Maximizing Your Franchise's Profit Potential
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
This is such a great topic. It reminds me of the joke we used to tell as kids, "How can you immediately double your money? Fold it in half and put it back in your pocket!" So how can you make a lot of money as a franchisee? At the risk of sounding trite, the easiest way is to start by selecting a franchise opportunity that is capable of making a lot of money.
Actually, there are a number of things you can do to increase your chances of making good money as a franchisee. Though picking the right opportunity where others are making a lot of money is a good start, it is no guarantee you will do the same. The key secrets to making as much money as possible include:
1. Starting with the right definition. This goal begs the question, "what is a lot of money?" Many people think of this answer first in absolute terms such as making a fixed amount like $100,000 per year. I think it is wiser to define "a lot of money" in terms of return on investment. If you can invest $5,000 and get a return of $25,000 per year, I'd contend you're making a lot of money on that investment by any reasonable standard of measure.
2. Starting with the right opportunity. It's essential to select an opportunity that matches up well with you, in which you are willing and capable of performing the primary role of the franchisee. As just one example, I know of a franchise that cleans public restrooms. This can be an intensely profitable business with a great return on investment, but many people simply wouldn't want to be involved in such a business. Their reluctance would probably mean they wouldn't make a lot of money, because they couldn't project the excitement and enthusiasm necessary to sell a prospective customer on the value of a sparkling urinal.
3. Keeping the investment size reasonable. A host of franchises can produce a great return on investment. Make sure you focus on ones where the per-unit investment is reasonable given your net worth and the liquid capital you have available to invest. Remember what your mom told you about not putting all your eggs in one basket.
4. Reinvesting to achieve your absolute goal. If you find an opportunity that fits well for you and has a great return on investment, and you've got your first unit up and making a lot of money, you can reach your absolute number goal by acquiring additional units. This can either be done through further out-of-pocket investment or through the reinvestment of the profits you're making into growing the business. I have a good friend who owns more than 40 haircutting franchises. The return on investment in each unit is great, but the absolute dollars in any one unit don't meet his overall total income goal. He found that by adding additional units over time through the reinvestment of profits, he could realize a total income far in excess of what his absolute goals were when he started the business. In the example mentioned in the first point, if you want to make $100,000 per year, make four of the $5,000 investments and you're there.
5. Following the system. The biggest reason to get a franchise, as opposed to starting an independent business, is to acquire the rights to use a proven system to achieve predictable results. A good franchise company has developed its systems through extensive trial and error and should be able to tell a new franchisee exactly what to do to make a lot of money. All you should have to do is execute the system well to achieve the success you want. If you want to make a lot of money, don't be an innovator-just pick a great system and execute it well, and you'll get your wish.
6. Capitalizing your business properly. This is a corollary point to the one about making sure the size of the investment for each unit is reasonable for you. There are many ways to capitalize your new business, including using all cash or using some portion of your cash combined with loans or leases to come up with the total investment. Most franchisees use a combination approach. When you're evaluating how to capitalize your business, keep in mind that the service costs of loans or leases will reduce the amount of money you'll have for other purposes. Too much leverage can be very dangerous and get in the way of making a lot of money.
7. Working with a good accountant. One of the hard lessons of life is that there can be a big difference between the money you make and the money you have. The difference is taxes, and they take many forms. One of the most important steps to making money that stays in your pocket is to use a good accountant to help you structure your business entity and ongoing activities in a manner that reduces the tax bite whenever possible. The entity selection can help you avoid double taxation of earnings and/or business specific taxes like B & O tariffs. In terms of your business activities, some techniques can be as simple as the timing of investments and major purchases or the type of capital structure you use. It's typically well worth paying some accounting fees to ensure you're minimizing the tax bite if your goal is to make a lot of money in your franchise.
Finally, keep in mind that in any successful franchise system, many people have traveled the path before you. Whether they are other franchisees or the franchisor, take advantage of their experience by asking for advice whenever you have doubts or your results aren't what you expected, especially when you're first starting out. They'll be happy to help you, and you can return the favor to other new franchisees in the future.