Similar
to buying a home, it is vital that a perspective franchise buyer has
realistic expectations, preparation and know cash flow capabilities to
invest. For years, mortgage companies have pre-qualified borrowers to
establish a price range for the home they would lend to. The benefits
are many, including a pre-qualification provides tremendous buying power
and the right guidance on lending ratios—debt
to income level, for example. This knowledge gives the buyer confidence
for making purchase decisions.
I had a chance to interview Mr. Alan George, Vice President - Franchise Strategic Planning at Franchise Marketing Systems about things to be aware of when considering a franchise.
What are the benefits of a franchise investment?
"Better
than the bank" is a very easy benefit. Interest rates are at
historical lows, saving your money in the bank in the past had a
potentially
rewarding return. Banks offering 1% interest rates would take 72 years
to double you initial investment. The investment in a
franchise substantially improve the rate of return.
A sound and expected return on a franchise should be 20% after
taking a salary.
Stocks
right now are at all-time highs, buying low and selling high is the
name of the stock game. The rates of return on a stock and 401K
are healthy can be a great path to wealth. Top fund managers are
returning 7 to 12%. At 12% rate of return it will take 6 years to
double your money.
Active
participation is another great benefit. Driving the business decisions
and making business happen is the American Dream. In the
book: The Millionaire Next Door, that millionaire is most likely a business owner. Driving the business and controlling the investment is a hug benefit. Active
participation can grow your investment at the rate you want. Want to
grow faster, triple your advertising and sales effort. You are in
control.
How does pre-qualification work and why is it important?
Pre-qualification
is the process of outlining your ability to fund a franchise
investment. that outline should include capital at hand and
the ability to borrow. Capital management is vital to the business
and a wise mix of leverage can extend the growth of any business.
Getting loan pre-approved will give you the ability to show worthiness.
Why
is pre-qualification important: Let's use a poker analogy:
Pre-qualification is putting your cards on the table and showing what
you
have in your hand. Providing a strong capital plan shows
the franchisor you are serious about investing. The Franchisor needs
to understand that the potential investor has the ability to make the
initial investment and the ongoing investment. To continue with our
Poker analogy, if you have 4 Aces in your hand, it best to show your
hand and collect your pot. Remember a franchise is awarded, not
purchased. There are many times when 3 or 4 players are in the game for
an area and the winning hand gets the potential
area.
What are some considerations people need to think about before investment in a franchise?
Whether
their money is better off in the bank or in their investment portfolio.
79% of all Americans want to be the boss, but only a fraction
of the 79% will be successful running a business. Buying a franchise
greatly improves your likelihood of success, but there is still risk
involved.
Another
consideration is risk. Are you a risk taker? Can you manage risk>
Can you minimize or avoid risk. Good business owner have the
ability to reach for the reward, while mitigating the risk.
Last
consideration, is being ALL IN. If you are going to take the risk, do
everything it takes to win. Expect long hours, testy customers,
demanding vendors, expect to juggle family and work. Learn the
work/family balance and make sure that the balance allows for your
return, but also for the ability to enjoy your return with your loved
ones.
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