If it isn’t employee management, it's malfunctioning equipment! Here's our latest challenge.

Our store manager called this morning to say that our bread baking oven wasn't operating correctly. Our oven is our source of income, since we bake our bread fresh every day, and it's difficult to make sandwiches without bread. Faced with losing revenue for the day, we were caught in a dilemma: do we call the local restaurant equipment repair company whom we despise because of their horrid attitude coupled with their inability to do a good job, or do we call in the restaurant repair company from 40 miles away who will tack on an extra $100 for the trip? We'd love to buy a brand new oven, but it costs about $4,000, and we just don't make enough money to be able to afford it right now. In the end, the oven started working again just in time to bake bread for lunch, but we're still going to have the remote service company come out and do a preventive service tomorrow. Ouch, probably another $500 "investment".

This malfunction got me to thinking about something I wish we had done differently when we bought this existing restaurant. We knew some of the equipment was old when we bought the store. In retrospect, we should have negotiated replacing the oven, and the Air Conditioning, at the time of closing. We financed the acquisition, and we could have added this in, or ideally negotiated the price down to include the cost of replacing the equipment.

The lesson: when buying an existing restaurant, negotiate replacing older equipment as part of the deal. Otherwise, you'll be getting those dreaded calls from your store that cause your stomach to move into your throat!

You must clearly understand your motivation in buying a franchise. Are you tired of working for someone else, or angry because you are not advancing as fast as you think you deserve? Are you concerned that the field you are working in is at risk, and that you could be a victim? Would you be content working long hours in a business that you owned, and where the future is somewhat more secure? If so, you are essentially looking to buy a job. This is probably the most common reality of many franchises, and can be a very successful strategy.

Most franchises are essentially “buying a job” with an average income range of $30,000 - $60,000 per year if 1) there is no debt; and 2) the franchisee works long hours in the business.

On the other hand, you may be seeking to create significant wealth, in the multi-million dollar net worth category. To accomplish this in the franchise world, you will need to become a multi-unit owner or Area Developer. This will require a higher level of management skill, more capital, and investing in a franchise that encourages its successful franchisees to own multiple units. Often, this is a rapidly growing franchise, or an established franchise system with reasonably high density of locations.

But be aware of this reality: even the high-income, multi-unit franchisees generally put in 60-80 hours per week in their business. This is not passive income.

Finally, you may be seeking to make money by buying under-performing locations, fixing them up, and flipping them.
My strong recommendation is to exercise this strategy with privately held independent companies, generally with sales starting in the $1-2MM annual sales.

The IFA states that roughly 70% of operating franchises are food establishments. There is an unfortunate perception in the marketplace that employees in these establishments are "unskilled" laborers who will gladly work at minimum wage and that there is a plentiful supply of such labor.

As a multi-unit QSR (Quick Service Restaurant) franchisee, I can report that the reality is significantly different. Most retail concepts require that their employees can do all, or at least most, of the jobs required in the establishment. This means not only cleaning and washing dishes, but also food preparation, cashiering, and serving customers. Each of these areas requires thorough attention to detail, reliability, teamwork, diligent work effort, a ready smile, good language skills, a willingness to learn new skills, and good physical condition. If ANY of these characteristics are missing, your business – and you – will suffer.

Now, take a moment to think about each of these characteristics. How easy will it be to find someone to work at or near minimum-wage, who exhibits:

• Reliability
• Speed and productivity
• Willing and able to learn
• Teamwork
• Excellent customer service
• Good physical condition
• Excellent language skills

Let me ask you a question: if an individual exhibited all of these characteristics, are they really forced to work at minimum wage? If not, how much are you realistically going to pay employees to get these characteristics?

The reality is that managing employees in a very low-margin business is very challenging, because good employees can expect to find their wages increasing quickly as they prove their capability.

When considering committing time and money into a franchise, it is important to consider the business dynamics at the franchisor level. Here are some questions to research before committing to a franchise:

• How many stores does the franchisor have in its network? How many are franchisee-owned and how many are company-owned?
• How many new franchisee-owned stores have opened up in each of the last 5 years?
• How many new franchisor-owned stores have opened up in each of the last 5 years?
• How many franchisees have sold their stores, or shut down, in each of the last 5 years?
• What has been the AUV (average unit volume) for each of the last 5 years? Even better, knock off the results of the top 5-10% of stores. All franchises have super-star stores that do great volume. You’re probably not going to get one of these. Therefore, by knocking off the cream, you can get a more realistic expectation of your results.
• What has been the trend in the average ticket for each of the last 5 years?
• List the 5 closest competitors to your potential franchise. Compare your franchisor’s growth rate to the growth rate of the competitors.
• Get the franchisor to articulate their growth plans both nationally and in your area.
• Given the national and local trend knowledge you now have, is the franchisor’s growth rate expectation realistic, in your opinion?
• What significant developments have affected the franchisor in the last 3 years, such as executive personnel changes, major financing events, litigation, major change in operations, major change in marketing? Have any major changes been announced but not yet implemented?
• Is the franchise owned by a large corporation or private equity firm that has plans to “flip” the organization, and if so, can you project how that might impact your results.

These are questions that you do NOT have to research if you are buying an existing independent business, but since the franchisor controls so much of the destiny of the franchisee, it is critical to research this information prior to investing in a franchise.

I see so many articles these days related to franchising that state "research indicates…" or "statistics prove…" and yet these articles almost always fail to state the source of the research or statistics. This is important!

When an article states as a fact that "Research indicates that the vast majority of franchisees are overwhelmingly satisfied…" I want to see the source of that research. Is it a scientific study subject to peer-review? Or is it commissioned by an industry association who has polled only relatively successful franchisees? Or how about the frequent claim that investing in a franchise is far safer than owning an independent business? I want to see this scientific study that takes into account the level of churn in the ownership of franchises.

Those of us in the trenches know that the franchisor will frequently say that only x% of their locations have closed, but that this is frequently only the tip of the iceberg. How about the many franchisees who built a new location, couldn't make it profitable, and sold at a tremendous loss to a perhaps more savvy franchisee who then made the location work because they could get it at a fraction of the asset value?

Show me an independent, scientific study, subject to academic peer-review, that has used a methodology that includes the results of failed franchises, and still comes out extremely positive on the franchise model, and I'll pay you $500.