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CHOOSING a FRANCHISE: Part 7 - "NEW versus OLD"

  
  
  
  

new franchise opportunity

     In this series of articles, we will unravel the mysteries of CHOOSING A MODERN FRANCHISE or BUSINESS OPPORTUNITY.  We'll uncover the TRUTH about what to look for, what to avoid, and what to ignore.

      In Parts 1 through 6, we have examined the basics of what needs to be considered when choosing a franchise, license or business opportunity.  The "key elements" of evaluating the business model from a modern standpoint, and the "pitfalls" that the modern business environment presents.

     You will now have to decide between an ESTABLISHED franchise or business opportunity, or a NEWER start-up.       

     The accepted standard seems to be that "ESTABLISHED Franchises" are less risky than "NEW Franchises" because the parent company has been around a lot longer, and they have many more established units.  True enough, but there's a LOT MORE TO CONSIDER THAN THAT . . . . best new franchise opportunities

  • Is the "established franchise" OLD?  Boring?  Is it an OLD IDEA? 
  • Is the "established franchise" still a VALID concept compared to NEWER competitors that have entered the marketplace?  Example:  Maybe the world has grown tired of SUBWAY, but newer concepts like Jersey Mikes & Firehouse Subs are growing for a reason.
  • Are there too many units already?  Will you be competing with other identical franchisees for market share . . . . 

    Face it - consumers LOVE NEW and DIFFERENT.  There is a REASON that some of the NEWER BRANDS quickly gain acceptance in the marketplace.  For many consumers, NEW IS BETTER.  So if you really think that an ESTABLISHED FRANCHISE is a SAFE BET, THINK AGAIN.  There's a LOT MORE RISK there than you think.  Look around you . . .

  • Do YOU tend to EMBRACE the new concepts (Shanes Rib Shack, Firehouse Subs, Jimmy John's, Five Guys, etc.), or do you stick with the old standbys?
  • Do the NEW CONCEPTS (the ones that are valid and make sense) that enter the marketplace SEEM TO DO WELL?
  • Are these NEW CONCEPTS pirating marketshare from the older, BORING established concepts?best business opportunities

     You KNOW THE ANSWERS to these questions.  It's YES.  So consider that the NEW FRANCHISE CONCEPT has some very relevant advantages in modern society:

  • Increased probability of a visit by consumers LOOKING FOR SOMETHING NEW, DIFFERENT & BETTER.
  • Almost GUARANTEED curiosity factor.  Consumers are constantly looking for a NEW EXPERIENCE.  Will YOU BE THAT NEW EXPERIENCE?

     Part of evaluating any franchise or business opportunity can't just be about "AGE" and "STABILITY", it has to consider the benefits of something NEW:

  • Is the concept MEASURABLY DIFFERENT?  Will consumers realize better quality, better prices, better selection, etc.,?
  • Is the PACKAGING improved?  Many of the older franchises SERIOUSLY LACK IN MODERN PACKAGING (theme, colors, style, etc.)  NEVER UNDERESTIMATE the value of packaging in today's world.  Modern consumers NEED THE "WOW" factor.  THEME is a really big deal.

      If you think about it, it's hard to get very excited about another "SUBWAY" opening up.  Something NEW and DIFFERENT is probably going to get your attention and most everybody elses too. Which would you rather have? 

     For my money, I'll cast aside "conventional wisdom", and go with something NEW and DIFFERENT, and spend my time evaluating the validity of the NEW FRANCHISE on it's merits, not it's age. 

CHOOSING a FRANCHISE: Part 5 - "PROFIT VAMPIRES"

  
  
  
  

emerging franchise opportunities

     In this series of articles, we will unravel the mysteries of CHOOSING A MODERN FRANCHISE.  We'll uncover the TRUTH about what to look for, what to avoid, and what to ignore.

      In Part 1, we examined the "How much money will I make" issue - essentially a sales/profit analysis.  In Part 2, we examined the "Need Test" - a realistic look at the NEED for the business concept in the marketplace.  In Part 3, we discussed return on investment considerationsnew franchise opportunity

     In Part 4, we examined "overhead", and why it is the #1 enemy of small business today.  The expense load of a small business venture can end up being much larger than projected, created by what we call "PROFIT VAMPIRES".  Here are some examples:

  • CAM ("common area maintenance") is the cost to maintain the shopping center, which you pay.  The TOTAL COST is spread between the tenants in a "percentage of total square footage" calculation.  Profit Vampire Alert:  Because this is a "pass-thru expense", some property owners/managers have very generous check books, creating excessive expenses that you will pay.  You are paying for EVERYTHING from light bulbs to landscaping.  ASK FOR A "CAP" on these expenses in your lease.
  • Landlord's Taxes & Insurance is another "pass-thru" expense that you pay for using the same "% of SF" formula.  Profit Vampire Alert:  An over-valued center, and rising tax rates to fill budget shortfalls can create a huge unexpected expense.
  • CAM, taxes & insurance is sometimes calculated using an "occupied space" formula.  Profit Vampire Alert:  If the center has increasing VACANT SPACE, you may end up paying a higher percent.  Make sure your lease DOES NOT have a clause that allocates these expenses to "occupied space" only. 

     In addition to these common unexpected expenses, every business has it's own unique Profit Vampires:

  • Food costs in the restaurant industry can spiral out of control from spoilage & waste.  Food is prepared anticipating a certain volume, and then thrown out if the target isn't met.
  • "Shrinkage" is a product that "disappears" without being paid for.  It is a problem in EVERY business except the service sector, and is impossible to calculate, and difficult to control.  Put it in your budget.
  • Labor costs can quickly overwhelm your budget, particularly in a slow economy.  Many businesses MUST staff for higher volume times, and labor is wasted "waiting" for that to appear.
  • Advertising & competitive pressures can add a significant expense load in a slow economy.  Your competitors are slow, and their competitive challenges require a response.  Consumers have abandoned print in favor of the Internet, leaving higher priced alternatives to choose from.  Advertising MUST BE IN YOUR BUDGET, and should be a percentage of gross sales. 
     There are many other examples. Your projected operating budget should include considerations for these unexpected, but inevitable expenses.

CHOOSING a FRANCHISE: Part 3 - "Return on Investment"

  
  
  
  

NEW FRANCHISE OPPORTUNITY     In this series of articles, we will unravel the mysteries of CHOOSING A MODERN FRANCHISE.  We'll uncover the TRUTH about what to look for, what to avoid, and what to ignore.

     In Part 1, we examined the "How much money will I make" issue - essentially a sales/profit analysis.

     In Part 2, we examined the "Need Test" - a realistic look at the NEED for the business concept in the marketplace.

      We will now consider RETURN ON INVESTMENT, which actually has (2) parts:

  • Return ON investment:  How much money your investment in the business venture will return to you as on ongoing income after ALL expenses.
  • Return OF investment:  When can you expect to be re-paid your investment so that it can be re-invested in another project.new emerging business opportunity

     You must now return to your sales/profit analysis, and calculate:

  • Annual net profit after operating expenses (all fixed & variable expenses)
  • Annual net profit after YOUR SALARY to run the business (or the salary of your manager.  YOUR salary should be EXACTLY what you would pay a manager - no more - no less)
  • Annual net profit after TAXES

     What's left is the ANNUAL RETURN ON INVESTMENT.  Divide that annual "remaining profit" by the initial investment, and you have the annual "rate of return" on investment.  It should be MORE than you could get if the money was invested elsewhere.

     But there's more to it than that.  What about returnew business opportunityn OF investment?  Think of it this way:

  • If the money was sitting in the bank, it's safe, and AVAILABLE.  It is earning a RETURN, but STILL EXISTS to be used.
  • When the money was invested IN A BUSINESS, it has been CONSUMED by purchasing "stuff" - all of the things that make up the business.  It is NO LONGER AVAILABLE ("liquid").  

     The goal is to "get that money back" - available again - to be invested again.  RETURN OF INVESTMENT.

     Now, go back to your SALES/PROFIT analysis, and plug in a re-payment schedule - to you - for the re-payment of the initial investment over time.

  • Most businesses could not tolerate that additional expense for the first 3 years (the "launch phase")
  • Return ON investment may suffer during the re-payment cycle, but that is OK.  The return ON investment numbers will become strong once the re-payment cycle matures.

     Summary:  The business profit structure needs to support (3) separate income/payment streams beyond operating expenses & taxes:

  1. Salary (your salary to run the business, or a manager's salary)
  2. Return OF investment re-payment schedule
  3. Return ON investment as an on-going "income" on your investment
     If the business sales/profit/expense load model doesn't support ALL 3 (and MOST WON'T), YOU ARE BUYING A JOB.
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