7 Things You Need to Know Before You’re Ready To Buy Your First Franchise - Franchise Secrets

Franchise ownership is a great route to a high income, high-quality lifestyle. Opening your first franchise can be tough, but with the expert guidance of Erik Van Horn it will be a whole lot easier.

Anyone who works with me knows that I love to help people, but as my reputation as a franchise owner has grown, I just can’t make enough time to answer every question from folks who are hungry to learn about franchising.

The answer? I’ve taken the seven most frequently asked questions, the ones that really hang people up if they can’t find answers, and turned them into a straightforward guide to acquiring your first franchise. There’s enough information packed in here to get you started, but if you have more specific questions please click here.

Before we get started.

My own franchise journey began with a choice. I was all set for law school when I decided the legal profession was not for me. Smart kid that I was, I went to mow lawns instead.

One of the nice old ladies whose lawn I mowed ask me one day, “Erik, what are you going to do with your life, young man?” When I answered that I had plans to build a property empire, she saw some potential and offered me a property deal.

It turned out to be the first of many, and while my college friends were racking up law school debts, I made my first real chunk of money. What does a twenty something kid do with a bit of capital? Well I didn’t do any of those things! Instead I invested it into franchises.

Skip forward to today and I turned my first franchise, a single Liberty Tax Store, into twelve outlets. I took one Sola store and built out, again, to twelve. I’ve done Synergy home care, Amazing Lash studio, Club Pilates and my latest, Profile by Sanford. In 2018 alone I’ve pushed 2 brands in 23 territories and 6 states. Whew!

I tell you all this for two reasons.

I want you to know that I really do this thing. There are enough people out their offering their business “expertise” who are anything but expert. I truly am not one of those people.

But even more important, I want you to think about your journey to franchise ownership. Maybe you’re a family breadwinner looking for a second income. Maybe you had a redundancy and want to be your own man. Wherever you are starting from, you want franchise ownership to take you up to the next level. So here’s some solid advice to get you there.

1. Franchising is more than McDonald’s.

The top sectors and industries to understand before making your first franchise purchase.

The most common misconception among new franchisees is that successful franchises = food. Even though they are some of the best known, McDonalds, KFC and Starbucks are some of the most difficult franchises to buy into, rarely accepting anyone who hasn’t worked in an established store over a period of years.

To find great franchise opportunities it’s essential to think beyond food, and look at the widest spread of industries where franchises can succeed.

Fitness: what I love about fitness franchises is recurring revenue. No other business is as good for building a loyal customer base paying monthly fees. But the downside is lots and lots of competition. When I talk to fitness franchise owners, even with top brands like Orangetheory Fitness, who crush the opposition, the number one fear is excessive competition.

Beauty: I worked with Amazing Lash in their early days as a regional developer, alongside smart people like John Leonesio, who went on to found Massage Envy. New owners fear that beauty will get crushed in a recession. But think about haircuts…do we all grow a shaggy mop when the economy is down? No. And women don’t stop seeing beauty as a need when money is tight.

Health: This might be the fastest growing franchise sector of all. Weight loss has always been a strong franchise opportunity, offering many of the same customer subscription benefits as fitness. But think about all the areas today where people are now eager to buy the healthy option. Health is a number one concern for everybody, and that makes it a great opportunity.

Service: With such a deep and wide market for services, it’s impossible to see every angle. Just think about services delivered in home improvements; painting, decorating, flooring, roofing, kitchen installation, bathroom fitting, big ticket items employing heavy machinery…and the list goes on, all of them offering potentially profitable franchise opportunities.

How are you, a new franchise owner, supposed to choose where to invest first? These are three principles I have used over many years to guide my decision making:

There’s no such thing as a slam dunk no-risk franchise, and anyone who tells you otherwise is just selling to you.

Look at the trends in each consumer sector and industry. Example: big box gyms are fading, boutique fitness options, like spin classes, are surging.

Think ahead into the next 10 to 20 years and build your portfolio of franchises to be resistant to the natural ups and downs of the economic cycle.

2. A Whole New Job vs. A Good Second Income.

Deciding on your level of commitment to the first franchise you buy into.

Many new franchisees are sucked in by the idea of a passive income that, once established, they never need to work on or think about again. There are consultants, brokers and franchise agents who will sell you on this idea. But take my advice – in reality, all franchises require some level of time and commitment from you the owner.

Understanding what level of commitment each kind of franchise requires will help you understand which franchise is right for you. Because I am a simple guy from South Dakota, I like to keep things straightforward. There are two kinds of franchises:

Owner-Operator: these franchises are like buying a whole new job. Often they depend on your skills as a worker. For  instance, a painting and decorating franchise will want the owner operator to be a skilled painter.
Semi-Absentee: franchises that want you working ON the business and not IN it, focused on growing the business and opening new stores.
I specialize in semi-absentee, where there is the best potential for growth. But not all franchise owners want to build a regional or national network of stores. You might be happy with a single outlet, providing a good second income for your family.

Owner-Operator and Semi-Absentee can be divided further into four subcategories:

  • Semi-Absentee Retail, e.g. boutique fitness.
  • Owner-Operator Retail, e.g. massage spas.
  • Semi-Absentee Service – can be hard to find; services tend to be owner operator, but the opportunities are out there.
  • Owner Operator Service – painting, flooring, electronic installation.
    If you’re wanting to work hands on in the business and be the manager, vs hiring the manager, then you are more likely to go owner operator. If you have strong leadership, management or operational skills, then think first about semi-absentee.

3. The $50,000 Franchise.

Understanding the kinds of franchises available at different levels of financing.

They are out there. If you search the back pages of Entrepreneur magazine you’ll find franchise opportunities advertising themselves for less than $50k – sometimes, much less. But I want to be very honest with you – I don’t know about these low cost/low return franchise options, because I do not mess with them. And my recommendation is that you don’t mess with them either.

If you’re sitting on less that $50k this is my suggestion: Save More and Learn More. Keep putting away the dollars and keep learning, so you can buy into a great franchise, not a second rate franchise.

I consider the baseline investment for a great franchise to begin at $50k to $75k. This is a solid level of investment that will open up some good franchising opportunities, mostly in the area of semi-absentee franchises.

But my advice, if you can work up to it, is to invest at the $100k level or above. This is a great opening investment that will open up a ton of opportunities for you, with many of the great franchises that I’m happy to work with.

4. Due diligence in 90 days.

Do the right homework to dodge the wrong investment.

I’ve helped and advised many good friends build up their franchise investments. My buddies are always surprised by how fast the buying process can be, from your first introduction to a franchise, to confirming your investment, can happen easily within 90 days.

Will you be OPEN in 90 days? No! Especially with retail franchises there is a process of fitting, recruitment and so forth to go through. But you can realistically own your first franchise inside this 90 day period.

What are you doing over those 90 days? Say it with me…Due Diligence! You will be going through the steps to make sure the franchise you’re investing in is everything it says it is, and that it’s the right franchise for you as an investor.

Day 1: you make first contact with the prospective franchise. This might be your first call or other introduction to the brand. This is also about introducing yourself and building that essential two way relationship. One of two things will happen: the franchise will start to seem real OR you will hate it. Either is fine, switch to the next franchise or proceed to the next step.

Day 30: around a month in comes the second organized call to the franchise. This will get down to details of unit economics and operations. You’ll get a franchise disclosure document that should deep dive into things like estimated startup expenses and financial performance validation. Around this time you should be talking to franchise owners about their experiences, and of course their finances.

Day 60: Discovery Day! Face to face meetings are your opportunity to really dig around in the operations of a franchise, look them in the eye and assess them as people. You should take this step once your finances are inline and you are ready to buy. This is all about making sure to yourself that this is the right franchise opportunity for you.

Day 90: Seal the deal. This is really a psychological final step. Along this whole process there will be freak out moments! We talk about dealing with those in my regular webinars.

5. Offensive vs. Defensive Strategy

How many territories should you buy?

Usually, around discovery day, people start to ask me, Erik, how many territories should I buy? One? Three? My latest deal is for twelve territories. The answer depends on a lot of factors but I like to think about the question as a choice between two strategies.

Defensive Strategy: you buy just one or a handful of territories to hedge against the investment going bad. If things go well you risk some disappointment as you watch other franchisees, who bought up more territories, expand around you. This is the strategy most new franchisees pursue…but is their best bet?

You buy just one or a handful of territories to protect you against overexposure in an underperforming market, or from being overcommitted to a franchisor who you’re not getting along with. If things go well, you risk some disappointment as you watch other franchisees with more territories expand around you. But if things go not as well as you anticipated, you’re protected against significant loss.

Offensive Strategy: when I make a franchise investments I want to own the territory. If there are three sites, I want all three of them. If things go well I can open all the sites on schedule. If the investment is slower than I expected, if I am making less money than I expected, I can always hand back a site to franchise.

When I make franchise investments, I usually want to own as much territory as I can, so I can have the option to expand my business. Just because I own many or all of the territories in a market, doesn’t mean that I have to operate in each of those territories. Instead it’s like an option, that I have the right to exercise if and when I want to. And if for whatever reason I decide that I only want a couple of the territories that I bought, but not all, I can sell those territory rights back to the franchisor no problem.

There’s always the possibility to scale back an offensive strategy, or to scale up a defensive strategy. With a hot brand, I mean a franchise that is really selling, there are nearly always new territories and sites opening up.

Between Offensive and Defensive you must make the best choice for you. In my experience, I have always been happy that I went offensive and purchased more.

6. A passion for your business, or a passion for your lifestyle? (Some food for thought)

Your business doesn’t have to be your hobby to be happy.

I have worked with people of all kinds who have succeeded as franchise owners. But I’ve observed one group of people who make that success a little bit more difficult for themselves.

We all dream at times of making our passion our job. If you love eating donuts, owning a donut franchise might seem like a dream. But our passions and hobbies are where we go to escape the pressures of work. Eventually, that donut store will stop being your passion, and just become your work.

I’m happy to say directly that I am not passionate about the franchises I own. I’m a guy from South Dakota with horses outside his window, am I passionate about eye lashes? No! But I am passionate about owning and operating businesses, and I am passionate about the lifestyle those businesses provide me.

I want to own businesses that provide me with money, that allows me to do what I want to do, when I want to do it. What do you want, a job that feels like a hobby, or a business that funds a great lifestyle?

7. How quickly can I cash-flow?

Well duh! Of course every one of you wants the answer to this question. We buy franchises because we want them to make money. But how quickly can we expect that to happen? I like to divide franchises into two categories:

Cash-Flow Franchises

Equity Franchises: I buy businesses that generate quick cash flow, AND I buy businesses that build long term equity. A strong franchise portfolio balances both. But which should you invest in first?

If you’ve just quit your job to franchise full-time, if your personal savings are burning down, you want to go for cash-flow. There are two big quick cash-flow opportunities to focus on:

Service industry franchises:  Any business that provides a service then sends a bill to the customer is one that will return cash relatively quickly.

Recurring revenue franchises (my favorite):

I love those fitness businesses because of pre-sold memberships. Your business can hit cash-flow from day one.

But, beware! Quick cash flow is addictive. Once you’re in the mindset of money coming in quickly, it’s too easy to overlook better long term opportunities that build equity.

If your finances are solid and you have over the magic $100,000 amount to invest, consider businesses that will build equity.

The downside of an equity business is you can easily spend 2 years or more dumping money into it before seeing any return.

But the upside are those returns can often be 4 times higher when they begin to flow, and you then have a strong asset that can better weather slow times.
Whichever direction you jump in, you must self-validate. Know the numbers backwards and forwards on any business you buy into. What’s the breakeven point? How many members will you need?

Whatever the specifics of your business are…learn them!