December 18, 2014

Franchise Ownership: When Can You Expect The Payoff?

franchise payoffIn most cases, the franchise payoff is not instant. Once in a while, it comes faster than expected but, on average, not fast enough. And, in a few rare occasions, it never happens. I’d like for you to avoid that.

Expectations

The professors at Stanford University are at fault.  They’ve taught some of the world’s best and brightest. Brin, Page, Thiel, and Hastings have all contributed to our current “instant gratification” mindset.  We want everything now. And, our kids want (and expect) everything, “yesterday.”

Some of today’s future franchise owners want instant gratification, too. That’s why they look for the hottest franchises. They really want quick success and fast payoffs. But, is achieving profit rapidly in a start-up franchise business really possible? Or, is it a totally unrealistic expectation?

Transitioning

If you’ve decided that you want to take more control of your life, becoming a small business owner can accomplish that goal for you. But, if you’ve been an employee for all of your life, making the transition to employer may be tougher than you think.

Think about it; you’re used to collecting a paycheck (at predetermined times every month). You do the work, you get paid. And, unless you’re in sales (where you are paid a commission that usually fluctuates) you generally know what your paycheck is going to look like.

Now, fast forward to your new franchise business. Your business has been open for 6 months. You have 3 employees, and soon, you’ll need to hire at least one more. Your revenue isn’t bad … you’re just about paying all of your bills, including payroll. In other words, you’re almost at break-even.

But, you’ll have to increase your revenue a lot more before you blow past your break-even point.

Go Long

If you’re looking to replace your paycheck quickly, the most valuable piece of advice I can give you is this; find employment. I’ve told countless people who’ve wanted to work with me – but needed to replace their incomes right away, the exact same thing. (Some of them were not very happy with my suggestion.)

I’d much rather have potential clients disappointed with my “get a job” suggestion, than have them call me 3 – 4 months into their startup franchise purchase asking for tips on how to “get out” of their franchises.

Here’s a statement from The New York State Attorney General:

“A franchise is a long-term investment. You will not get rich quick. It may take you several years to develop your business to a point where you have paid off loans and are making the amount of money you anticipated. If your business does not become profitable or you tire of it, you cannot simply close up shop and forget about it. Like it or not, you must continue to work for the full amount of time agreed to in your contract.”

Please read that again.

The Reality

Not everyone I talk to can wait.

For example, if I’m working with a 50 year old woman who was the victim of a corporate downsizing, and whose oldest child is about to start college (with child #2 nipping at child #1’s heels) her short-term income needs are real. Investing in and running a startup franchise may not be in the cards for her. That’s just reality. (Unless she has college for both of her children fully paid for and extra money in the bank.)

But, some people can wait for the payoff; they already know that they’re going to have to. And, they’re 100% comfortable with that fact, as long as they know (or have faith) that eventually there will be a payoff.

So, if you know going in that you’re probably not going to see a paycheck for a while, and you have enough of a financial cushion to allow you to breathe a bit as your new business ramps up, all the better.

How To Determine When The Payoff Will Happen

This is actually the easy part.  All you need is a formal business plan. If you’ve never written one, there is plenty of help available to guide you through the process.

The Small Business Development Center

Your local SBDC usually has counselors on hand that can assist you with your business plan. Go here to find the closest one. Their services are free, because of a unique collaboration of the Small Business Administration, state and local governments, and private sector funding resources.

CPA’s

Most Certified Public Accountants can help you write your business plan.  Go to The American Institute of CPA’s (AICPA) website to find CPA’s in your state, or get a referral from a business attorney or small business owner in your area.

Business Plan Software

Tim Berry has written numerous articles for Small Business Trends over the years. In addition, he was principal author to what’s now the best-selling business plan software in the world, Business Plan Pro. All you have to do is plug-in the numbers and the calculations are done for you. (Plus a whole lot more.)

A properly written business plan takes most of the guesswork out of things like when your franchise business will break even, and when you’ll start to see a payoff.

One more thing:  In addition to asking franchisors great research questions like these, talk with existing franchisees.  Ask them how long it took them to break-even and become profitable. I’ve found that franchisees are very amenable to answering questions related to their finances if approached properly.

If you do enough things right in the franchise exploration process, and go into your new business with no expectation of an instant payoff, you could come out a winner.

Raining Money Photo via Shutterstock

1 Comment ▼

Joel Libava - Franchise Expert


Joel Libava Joel Libava is the Franchise Expert for Small Business Trends. Joel, The Franchise King®, equips today’s prospective franchise owners with time-tested, proven techniques designed to increase odds of success. He does this through one-on-one coaching, and gobs of useful content that can be found on places like Small Business Trends, SBA.Gov, and his award-winning franchise blog, The Franchise King Blog . He’s been featured in Entrepreneur® magazine, and is frequently called upon by national media outlets and publications for his no-spin insights into the world of franchising.

One Reaction

  1. Joel, thank you for this important article. I wish I came across it when I first started researching franchising. The information you provided is so fundamental, yet I have not come across any franchise that actually gives a real world breakdown of what you can expect as franchise owner. They’re good as selling you the lifestyle ‘dream’ but don’t give you sense if what the reality is like. I was fortunate enough to have an opportunity to work as a manager in the franchise I was interested in. This gave me real hands on exposure to what it takes to run a fitness franchise and where the pitfalls are. I would recommend anyone interested in buying into a franchise, spend 3-6 months working for one, if your financial situation allows for it. Another I noticed that seems terribly understated is the importance of location for any retail franchise. That age old term: location, location, location… is really significant. There should be written on the subject of lease negotiation, leasehold improvement how to find the optimal location for your specific business.

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