Starting your venture by acquiring a franchise would seem to be more expensive than starting an independent business, however, it is not, since you have all the experience of the Franchisor so as not to make unnecessary investments. When you acquire a franchise, you receive a business that already has a developed corporate image, trademark, concept, has worked on standardizing processes and manualization, has a defined organizational chart with job profiles and descriptions, knows how to obtain the license and pay taxes. taxes, has established criteria for selecting new locations, among thousands of other topics.
It seems that you could put an equal establishment with less investment. The adaptation project of the unit obeys the needs and specifications of the Franchisor, you cannot look for cheaper substitutes except by express authorization. There are specific suppliers from which you must acquire the furniture, equipment and supplies and many other investment guidelines that you must follow, which in most cases result in a lower investment than if you searched for them on your own. The reality is that you are paying for the experience that the Franchisor has in investing in multiple units and in negotiating with proven suppliers. The franchisor probably made many mistakes at the start of the business and made unnecessary expenses buying equipment that was not suitable for the operation, non-durable finishes, an image without an impact, and other mistakes derived from inexperience, and now he shares his learning with you by having a large number of openings (and closings). It is not only about buying better and having better suppliers, it is also about all the time you will save in the development of the project, the search, comparison and selection of materials and suppliers, corrections, etc. Time, headaches and uncertainty not only imply a cost, sometimes they cost us more in terms of health, family and personal peace. But be very careful! This makes sense only if it is a franchise system that has been tested and has experience, otherwise you will surely end up paying for the mistakes that the Franchisor makes when experimenting with you for the first time.
Therefore, although at first sight the investment is higher, if in the end a comparison is made between the investment in a franchised unit and the expenses that an entrepreneur makes in the creation of his business until leaving it running correctly, the result will be that the entrepreneur spent much more. What in most cases tips the balance is the liquidity available at the time of wanting to open a business. Can and do you want to pay to learn from someone else’s mistakes, or do you want to learn from your own?
Most people in Latin America seek to invest their assets in a franchise with the purpose of making it their primary income. What is your objective in acquiring the franchise? If your goal is to operate the franchise full-time or live off the income from it, you should be much more careful in terms of reviewing the income statement very well and clearly understanding what makes you earn or lose money, that is, what is it that makes you earn or lose money? What are the cost components that determine this? Do not trust the income statements shown by the Franchisor and/or its sales staff, do not base your decision on the results of other units, you must take into account the standard operating items and understand the financial model so that you can establish, based on the research you carried out on the costs in your city, a real cash flow and determine how much money you can take monthly from the business either in the form of salary (ask the Franchisor what is the salary for the manager of this type of business) or in the form of anticipated profits. The more realistic you are, the better, since we do not want you to be too optimistic because you cannot cover your monthly expenses and your family is affected and/or, as we have already mentioned, you take money that is not yours and you cannot pay the rent or the necessary inventory so that the unit can function properly, which will inevitably lead you to have problems with your family, with the Franchisor, with the landlord, with your provider and with everyone.
Determine which of the Franchisor’s units could be similar to yours in your city. Requires from the Franchisor the data related to business expenses, obtain from the Franchisor the data on the fees for royalties, advertising or any other payment that you must make, these data are normally percentages of sales or fixed fees. It will also be important to obtain the percentage of cost that is handled, which you must compare against data from the industry or the competition. On one occasion a person came to my office and the first thing he said to me was “I want to see the financial statements of all his units” to which I asked, why? To see if “this” is a business, and I said let me understand… if my units in the Condesa neighborhood of Mexico City leave money, will your unit in Mérida also? What does one thing has to do with the other? It seems that we have not understood what to ask and why we want such information. The best thing to do at this point, if you are not a finance person, is to hire an advisor who can be an accountant with experience in business or a financial advisor to help you with projections. These projections will help you to know the necessary sales for the business to be attractive to you, determine how many clients you should serve per day, how many products you should sell, how many clients you need to prospect; and if you cross this information with the field research that you carried out in the units, you will be able to draw your own conclusion as to whether the business is attractive or not. Be careful when you are going to take a brand from Hermosillo to Veracruz, the financial model is not the same, it forces the Franchisor to evaluate your city and make “real, not booklet” financial projections, the model they developed for Sonora is totally different for you. Do not forget to include the necessary working capital that contemplates the fixed expenses of at least three months as a minimum and the strong advertising and promotion program that you will have to carry out in your locality. It is worth negotiating the support of the Franchisor at this initial stage, since it is his brand that you are going to position and not yours!
You must bear in mind that NOT all businesses -including franchises- are designed to support a credit, in the financial runs you must include the monthly payments that will be necessary to make to see the impact that this has on the income statement and see the real flows that the business will generate once expenses and operating costs are covered; credit and your salary. Never decide to buy a franchise just because they give you credit. It is worth mentioning that you walk away again and tell whoever you trust the most if a Franchisor wants to sell you based on a credit, or perhaps shouting at fairs that you buy from him based on the fact that he is getting you a credit . There have been many cases where the Franchisor sells you supported by a credit without seeing if the business is going to work to pay that credit and in the end we are left with a business that did not work and also paying a debt. My suggestion is always the same, if this is your first business, DO NOT take credit. You cannot risk your assets and your future flows in a business and a brand that you do not know or know how to make money with; If, on the contrary, over time it was proven that you made money with that brand and YOU ALREADY GET ON GOOD WITH YOUR FRANCHISER, and the Franchisor is willing to grow with you because you proved to be a good Franchisee, only then is it worth thinking about a loan to grow in a system that you already master, it is time to grow with your own or external resources.
I really do not understand franchise “salesmen” who go for a commission and are far from being business consultants. When they are dealing with the prospect, they do not tell them the estimated real investment to be made to acquire a franchise because they think that the business is going to fall, they do not understand that it is better to say the real investment (including the 25,000 pesos that the training of their staff in Mexico City if they come from Chihuahua for three weeks) and that if the interested party does not reach them, they should go to the next stand. It is very risky for a candidate to be granted the franchise by committing to the last peso, selling the truck, pawning the dog and asking his aunt for money. What happens if the business does not go well at first and you no longer have additional sources of financing?, surely you will not be able to support it. So it is better to bring an investor who has the economic capacity to make the business work in case the results projected in the Excel do not occur.
My recommendation will always be the same: investigate, train yourself, educate yourself before making any decision. Ask the current franchisees of the brand how their investment went, how much they spent, how different their output was from what was projected by the franchisor. If you do not have enough capital, better look for another option or wait until you complete it.
In the ILAF International Franchise Diploma we have developed two modules in this regard, one that has to do with the income statement of the business and the initial investment, and the second with the franchisor’s sources of income.
I hope this weekly column is useful for you and your business. Remember to visit my YouTube channel “FranchiseZar” where you will find a great collection of business, franchise and entrepreneurship issues. Listen to me on the FB channel of LA FORMULA DE LA FRANQUICIA every Wednesday at 7:00 p.m. cdmx. Interested in acquiring a franchise? Ask FranchiseZar® and #notedejessoprender. Your friend the Czar of Franchises says goodbye to you, see you in the next one.
Jorge Valencia L.
President of the Latin American Franchise Institute.
CEO Interfranquicias Group Latam.