5 tips and a top secret to become rich through franchise model
If you make money work for you instead of working for money, you get richer. One of the proven ways to make money work for you is to take a franchise. Franchise means that you buy rights to buy a proven business that has managed to achieve certain level of standardisation w.r.t to the procurement of raw materials, the ingredients, the recipe or design, the distribution of goods, design of interiors of the end shop, marketing strategies etc.
In short franchise model make it easy to start a business by directly investing into somebody else’ work.
But there is a price you need to pay. That includes the cost of franchise that does not include any item in exchange but sheer royalty for the work already done. The other cost involves the initial setup cost that is decided by the franchise and finally the real estate cost of the space – rented or owned. (Typically a franchise model goes best with owned space. This is because of the risks involved with this model that is covered in this article). Generally the setup cost ranges from 50,000 to 1–3Crores.
Why do franchise models fail?
1. More of the same is a model lame!
Barring a few as in – MacDonalds & KFCs in ready to eat industry, 3M in car care, floating walls in interior designs – many of the franchise have a real potential risk. The easy-of-all franchises, the ready to eat food business is the riskiest of all. The more the number of franchises open for the same brand in a locality, the more the people do an initial rush to it and then they start growing tired. The franchise market also is running high with ideas and so a newer set will open up.
If the franchise owner do not think much before giving away the model to too many people for want of quick money, the traction dies down in individual units and then the rentals and other killer costs start rising thereby putting the business to risk.
2. Long break even periods
Break even periods will be very long for many franchises and a typical period spans tad above 1 year and thereby it sets an inbuilt risk already. What if the brand gets into a spoilt period in the media with a bad news, what if there is some crises in the specific industry for whatever reason. Generally anything with long waiting periods will throw your mathematics with reinvestment of the returns from the business until the break even is achieved. People who do franchise models as the single source of income should strictly not forecast their investment based on sales in the initial 2 years at least until break even. Think more about this statement.
3. You need to know “the place” for the business
Naturals icecreams made amazing sense to a lot of people wanting to get a franchise. The brand is really cautious in giving away rights and thus safeguards its franchise however their franchise units in mangalore where Pabbas or Ideal icecreams rule was a big failure. Even ibaco icecreams took a hit against Pabbas. 3M car care in a spot where you need to beat traffic and take a messy turn in a 1 way road will not work, So you need to know “the place” that you pick. Though most franchises have business managers who know where the businesses click and will recommend, your insistence sometimes gives away and they let you go for it. So now you know more.
4. Labour issues galore
Labour issues are a big bottleneck in this business. Your store needs multiple people and if one of them declares a day out, the others will start spinning your business down by way of shabby management, eventual new hire requirements, attrition rates etc will raise training costs. Personal hygiene is another big concern when it comes to food industry and pilferage of various kinds are a headache to manage though the franchise model comes with a certain level of checks to plug these kind of risks.
5. Own or rent puzzle
We hinted earlier that renting on a franchise model does not work out? To understand this, let us flash back into the origin of franchise models. McDonalds is one of the first set of companies that started the model and very famously are known as real estate company than fast food company. The vision or key objective of these companies are to buy real estate over a period of time. This is the true idea. Listen in if you wanted to get rich – if you want to buy a shop in a busy mall and you have about 2/3rds of the money after all the borrowing – invest part of that as initial investment and the remaining into a franchise unit. You should have another primary source of income with you which is capable of paying the monthly interest charges. So now the real mathematics comes into play. You make more money in the franchise in the initial days due to traction. At this time focus solely in paying off the interest charges. Kill your loan or if that is not immediately allowed by your bank, accumulate in financial instruments with medium risk,to be able to kill the full loan when allowed. Do not invest initial profits until you break even into stock markets.
Here you should clearly see that your objective is not the franchise ownership but to own the real estate at the end of the activity of clearing the loans. Let us take 1 year after the start, when you managed to pay off a good part of the loan, you may have not break-evened into the franchise but you managed to own a business plot that will become your biggest asset. The gains in real estate cost is your true returns.
Now tell me, would you own or rent a shop in a franchise model.
You see where we started off with? You wanted the money work for me you but if you see points until 5, the risks require you to start working again and puts you back into the same rat race you wanted to run away.