HIRE YOURSELF Blog

Start small or go big - 4 franchise models for financial freedom

Posted by Pete Gilfillan on Jul 16, 2018 11:50:00 AM
Pete Gilfillan

Classic comedian Milton Berle once quipped, “If opportunity doesn’t knock, build a door.” In a nutshell, that’s what many aspiring entrepreneurs are looking to do. Becoming an entrepreneur through franchising offers many different ways to build that door, depending on whether you want to gradually build a bridge from your corporate job while still working or whether you’re ready to go all-in right away. For example, I recently worked with a candidate who already owns a business in one industry. He wanted to diversify his investments, and told me he could set aside 10 to 15 hours a week to give to a second business. We were able to find a perfect opportunity for him in a fitness franchise—one that allowed him to add his new business to his existing schedule, rather than trade one for the other.

It all starts with finding a franchise model that matches your desired level of engagement and investment strategy.

First, Choose Your Level of Engagement: Owner –Operator vs. Executive

Owner-Operator/Artisan Model: The most basic franchise format is an owner-operator model. With owner-operator businesses, the franchisee may be the artisan, the person behind the counter, or the one in the truck providing the service. In this case the owner has one business, and probably one location. It is a great starting point for someone who has always dreamed of owning a business, and who wants to work for himself. Buying a franchise helps you get off the ground quickly with a new business. An owner-operator may be interested in building a good business, but is not necessarily interested in substantial growth or multiple locations. As an owner-operator you will spend your time working in the business, not on the business. You will be tied to the facility or the truck, taking care of the daily needs of the business.

It can be challenging to accomplish the sales and marketing that drive growth if you are a full-time artisan. Some people find balance and happiness in this model, and some gradually cut down their hands-on time in favor of paid labor as they grow the business.

The Executive Model: The business owner who wants to leverage his or her capital to deliver the highest possible return on investment might consider the executive model. This person has the capital and business acumen to build a large operation. Over the long term, people choosing to leverage the executive model want to work on the business, not in the business. They will always be engaged, but not necessarily as the artisan or day-to-day operator. The franchise owner may spend 10, 15, 20 or 40 hours a week minding the business, focusing on the higher level decisions. He or she might be considering the advertising plan for the coming months or focusing on putting the right managers in place to run various locations.

The executive model can be lucrative. At this level, you can take advantage of some economies of scale. As your business grows, you can focus on leading the managers of your locations, or setting up accounts to grow your service businesses. You still need to learn the business, of course, and you’ll keep mindful eye on marketing and cash flow, but you will have managers to be in the store or drive the truck every day. For some investors, the ideal way to build a franchise business is to start out as an artisan, learning the work and bringing the business to profitability, and to eventually move to a more executive role.

Next, Size it Right: Single Investment vs. Multi-Unit vs. Area Development

Strategic franchise ownership is a phrase that describes large-scale franchise investments. The idea is to build a sizable business that, over time, can provide enough income to replace or exceed a corporate level income and provide a significant return on investment. Many franchise owners want to start with a simple Step One: investing in a single unit of a single franchise. For those who wish to pursue compound interests, though, there are two major models: the multi-unit model and the area development model.

Multi-Unit Model: When you delve into franchises one at a time, you invest in a single XYZ franchise and pay a single franchise fee—we’ll work with $50,000 as an example. You might open your XYZ franchise location eight months after signing the franchise agreement. When that business is stable twelve months later, you might go back to the franchisor and request a second XYZ franchise.

There are two potential disadvantages to investing one-at-a-time if your long-term goal in owning multiple units. First, in most cases, you’ll have to pay another full franchise fee for a second location. In this example you would pay another $50,000. Second, assuming you invested in a growing franchise concept, the best locations in your area may be sold by the time you’re ready to double down.

In the multi-unit investment model, you invest up front for the rights to open multiple locations in strategic territories within a defined time period—but not necessarily right away. This is also known as a franchise development schedule.

The strategic investment strategy can be applied to service-based franchise concepts as well as facility-based models. Instead of investing in a small territory and hoping you can secure additional territory in the future, you can invest in a large territory up front, gaining the ability to scale the business to your desired level down the line—and protecting desirable locations.

There are three main benefits to signing a multi-unit franchise agreement. First, if you are investing in multiple franchise units up front, the franchisor will likely give you a discount on franchise fees for the additional units. For example, if the XYZ franchise fee for the first unit was $50,000, the second unit franchise fee may be $30,000 and the third may be $20,000. So instead of paying $100,000 in franchise fees for two franchise units purchased individually, with the multi-unit investment strategy you would acquire three. Second, the strategy allows you to protect territory for planned expansion. Third, in the long run, with a multi-unit approach, you leverage your advertising and back-office support across multiple locations, making your marketing and administrative dollars go farther.

Area Development/Master Franchise Model: The second major strategic ownership approach is area development. In this model—sometimes called a master franchise—the franchisee buys the rights to a large geographic area. For example, you may buy the rights to develop a franchise concept for the state of Illinois. An area developer or master franchisee works with the franchisor to find franchisees and help them set up new businesses.

As an area developer, you are essentially working as an independent agent of the franchisor, helping that company expand while building your own business. You also take some of the responsibility for training and developing the new franchisees within your territory.

Unlike most single franchise outlet investors, area development franchisees generate revenue in multiple ways. First, when they help place franchisees, they receive a portion of the upfront franchise fee. For example, if the franchise fee is $30,000, the area developer payout share might be half. Second, when the new franchisee is launched, the area developer gets a portion of the franchisee’s monthly royalty payment to the franchisor. Third, many area developers have the right to open their own operating franchise units within their territories to generate additional revenues and cash flow.

Area development is not for the faint of heart; this approach tends to require large capital investments, and the strategy may take a long while to grow prosperous. Good area development franchise opportunities are also hard to find. The advantage of building your business this way, though, is that in the long run, you will be paid for other people’s work. You can create a steady revenue stream without direct responsibility for day-to-day operations.

Ready to HIRE YOURSELF? I’ve created a free quick quiz to help you assess the best franchise structure for you. If you follow this link, you can get started right now.

QUIZ: Choosing the Best Franchise Structure for You

 

Topics: Franchise, entrepreneurship