Franchisor Validation

Millennials Search for the Next Big Franchise Idea

Millennials-image(2) If you were born between 1982 and 2004, you are considered a Millennial. You’re as old as 31 and as young as 9.  Today, the number of 20 to 30 year olds aspiring to be their own boss is, perhaps, greater than ever before. If you’re in your 20’s and your looking for the next big franchise idea, you’ll need to understand the evaluation process.

How Should You Evaluate the Prospects for a New Franchise Business?

The good news is that you are only in your 20’s.  You can afford greater risk because if you were to fail, you have time to learn from the mistakes you made and start over.  Ideally, if you can succeed in your first venture, the road ahead is easier to navigate.

To be successful, you’ll need the right opportunity, the support of an experienced, successful management team and you’ll need the financial resources to sustain the business over time.  Your success depends on all three of these elements being present from day one. Further, you will need to trust the prototype and follow the plan, while staying on budget.

Who is Your Customer?

First and foremost, you need to ask yourself, do customers truly need the product or the service the franchise is offering. Customers need to believe the product they are buying or the service they’re getting is better than they could buy anywhere else.

Know your customer.  Who are they? What is their demographic? Is that demographic well populated in your community?   Identify the market before you evaluate anything else.

Evaluating the Management Team

Have you ever wondered why SUBWAY® has become so successful?  The growth in
SUBWAY® has been nothing short of phenomenal. From the beginning in 1965, Fred DeLuca honed his skills while owning and operating 16 sandwich shops in the state of Connecticut. In 1974, his co-owner and he decided to franchise SUBWAY® Restaurants.

Their record of increasing sales and profits over the last 39 years, has been instrumental in the success of franchisees all over the world.

The same can be said of Joseph DePinto, president and CEO of 7-Eleven, Inc., or Ray Kroc of McDonald’s. Ray Kroc built McDonald’s into the most successful fast food franchise in the world. If you were fortunate enough to sign on as a partner franchisee with McDonald’s, you likely became highly successful because you followed the system. His management team and their expertise made all associated with McDonald’s a success.

Find franchise partners with experience in building a franchise system. Partners that will be accountable for profit and loss throughout the system. The management team needs to have direct industry experience. There are, of course, exceptions to this rule. Scores of entrepreneurs across many industries have succeeded without having previous specific industry experience. Can an electrical engineer succeed in the fast food industry? It’s certainly possible but the odds against it are greater than you might think. Bottom line, look for management with a history of growth in whatever they have done. Sales, profits, unit growth, consistency year after year. You find that and you have found a management team you want to partner with.

Estimating Start-up Cost and Initial Investment

Franchisors will adhere to the disclosure laws. The Franchise Disclosure Document will show pro forma financials based on actual franchisee experience but they are an avearage of franchisees and a random number of franchisees. Not all franchisee numbers are disclosed. So, when evaluating start-up costs and initial investment, do not rely solely on the disclosed numbers.

Real estate and leasehold interests may be calculated separately so investor beware. Further, start-up costs and operating costs will vary from state to state. It’s going to cost you a lot more to operate your franchise in New York than in Des Moines, Iowa.

The disclosure document will also assume the franchisee is the manager. Average manager’s compensation will be included in the disclosure but franchise owners remuneration will not be dealt with.

Get your CPA involved in the negotiations to help with the balance sheet, working capital estimates, cash-flow projections and possible financing. The disclosure document is not an individual assessment of what will be required of your personal investment.

Millennials, as well as anyone interested in buying a new business or a franchise, need to take every aspect of the investment personally. It is all about your personal situation. Where you live, the franchise opportunity, the product, the service, the target market, the location, the financials. Find the answers to all the questions and partner with a team of experienced franchise professionals who know how to build a franchise system.

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