User Panel
Posted: 1/7/2006 4:55:57 PM EDT
So me and the wife are thinking about franchising a food joint. So we get to looking at various websites and all of them say I need to have anywhere from $250K - $1m in liquid assets. Hmm, how does this work. I was under the imipression that one could get a business type loan for a venture like this. Can I or do I have to be rich to begin with? I am not worth $1m. Has anyone done this before that could offer advise before we go to the band and start asking questions?
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In a traditional financial sense you could have a million in assets and 1.2 million in liabilities (loans) and be worth nothing....
I looked into franchises a while back and their exact requirements varied....some wanted X in liquid assets, Y in assets, and Z in net worth.... |
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that is kinda what i thought, but I Thought there was something the average joe could do besides be rich that would allow him to franchise a place.
I suppose I could find some partners or investors, but this isn't the path I wanted to follow. Anything else? |
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You've discovered what I did.....if I had a million in liquid assets, why the hell would I want to own a Quiznos?
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I was looking into Round Table Pizza and it went like this:
you buy the place and setup everything you must have $600k operating capital so that it will not fail right away (this is a buffer) you must pay a $25k franchise fee - this pays for the startup crew to come out, train, etc and since I was in a new area, I would basically own the area, but have to put in 10 locations within 5 years there were other fees, etc, but otherwise not too bad |
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Though there must be much variation, a friend of mine ran food franchises for years and says return is about 30%.
So far as financing........the Small Business Administration (SBA) is prob the best way to go. The SBA will loan you about $2 for every $1 you have and the interest rate will be lower than hrough a commercial lender. Finally, I know there must be people who start a business with $3.12 and make millions but I've never met nor heard of one. On the low side you'll need about $250,000 total capital - your own and borrowed. IMHO. 5sub |
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What type of franchise are you looking to setup? My brother in law owns a successful chain of NY style deli's that they are just now beginning to franchise and they have been doing quite well. You can get into one for significantly less money than what you've listed here. Email me if you'd like some more info.
[email protected] |
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A franchise is great for someone who is not as business savvy as they think they are. No offense, but this probably includes you. Hell, it probably includes 90% of the membership. (No, that doesn't mean that franchise owners aren't business savvy) Whether or not the franchise fee is worth what you are getting from them is of course a pivotal question. If it's a Mc Donald's the answer is probably yes; if it's "Sally & Joe's Elderly Home Care" the answer may very well be no. Since "Sally & Joe's" has no national ad campaign or brand recognition, you might, for example, be able to hire a consultant for less than the $25,000 franchise fee for Sally & Joe's. In addition, you need to realize that if you are say a chef, that doesn't necessarily mean you'd be great at running a restaurant. The chef is the technical worker of the business, but as business owner you also need to worry about growing the business - being the entrepreneur (as well as operations manager). What you probably need to do is hire a chef or the business will fail or stagnate. If you decide to be the chef and hire managers, you will quickly find yourself working for a "boss", even if that boss is you. You'll most likely work harder and longer hours with little reward. Look at the margins involved in whatever business you open. If I were faced with starting a business I have worked in that averages a 3% across the board margin, or a business I am unfamiliar with that has high demand and averages a 25% margin, the choice is clear. You can always hire the technical staff. The business management and entrepreneurial skillset is where your focus should lie. I have seen too many people ignore this truth and pay heavily for it. Let's take a small business, we'll call it "Joe's Welding". Joe owns a truck with a welder and this is how he starts his business. When Joe grows big enough to need some help, he hires an assistant and continues on his way. I have seen many people like this reach retirement and try to sell the business. In one case, "Joe" wanted $100k for his business, because that's what he needed to retire. Since Joe WAS the business, and people wanted to do business with Joe, goodwill was nil. In fact the real value of the business was barely more than the value of the truck and equipment, say $10,000. Quite the slap in the face to Joe, who thought he was building something that would pay off for him in retirement. Sadly, because of Joe's lack of understanding that he had to work ON his business rather than IN it, it never grew. Another factor Joe never looked at was his return - if he had, he would have abandoned the business a long time ago and went to work elsewhere. Understanding finance and principles of proper leverage practices is vital to maximizing return. Unfortunately, most "Joe's" don't have an MBA in finance to help guide them in this area. Yes, I know that for some people, it's not all about the return, but I can't imagine putting myself into that risky of a situation without a handsome return. If your business is going to net you say 7% and you work 50 hours a week, why not put the damn money into a mutual fund and sit at home and earn 7%? Before you think I am knocking them too hard, franchises put procedures and marketing power into place so you don't necessarily have to be the entrepreneur. In that regard, they are great, since most people focus on the technical work of the business, rather than the role of entrepreneur. They help ensure success, and since most startup businesses fail, that can only be regarded as a good thing. Oh, and for God's sake, if you decide to start a business, franchise or not, please put together some pro-forma financials with reasonable estimations of sales and expenses. |
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exactly...a million liquid would mean you were worth much more.... Hell, I'd open my own and 1 up the local franchise formula...offer something more for the same amount. But, Im the kind of guy that eats at locally owned/ non-franchise joints when I can. |
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Everything Peteco said is dead right. I would add that you should take the amount of operating capital you think it will take and triple that number. A franchise will give you instant customers that you might not have other wise and make it possible to turn a profit earlier.....but plan on needing the cash to stay afloat. The other thing I have found over the years of working with new business owners is not everybody should be in business for themselves.........it is hard for some people not to get lazy. Hell some days I need a boss. |
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I have never seen projected sales numbers from a new company that were worth the paper they were written on. Now reasonable expenses is the real key, because what you really want to know is, first what will it take to break even and second how much cash will it take to get there. |
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I agree with most all of what yor are saying. The part I don't understand is how the hell can one become and entrepreneur if that one has to be worth $1m to begin with. Does one start small or think big. I know you can get a loan to start a business, is this different froma franchise? I am in my mid 20's and I am probably worth an even $0 with what our house is worth compared to what all of our debts are? How do I take a net worth of $0 and do anything with myself if I am supposed to be worth $1m to start a business? Do I start small, buy some small homes to rent and when I get enough worth, then go bigger? Where I am comming from is that I hear stories of some of the local folk that just worked somewhere during college and then decided to franchise one. How did he/she do that with no net worth? |
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I'm not sure on that, I haven't looked into many franchises. Maybe they expect you to bring in some money partners, and maybe you manage the business for your share of the equity? You might look for a local SCORE chapter for help, or of course the SBA.
See above. Maybe they are looking for someone who is willing to throw their mostly paid-off house and their 401k on the chopping block? Franchises always pissed me off because I could never get copies of actual financials (even on anonymous, far away franchisees). I figured that rather than pay the franchise fee, why not just start to actively invest the money (rather than a passive investment like a 401k)
You could do that, but if you find yourself a real estate mogul in 10 years, why bother with franchising a restaurant? Just get better and better at what you did to earn the money in the first place. If the barrier to entry is lowest for you for real estate, you could just spend your time learning everything about that, and just pull the trigger. Bank financing is probably more accessible to you for a rental property, but you probably won't get any SBA funds. Hopefully some actual franchisees will chime in - I always wondered much of that too - if I have $250k lying around, it's already tied up in investments earning more money. Why would I open a Dunkin Donits with it? |
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If you have "0" net worth you only have your labor and intellegence to bring to the table. I know you said you didn't want any partners.........but it may be the best way for you to go. If you don't have cash, you need know how......if you want to open a fast food chain.......do you work for one now? Do you know the management prctices that they have in place? A very good friend of my is a restaurant chain managing partner.....wow talk about knowing his shit...the dude is brilliant in the food business. His dad owned a restaurant and he has been in the biz all his life. Know how.....if you don't have you need to get it if you want to maximize the chances of survival With all due respect....you will need know how or a shit load of cash to hire the know how.....but most likely you'll need both. |
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Good luck. You don't have to be a millionaire to buy a franchise, there are franchises available at all levels of investment, from things like pet-walking services to McDonalds.
Investigate the type of business you are interested in, talk to people like the Entrepreneur Authority to get ideas of what business would best fit your visions of what life should be like. For instance, I looked into Quiznos and found people were working 70+hrs per week to break even. Not the kind of lifestyle I want. A Sub shop I looked into had you in-store 10hrs a day, up to 7 days a week. Then there was a home window treatment franchise. Guys had some 20-somethings doing the work and they just did sales. Some weekends and evenings, but much better work and a hell of a lot less hours. I also looked at Cleaning services. Nice returns, low-skill workers to do the work, but I don't care for the night hours. Doesn't fit my goals. I find out most of this stuff from talking to actual business owners. Just look them up in the book. Tell them who you are and what you are considering. Most are exceptionally open about it and very nice. Now, after 2 years of looking, I am about to dive into a business that I believe will not only be profitable, but will also fit my style and my goals. Self employment is the wave of the future. You can either be a worker bee or an owner. If you are a worker, only expect to be |
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BTW, a great book is Entrepreneur Magazine's Ultimate Book of Franchises. Gives you a short overview of over 1,000 different franchises in a lot of different categories. Read it, you will be shocked how low it is to get into some of these.
Most people don't have "$250k lying around". Most of us have it tyed up in 401ks and houses. And if we have it tied up in investments, most of us aren't making the returns on it that are possible with a good business. So what you do is you use www.benetrends.com or www.franfund.com to invest your IRA/401k savings in a business. Plus you take out a home equity loan on your house and invest that. |
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...or other investments, which is what I meant (and said). The "lying around" part means it is readily accessible to use in a new investment, such as a new franchise opportunity. And some people do accumulate cash and then periodically invest it. I know a guy with over $600k in cash/equivalents, and he will periodically find a good investment and draw from it.
Unless it's invested in another business, or real estate, or a number of other vehicles which do better than your average 401k. Plus, many businesses give shit returns. But I do agree, a good business is THE best way, other than inheritance, to gain wealth.
Amen to that! Rather than the usual thing people do, a good investment IS one of the best reasons to leverage home equity (or issue any kind of debt, for that matter). Instead, many people will every 3-4 years, refinance and use their equity to pay off the Visa and Home Depot credit card that they ran up paying for the electric bill and groceries because the BMW lease was too much for them to afford. Then they repeat the cycle a few years later. Ugh. "The rich get richer and the poor get poorer" - yeah no shit! That's because the poor keep doing things that make them poor, and the rich keep doing the things that made them rich. |
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3 things....
1. Get a UFOC of any franchise you might think about ( Uniform Franchise offering Circular). 2. Read the E-Myth 3. DONT EVER USE YOU HOUSE AS COLLATERAL. SOmething like 90% of busiensses fail within 5 years. Do you really want to loose your money, business, and home? |
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