If the business is in line with your personal interests and passions, than this can be a pleasure for you and everyone involved. The old saying of find something you love and every day is a vacation holds true for many entrepreneurs.
- Do my management skills, experience and personality align well with the needs of the business? We all know people that are just naturally outgoing, confident and hold up well under pressure. We also know folks that are highly analytical and precise in everything they do, but prefer to work alone or only with other experts. Picking a business that fits your personality and management style is an important first step in building your success. Some years ago I put an air traffic controller and his wife into a restaurant business we owned at the time. This guy was very bright and he and his wife, who was a veterinarian, had built up a reasonable level of wealth that they were looking to build upon. I knew this guy could handle pressure based on his current occupation, and I also knew he certainly they had the smarts to run the business. What I didn’t count on was that he hated dealing with the public day in and day out. His home base was working in front of a computer screen and coordinating air traffic at one of the nations highest volume airports. They ended up selling the business to someone that couldn’t wait to get in there and build it to its full potential. I have seen similar scenarios play our time and time again where one owner takes over an existing business and within a period of months doubles the fussiness revenues. This is often a simple case of having the right owner in place to take advantage of all of the opportunities that already exist.
I recently began working with a new franchise group that had absolutely no restaurant experience, yet were considering a substantial investment in our restaurant brand. The partners spent many months in soul searching, researching a variety of industries and opportunities, along with conducting significant due diligence on our brand. We helped them through the entire process but also encouraged them to speak to a variety of sources to make sure they were making the best decision for themselves. They eventually decided to get involved with us and committed to a 5 store multi-unit agreement. We felt particularly comfortable with them for a number of reasons. One of the keys to the success of this group was that they had a firm understanding of their wants and needs, strengths and weaknesses, investment resources and ROI expectations. They also had great business experience, and outstanding reputation and they both had a track record of substantial success in other industries. Lastly, they were just great people to be around, the kind of high integrity, outgoing, intelligent entrepreneurs that would be successful in a wide variety of industries. By being up front with them on their potential challenges and our expectations, we were able to help them achieve their goals while insuring the integrity and continued success of our great brand! It is exactly the type of relationship that we can all be proud of and enjoy for years to come.