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.