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Let's talk about franchising

AgainstAllOdds

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Recently, I started looking into the world of franchising and gathering as much info as I could.

Why?

At first because it's something that I wanted to potentially structure my business for in the future. My mindset was that franchises are proven money making systems. Their value is immense. That to "franchise", you have to have something amazing like McDonald's. My goal for my research was to learn how to brand a tiny bit closer to McDonald's.

However, after looking into it for a bit, I started getting disappointed with what's out there. Most of the franchises that exist are not money-making systems, but high paying CD's, high paying jobs, or often times slavery disguised as an opportunity.

Take for example these charts that I found:

28790

28791
Link: https://www.forbes.com/sites/sagewo...-industries-are-most-profitable/#6d73ca325b6d.

Car dealers make under 2% profit.
Restaurants: under 4%.
Gas stations/convenience stores: 2.7%.

Now factor in the royalty rates.

Car dealers: 2-10% typically of gross sales.
Restaurants: 5-6%
Gas stations/convenience stores: 3-7.5%

In most of these scenarios, what you have isn't an income stream, but another form of voluntary high-paid slavery. The franchisee isn't the one that's making the money, but the franchisor.

So you're telling me if I get a Circle K, put up all the investment capital, pay you a franchise fee, work my a$$ off for 100 hours a week to get it going, then you'll come in and take 5-10% with the ad fees, whereas I only get 3%? Go F*ck yourself.

In what world is that acceptable? Turns out in ours.

McDonald's

Let's hop to McDonald's.

How much do you think the average McDonald's makes a year?

The investment cost is typically $1,000,000 to $2,200,000.

How much do you think you'd make on $1M to $2.2M?

Turns out .... $150k a year on average. Here's what it costs to franchise a McDonald's store

Here's a breakdown of one store's income.

28792

F*ck.

And you know how much McDonald's makes on average per store?

$156,491.877

28793

Just do the math and divide up the net income by the number of stores.

For every $1 you make, they make $1.

Owning one of their franchises isn't owning a "business", but a high paying CD that comes with more risk attached to it.

It's ridiculous and upsetting.



The Mindset shift

After researching all of this, I had a bit of a mindset shift. @Walter Hay has been pushing his franchising book on the forum, and mentioned that the sales were slower than the other books. My theory was that it's because most people don't think they have something franchise-able. However, after doing my research, the conclusion I came to is that this form of thinking is a limited belief and nothing short of bullshit.

Do you know how much income the average franchise brings in?

28794

According to this article, these amounts. Some of those amounts are respectable, however, they are by no means impressive.

There's probably 100+ of us on this forum that have some sort of business that 1) makes more than that; and 2) can be taught to someone in a different geographic location.

For example, in my business, with a $100k to $250k capital investment, I'm confident that someone with the time and hustle can turn that into a $100k income at a minimum, and as high as a $1M+ in bigger markets like New York City.


My conclusion

Franchising isn't just for the McDonald's, Subways, etc. The returns that they're giving people are absolute dogshit. Franchising is for anyone and everyone that has a system that is scalable and can provide a good source of income for the franchisee.

If you have a business that makes $100k+, can be taught to someone else, and they can replicate it for low 6-figures, then you have something that is franchise-able.


What do you guys think?
 
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csalvato

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My understanding is that the big company franchise returns are lower because of predictability.

For example, if you buy a franchise for a lesser-known-newer-franchise like Play Street Museum, then you can expect a higher profit margin because it's not predictable that you will succeed, and you're getting in on the ground floor.

With McDonalds, it's almost a sure thing. They give you everything you need to know to generate a modest but steady return. Yes, it's only 4-8%, but it's going to succeed pretty reliably.

Many people are very happy to sacrifice higher profits for predictability.

EDIT: Forgot to add, your main job in selling early-stage franchises would seem to be convincing them it will actually work. If someone approached me with a franchise and their business was only making $100k/year, my two big objections would be:

1. It wouldn't work (i.e. they were a fluke)
2. I didn't need them.
 
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broswoodwork

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EDIT: Forgot to add, your main job in selling early-stage franchises would seem to be convincing them it will actually work. If someone approached me with a franchise and their business was only making $100k/year, my two big objections would be:

1. It wouldn't work (i.e. they were a fluke)
2. I didn't need them.
I've thought about this myself for down the road once I get everything humming along the way I want.

I was wondering if it may make sense to set up the first few initial franchisees at low or no cost (other than the ongoing percentage of sales) to eliminate their risk and overcome those objections, and leverage their success to sell systems with upfront fees. What I do is essentially a service that can be slammed together without a huge capital outlay.

I have no idea if that's remotely feasible though.
 
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Lucky Lu

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I can give my humble take on the matter having produced the franchise contracts for a few of them in South America.
You are on point on the analysis, no doubt about it.
Franchises are a good business on one side only, the franchisee is just working for the brand most of the time, on a contingency salary and assuming all the risk (or most of it)
I have done all, from big ones to a very small brewery that had only one successful location and despite my objections to the owners (one of them a dear friend) advising that it was too early to franchise, wanted to sell the first one.
Most of the work on the not so famous ones was to build ironclad contracts created mostly to avoid replication of the model by the franchisee taking down the sign and setting up a new one. (When the name is not strong, replication is fairly easy once acquired the know how).
If we succeed doing that, the other is to protect the other sources of income besides the franchise fees. (Those could be the portion of the revenue calculated as the royalties or the most interesting one for regional franchises which is the product supply).
So, using the example of the brewery, the most interesting part was to solidify the supplier relationship forcing the franchisee to only buy and sell the brand products (beer and food items), setting up control mechanisms in order to impede them to sell third party or even own ones.
Of course, a too early franchise operation is deemed to fail, (from the legal stand point, I don´t have the entrepreneurial experience first hand) unless what they do is proprietary and subject to IP protection. Otherwise there is nothing of value other than the know how on the process that are not hard to acquire or figure out.
If the timing is right, and the concept has been proven or the product is popular enough, could be a good and profitable way to go, mostly having hands and arms growing the brand on their own effort and risk. If you can constitute in provider of products, machinery or paid systems your almost passive profit could be potentially assured. (At least on paper)

Your numbers are mostly correct though. Great Job.
 

BellaPippin

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It even sounds like a higher scale, much higher risk/effort Uber lol

Originally my product idea was that I could make the homeless centers self-sustainable enough for people to want to buy the franchise. If the franchisee made money they would buy, thus also building more and more centers where homeless people can shower. That said, I haven't found the way to make it profitable to them yet, because a friend of mine that has set up several small businesses told me having a brick and mortar storefront a-la bed and bath works and the showers in the back wouldn't barely make them any money. I'm not sure my product can do that. But it's a puzzle I have fun trying to solve.

Also fun fact: I read somewhere once (might have been Rich Dad Poor Dad) that the real money McDonalds makes isn't from the stores, it's from the real estate their stores are on. I forgot the whole explanation so that's about how far I can go sorry... haha

Fun Fact 2: My aunt bought a men's underwear/clothes/shirts franchise called Arthur in France as an opportunity arises. I mean, she enjoys working her own store, but like you say her
margin might not be that awesome. Not sure if it is the same in France.
 
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PizzaOnTheRoof

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It even sounds like a higher scale, much higher risk/effort Uber lol

Originally my product idea was that I could make the homeless centers self-sustainable enough for people to want to buy the franchise. If the franchisee made money they would buy, thus also building more and more centers where homeless people can shower. That said, I haven't found the way to make it profitable to them yet, because a friend of mine that has set up several small businesses told me having a brick and mortar storefront a-la bed and bath works and the showers in the back wouldn't barely make them any money. I'm not sure my product can do that. But it's a puzzle I have fun trying to solve.

Also fun fact: I read somewhere once (might have been Rich Dad Poor Dad) that the real money McDonalds makes isn't from the stores, it's from the real estate their stores are on. I forgot the whole explanation so that's about how far I can go sorry... haha

Fun Fact 2: My aunt bought a men's underwear/clothes/shirts franchise called Arthur in France as an opportunity arises. I mean, she enjoys working her own store, but like you say her
margin might not be that awesome. Not sure if it is the same in France.
Yep. Basically McDs Corp buys the land for the franchise and then rents it out to the franchisee, on top of the royalty.

The store could be losing money and corporate will still collect that rent check as it’s factored into the base running costs.

McDs Corp gets paid before the franchisee.
 

Icecreamchild

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Recently, I started looking into the world of franchising and gathering as much info as I could.

Why?

At first because it's something that I wanted to potentially structure my business for in the future. My mindset was that franchises are proven money making systems. Their value is immense. That to "franchise", you have to have something amazing like McDonald's. My goal for my research was to learn how to brand a tiny bit closer to McDonald's.

However, after looking into it for a bit, I started getting disappointed with what's out there. Most of the franchises that exist are not money-making systems, but high paying CD's, high paying jobs, or often times slavery disguised as an opportunity.

Take for example these charts that I found:

View attachment 28790

View attachment 28791
Link: https://www.forbes.com/sites/sagewo...-industries-are-most-profitable/#6d73ca325b6d.

Car dealers make under 2% profit.
Restaurants: under 4%.
Gas stations/convenience stores: 2.7%.

Now factor in the royalty rates.

Car dealers: 2-10% typically of gross sales.
Restaurants: 5-6%
Gas stations/convenience stores: 3-7.5%

In most of these scenarios, what you have isn't an income stream, but another form of voluntary high-paid slavery. The franchisee isn't the one that's making the money, but the franchisor.

So you're telling me if I get a Circle K, put up all the investment capital, pay you a franchise fee, work my a$$ off for 100 hours a week to get it going, then you'll come in and take 5-10% with the ad fees, whereas I only get 3%? Go F*ck yourself.

In what world is that acceptable? Turns out in ours.

McDonald's

Let's hop to McDonald's.

How much do you think the average McDonald's makes a year?

The investment cost is typically $1,000,000 to $2,200,000.

How much do you think you'd make on $1M to $2.2M?

Turns out .... $150k a year on average. Here's what it costs to franchise a McDonald's store

Here's a breakdown of one store's income.

View attachment 28792

F*ck.

And you know how much McDonald's makes on average per store?

$156,491.877

View attachment 28793

Just do the math and divide up the net income by the number of stores.

For every $1 you make, they make $1.

Owning one of their franchises isn't owning a "business", but a high paying CD that comes with more risk attached to it.

It's ridiculous and upsetting.



The Mindset shift

After researching all of this, I had a bit of a mindset shift. @Walter Hay has been pushing his franchising book on the forum, and mentioned that the sales were slower than the other books. My theory was that it's because most people don't think they have something franchise-able. However, after doing my research, the conclusion I came to is that this form of thinking is a limited belief and nothing short of bullshit.

Do you know how much income the average franchise brings in?

View attachment 28794

According to this article, these amounts. Some of those amounts are respectable, however, they are by no means impressive.

There's probably 100+ of us on this forum that have some sort of business that 1) makes more than that; and 2) can be taught to someone in a different geographic location.

For example, in my business, with a $100k to $250k capital investment, I'm confident that someone with the time and hustle can turn that into a $100k income at a minimum, and as high as a $1M+ in bigger markets like New York City.


My conclusion

Franchising isn't just for the McDonald's, Subways, etc. The returns that they're giving people are absolute dogshit. Franchising is for anyone and everyone that has a system that is scalable and can provide a good source of income for the franchisee.

If you have a business that makes $100k+, can be taught to someone else, and they can replicate it for low 6-figures, then you have something that is franchise-able.


What do you guys think?

If our business is systemized to a point where we can franchise it without losing quality, why can't we simply raise money and open our own branches instead of going to the franchise route? This is what Starbucks did.
 
Last edited:

Walter Hay

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However, after looking into it for a bit, I started getting disappointed with what's out there. Most of the franchises that exist are not money-making systems, but high paying CD's, high paying jobs, or often times slavery disguised as an opportunity.
Absolutely correct. This is why I say DON'T BUY franchises - sell them.

There is no doubt that there are some franchises that are excellent money-making systems. My franchises that I sold in four countries were just that, with only one failure that was due to the franchisee's gambling addiction, but I have seen many appalling franchises on offer.

The very worst of them are ones that are designed to fail. I don't dare name names, but beware of some low cost franchises in the fast printing business, cleaning service businesses, and ones that require the purchase of specialized equipment supplied by the franchisor.
After researching all of this, I had a bit of a mindset shift. @Walter Hay has been pushing his franchising book on the forum, and mentioned that the sales were slower than the other books. My theory was that it's because most people don't think they have something franchise-able. However, after doing my research, the conclusion I came to is that this form of thinking is a limited belief and nothing short of bullshit.
A forum member has been sitting on a goldmine for a very long time, not thinking of franchising, but has now bought my book. He could sell franchises that can replicate that goldmine many times over in the USA and Canada, and after that, he could expand to a lot of countries. I expect to see him making multi millions limited only by his vision, his energy, and in the early stages, his financial management.
I'd agree, I think any brick and mortar business system can be franchised if someone is willing to buy into it.
However, I would argue you don't necessarily even need to be able to replicate it for low six figures.
These franchises are $15K or less to start
The one I refer to above is definitely not a B&M business, and I would urge members wanting to make it big in franchising that they consider a much wider range of businesses to franchise out.

There are numerous millionaires out there who have made their money by franchising their service businesses. I don't know of any millionaires who got there by buying a service business franchise, with the possible exception of services in a professional field.

Those $15K or less franchises include some that would require a buyer to do very, very, (in fact extremely) diligent research to validate. Some of those categories could include franchises that are set up to fail. HINT: If you are buying a franchise that includes in the package a customer/client list, look at the contract in the possession of the customers/clients. How much were they quoted for each job? Does that match what the franchisor says you should charge?
I was wondering if it may make sense to set up the first few initial franchisees at low or no cost (other than the ongoing percentage of sales) to eliminate their risk and overcome those objections, and leverage their success to sell systems with upfront fees. What I do is essentially a service that can be slammed together without a huge capital outlay.

I have no idea if that's remotely feasible though.
It is common in the franchising industry for heavily discounted upfront fees to be charged for the first few sales of franchises. I would be wary of such an offer, preferring to look at businesses that have a track record. Even 12 months of verifiable high profits would be a better selling point. Ideally it is better to set up a pilot operation away from your home base, and make it work before you offer a franchise for sale.
So, using the example of the brewery, the most interesting part was to solidify the supplier relationship forcing the franchisee to only buy and sell the brand products (beer and food items), setting up control mechanisms in order to impede them to sell third party or even own ones.
This is one of the most common forms of franchising, and the buyers relinquish CONTROL. This method is used in many take-away and other franchise systems and unless done with great care can result in the FTC (in the USA) taking a great interest, often with unhappy consequences for the franchisor. If you have to make a profit out of the basic purchases by franchisees of consumables, or of goods being re-sold, the franchise is clearly not a good one. In some cases it is really a wholesale business and should not be called a franchise. Ask the FTC.

Walter
 
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PizzaOnTheRoof

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Simply put I will never own a franchise.

The lack of control and autonomy over my own business is a non negotiable dealbreaker.
 

PizzaOnTheRoof

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Absolutely correct. This is why I say DON'T BUY franchises - sell them.

There is no doubt that there are some franchises that are excellent money-making systems. My franchises that I sold in four countries were just that, with only one failure that was due to the franchisee's gambling addiction, but I have seen many appalling franchises on offer.

The very worst of them are ones that are designed to fail. I don't dare name names, but beware of some low cost franchises in the fast printing business, cleaning service businesses, and ones that require the purchase of specialized equipment supplied by the franchisor.

A forum member has been sitting on a goldmine for a very long time, not thinking of franchising, but has now bought my book. He could sell franchises that can replicate that goldmine many times over in the USA and Canada, and after that, he could expand to a lot of countries. I expect to see him making multi millions limited only by his vision, his energy, and in the early stages, his financial management.

The one I refer to above is definitely not a B&M business, and I would urge members wanting to make it big in franchising that they consider a much wider range of businesses to franchise out.

There are numerous millionaires out there who have made their money by franchising their service businesses. I don't know of any millionaires who got there by buying a service business franchise, with the possible exception of services in a professional field.

Those $15K or less franchises include some that would require a buyer to do very, very, (in fact extremely) diligent research to validate. Some of those categories could include franchises that are set up to fail. HINT: If you are buying a franchise that includes in the package a customer/client list, look at the contract in the possession of the customers/clients. How much were they quoted for each job? Does that match what the franchisor says you should charge?

It is common in the franchising industry for heavily discounted upfront fees to be charged for the first few sales of franchises. I would be wary of such an offer, preferring to look at businesses that have a track record. Even 12 months of verifiable high profits would be a better selling point. Ideally it is better to set up a pilot operation away from your home base, and make it work before you offer a franchise for sale.

This is one of the most common forms of franchising, and the buyers relinquish CONTROL. This method is used in many take-away and other franchise systems and unless done with great care can result in the FTC (in the USA) taking a great interest, often with unhappy consequences for the franchisor. If you have to make a profit out of the basic purchases by franchisees of consumables, or of goods being re-sold, the franchise is clearly not a good one. In some cases it is really a wholesale business and should not be called a franchise. Ask the FTC.

Walter
Is it possible to franchise out an internet/ location independent business?

Or would it make more sense to just scale and license out processes?
 

BellaPippin

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Is it possible to franchise out an internet/ location independent business?

Isn't that kind of like MLMs? Except they call it differently.. But the MLM creator gets the money, you get hot garbage (for selling their product)
 
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Raoul Duke

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Isn't that kind of like MLMs? Except they call it differently.. But the MLM creator gets the money, you get hot garbage (for selling their product)
Maybe? I think MLMs are known for using “down lines” and recruitment as the primary growth driver.

Now that I think about it, a franchise is really just selling access.

Access to a certain product/service in an area that otherwise wouldn’t have access to it.

Half the country doesn’t have In-N-Out Burgers available to them.

The internet can be accessed anywhere and everywhere, effectively eliminating the need for “franchises”.

I think I’ve answered my own question lol
 
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My conclusion

Franchising isn't just for the McDonald's, Subways, etc. The returns that they're giving people are absolute dogshit. Franchising is for anyone and everyone that has a system that is scalable and can provide a good source of income for the franchisee.

If you have a business that makes $100k+, can be taught to someone else, and they can replicate it for low 6-figures, then you have something that is franchise-able.


What do you guys think?

While I agree with the majority of the points you made, I don't think we can be that quick to make sweeping statements.

Not every $100k+ profitable business is suitable to be franchised. The main motivation for franchising should be to achieve scale and speed that would otherwise not be possible on your own or through OPM. Some businesses should consider corporate chaining instead of franchising.

Most product-based businesses (physical and digital) can often achieve massive scale via the internet, making franchising pointless. Some products that are B2B may not be suitable for online sales, in which case they would more likely expand via corporate chains or warehousing. Even if you run a successful B&M, it would likely make more sense to expand via corporate locations (c-chains). See Lululemon, Home Depot, Apple, and most stores in malls.

Whereas service-based and consumable businesses can be ripe for franchising when they yield high $/sq ft, are easily replicated and serve wide audiences. Think AnytimeFitness, Yogenfruz, JiffyLube, etc.
 
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I thought I'd chime in as I'm at very early stages of trying to franchise my gelato food truck biz (which reminds me, I really need to update my execution thread) so I've been obsessing on the topic as well.

From what I've seen a typical franchisee isn't as much a "typical" entrepreneur and in many ways is happy to buy into a high paying job rather than go through the suffering of trying to start your own business. The safety net of an established product, process & brand appeals to a "manager" type person.

I remember reading somewhere that there was a huge influx of people in the market for franchises after the 2008 economic crash as they ofter were out of a job, but either had some form of severance package or equity in the house that they used to buy into a franchise.

In the UK, I heard that it is quite common for Asian families (eg. Indian, Pakistani, etc.) to buy into multiple franchises and operate them as families. It sort of makes sense, when you consider the huge failure rates of new business anyway. Obviously the reward is a lot lower, but nothing to stop people reinvesting money into other units of the same franchise or different franchises.

Lastly, there is something to be said about seeing first hand how a turn-key business operates if you ever wanted to try and start your own. With that said, I'm still trying to get into the business of selling franchises rather than buying them.

From the one franchising exhibition I went to, I saw a real mix of what franchise options are out there and for a lot of them there seemed to be zero differentiation or USP and it just seemed like they were selling a hard life to people.
 

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I've thought about franchising.

I've decided not to sell my products through B&M retailers. Instead, I want to have my own B&M storefront one day. I need to spend a few years fleshing out a full line of custom products that would justify this. But once I prove the concept with one location, franchising could be an option to expand.

I don't fully understand the benefits of franchising out, vs. expanding as a corporate-owned chained, as @inputchip mentioned.

Franchising perhaps would be faster scale, and would transfer a lot of the financial risk to the franchiser. You also get a manager with skin in the game. Whereas corporate chain would be higher risk, but keeping more of the profit.
 
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It looks like the only way to really make money as a franchise owner is to own multiple franchises.

i.e like 10 seven eleven making $100k/year each.

But, like you guys hinted at and MJ taught us in his book; we should be the franchisor, not the franchisee.

I want to throw out a 3rd option; what about buying a turnkey business, and not just a normal brick and mortar business, but a wholesale/distribution/manufacturing turnkey business that sells units in the thousands to other businesses for retail/end consumers.

Another lesson MJ taught us was that we should own businesses that are up the value chain i.e manufacturing/distribution/wholesale businesses because then you're working with a business model that has "scale" and "magnitude" built into it.

Supply-Chain-Example.png

Another benefit of going down the turnkey route instead of franchise route, is that you won't have to pay a on-going licensing/franchise fee.

Some interesting turnkey projects I came across are:

Pharmaceutical turnkey business

Flooring manufacturing turnkey business

Tire recycling turnkey business

Industrial coffee roasting turnkey business
 

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It looks like the only way to really make money as a franchise owner is to own multiple franchises.

i.e like 10 seven eleven making $100k/year each.

But, like you guys hinted at and MJ taught us in his book; we should be the franchisor, not the franchisee.

I want to throw out a 3rd option; what about buying a turnkey business, and not just a normal brick and mortar business, but a wholesale/distribution/manufacturing turnkey business that sells units in the thousands to other businesses for retail/end consumers.

Another lesson MJ taught us was that we should own businesses that are up the value chain i.e manufacturing/distribution/wholesale businesses because then you're working with a business model that has "scale" and "magnitude" built into it.

Supply-Chain-Example.png

Another benefit of going down the turnkey route instead of franchise route, is that you won't have to pay a on-going licensing/franchise fee.

Some interesting turnkey projects I came across are:

Pharmaceutical turnkey business

Flooring manufacturing turnkey business

Tire recycling turnkey business

Industrial coffee roasting turnkey business

The links you provided are not "turnkey".

"Turnkey" implies that all you have to do is turn the key and your doors are open for business. With the Alibaba links, the process works as follows:

1) Identify a location to run your business.
2) Rent that location.
3) Hire the factory from Alibaba to make your machinery.
4) Get the appropriate permits to install that machinery.
5) Get the appropriate electricity rewired for your facility for that machinery - this can typically cost $100k+.
6) Import the machinery.
7) Get Visa's for the Chinese factory employees.
8) Fly in the crew of Chinese and pay them for 2 weeks to install the machines.
9) Do some test runs to make sure the machinery works.
10) If you haven't already, line up suppliers for all of the raw materials that will be going into your machines.
11) Import those raw materials so you have enough stock for operations.
12) Run a marketing/sales campaign to bring on new customers.
13) Onboard those new customers.
14) Get started.

A turnkey business skips steps 1-13. What you're referring to in most of your links is a manufacturing business. And there's tremendous potential, but it's not "turnkey" following the links that you provided.

That's why a lot of people like franchises - because a lot of them actually are turnkey. You buy a convenience store franchise, invest in all the inventory, the company sets it up for you, and then you just open the door hoping people come. That's turnkey, but not nowhere near as profitable as taking on the uncertainty yourself.
 

AgainstAllOdds

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I don't fully understand the benefits of franchising out, vs. expanding as a corporate-owned chained, as @inputchip mentioned.

The biggest is leverage of capital, and leverage of human resources.

With a franchise, you're not putting up your own capital. You're using the franchisee's capital to open a location.

Next, you're getting a manager with the deal.

Let's say you run a small specialized business. To open a new location, you need $100k and to hire a manager for $60k per year. Your personal time to manage that manager is valued at $20k, so your real cost for that employee is $80k per year to keep the small business operational.

If you open the location, it brings in let's says $300k in revenue and $110k gross profit per year. So... $110k - 80k for the employee = $30k that you're making per year if you decide to open that location. You have to drop $100,000 upfront though for that 30% return, take on a lot of risk and uncertainty.

In the franchise model, let's say you charge a $15k franchise fee, $100k startup costs, and 7.5% of the revenue.

In that case, with a new franchisee you get $15k upfront, and a "cashflow free" manager. Let's say the franchisee is the exact same person as the manager in the last scenario. He has $15k saved up, and takes out $100k loan from family to get started on the rest.

Because it's his business, he works his a$$ off and increases the revenue from $300k to $400k, for a gross of $150k. He has to pay you your royalty of 7.5%, so $30k. In this scenario, he's left with $120k, and you're left with the same amount - $30k per year without any of the financial or HR risk.

Scenario 1:
@amp0193: makes $30,000 per year after tying up $100,000. If his manager quits, or decides to break off and start his own business, then everything stops and goes to shit. He's also responsible for all the fixed costs, rent, etc.
Manager: Makes $60,000 per year as an employee.

Scenario 2:
@amp0193: Makes $30,000 per year without tying up any capital and without having to deal with managerial turnover. Also gets $15,000 upfront as a thank you.
Manager: Makes $120,000 a year as a franchisee.

Both individuals win in the second scenario.

Meanwhile, @amp0193 can decide that he has the capital to open up a different location, so he does concurrently with the franchise, and in one year opens a new franchise location, and a new corporate-owned location, allowing him to open 2 locations in the same time that it would have take him to open just one.
 
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AgainstAllOdds

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My understanding is that the big company franchise returns are lower because of predictability.

  • For a lot of the food franchises, you need to have experience already running a restaurant or chain of restaurants.
  • Next, you need a high net worth, for McDonald's around $1M+
  • Then, you have to go through 9-18 months of training before you're ready to launch.
The reason a lot of the income is predictable is because the selection process allows for it to be.

That would be the equivalent of me telling @CareCPA that he can open a bookkeeping franchise since he has the CPA experience. In a lot of these scenarios the predictability is a factor of picking the right franchisee.

Probably 50%+ of the franchisees would fail by themselves. However, there would be a significant percentage of those that would have succeeded on their own.
 

100k

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The links you provided are not "turnkey".

"Turnkey" implies that all you have to do is turn the key and your doors are open for business. With the Alibaba links, the process works as follows:

1) Identify a location to run your business.
2) Rent that location.
3) Hire the factory from Alibaba to make your machinery.
4) Get the appropriate permits to install that machinery.
5) Get the appropriate electricity rewired for your facility for that machinery - this can typically cost $100k+.
6) Import the machinery.
7) Get Visa's for the Chinese factory employees.
8) Fly in the crew of Chinese and pay them for 2 weeks to install the machines.
9) Do some test runs to make sure the machinery works.
10) If you haven't already, line up suppliers for all of the raw materials that will be going into your machines.
11) Import those raw materials so you have enough stock for operations.
12) Run a marketing/sales campaign to bring on new customers.
13) Onboard those new customers.
14) Get started.

A turnkey business skips steps 1-13. What you're referring to in most of your links is a manufacturing business. And there's tremendous potential, but it's not "turnkey" following the links that you provided.

That's why a lot of people like franchises - because a lot of them actually are turnkey. You buy a convenience store franchise, invest in all the inventory, the company sets it up for you, and then you just open the door hoping people come. That's turnkey, but not nowhere near as profitable as taking on the uncertainty yourself.

Thanks for the insight.

Where would you go to find a true turnkey project provider?

Those extra steps means there's a higher barrier to entry - which is a positive, as there will be less competition. I still believe you there are some providers that offer turnkey projects, where they take care of everything, and just hand over the keys when things are ready.

Its just a matter of finding them.
 
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Just my two cents... I once heard about a Burger King franchise that owned about (80!) locations. The people that made good money with franchises seem to alway own atleast 3-5+. If you can hire good managers and get the best locations for your franchises it might work but only if you have a lot of franchises.
I also heard about people specializing in buying bad running franchises from burned out owners for a lot less than the intial investment.

Is it fastlane? I don't know but like with a lot of things with the right skills and execution a lot of not ultra fastlane things can give you fastlane money.
 
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SEBASTlAN

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Yeah, franchising obviously violates Control.

Having said that, I heard Chik-fil-A only charges $10K franchise fee and makes way more per store than what a McDonalds makes.
 

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  • For a lot of the food franchises, you need to have experience already running a restaurant or chain of restaurants.
  • Next, you need a high net worth, for McDonald's around $1M+
  • Then, you have to go through 9-18 months of training before you're ready to launch.
The reason a lot of the income is predictable is because the selection process allows for it to be.

That would be the equivalent of me telling @CareCPA that he can open a bookkeeping franchise since he has the CPA experience. In a lot of these scenarios the predictability is a factor of picking the right franchisee.

Probably 50%+ of the franchisees would fail by themselves. However, there would be a significant percentage of those that would have succeeded on their own.

You're doing a lot more research on this than I ever had, and I admit I'm out of my wheelhouse, for sure.

This seems to clash with my understanding that a lot of people who own the big-name franchises tend to have come upon a TON of money from other, non-business-focused means. People like pro-athletes, not restauranteurs.


[Shaq] is the joint owner of 155 Five Guys Burgers restaurants, 17 Auntie Annie's Pretzels restaurants, 150 car washes, 40 24-hour fitness centers, a shopping center, a movie theater, and several Las Vegas nightclubs


One of the world’s most famous and marketable athletes has been along for the ride from almost Day 1. Today, LeBron James is all-in on Blaze as an investor, franchisee and paid endorser of the company. “LeBron helps us punch in terms of our brand awareness well above our weight,” says Blaze Pizza CEO Jim Mizes. Witness a recent Harris Poll where Blaze finished second among the best pizza chain brands, behind Papa John’s and ahead of Pizza Hut, which has more than 7,000 locations in the U.S.

This makes sense to me. For someone who knows little about business, but has a ton of cash, a franchise seems like a fantastic option. They see their other non-business-focused friends blow their cash on Vegas parties and blow, and they say "shit, dude, I just need a turnkey system to make it work".

So 4-8% on a suite of franchises makes sense as a way to diversify a portfolio when you're loaded. And these people want certainty that the franchise will work to preserve and steadily grow their net worth – they don't need to hit it big.

I think the other market for franchisees is older, retired people. Same boat, just the amount of money they have is a lot less. Of the smaller franchises that I see open up in my town (e.g. Play Street Museum) who I have had a chat with the franchisee, they tended to be older people who are looking for a way to spend their retirement, and don't want to be guessing at how business works. They simply don't have the time for it. They also seem to care less about hitting it big, and more about preserving their retirement nest-egg while keeping busy.

I wouldn't imagine there's a big market for franchisees if your business is only at $100k/year in revenue because of who I see buying franchises.

Like I said, you're looking into this a lot more than me. @Walter Hay would know better, of course, and I understand my research here is very very limited. Hopefully you can let me know where I'm wrong!
 

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You're doing a lot more research on this than I ever had, and I admit I'm out of my wheelhouse, for sure.

This seems to clash with my understanding that a lot of people who own the big-name franchises tend to have come upon a TON of money from other, non-business-focused means. People like pro-athletes, not restauranteurs.







This makes sense to me. For someone who knows little about business, but has a ton of cash, a franchise seems like a fantastic option. They see their other non-business-focused friends blow their cash on Vegas parties and blow, and they say "shit, dude, I just need a turnkey system to make it work".

So 4-8% on a suite of franchises makes sense as a way to diversify a portfolio when you're loaded. And these people want certainty that the franchise will work to preserve and steadily grow their net worth – they don't need to hit it big.

I think the other market for franchisees is older, retired people. Same boat, just the amount of money they have is a lot less. Of the smaller franchises that I see open up in my town (e.g. Play Street Museum) who I have had a chat with the franchisee, they tended to be older people who are looking for a way to spend their retirement, and don't want to be guessing at how business works. They simply don't have the time for it. They also seem to care less about hitting it big, and more about preserving their retirement nest-egg while keeping busy.

I wouldn't imagine there's a big market for franchisees if your business is only at $100k/year in revenue because of who I see buying franchises.

Like I said, you're looking into this a lot more than me. @Walter Hay would know better, of course, and I understand my research here is very very limited. Hopefully you can let me know where I'm wrong!

It's important to note that a lot of these athletes/celebrities are given franchises at terms that are not available to the general public.

LeBron is an endorser of Blaze. Same way that Peyton Manning was the face of Papa John's for awhile. However, Manning ended up selling the second he could: Peyton Manning sells his Papa John's franchises before split with NFL.

The franchise is a form of endorsement compensation: "We can't give you the money you want, but we can give you 30 franchises at no cost that you can later resell."


Magic Johnson is another example. He's one of the few (only one I've ever heard of) to ever own a Starbucks franchise. He got those franchises because Howard Schultz wanted to push into the African American communities and tap into that market. Shaq was approached first but turned the deal down because "black people don't drink coffee" (his words).

My point is - Starbucks, a brand that never franchises, made exceptions for athletes in order to grow their brand.

When we see athletes owning franchises, it's not always because it's a good investment. It's often times because they received a much better deal than we ever would.

With all that said, you're 100% right. Owning a franchise is a lot safer bet for these rich people without business skills than tossing their money on the stock market or anything else.
 
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Where would you go to find a true turnkey project provider?

Start by searching on BizBuySell for the keyword: Search Businesses For Sale - BizBuySell.com.

Turnkey businesses are good for wealth preservation.

Not good for wealth growth.

One of the greatest pieces of advice my mentor ever gave me: "The easiest way to get rich is to buy an existing business, make it a little bit bigger, and sell it. Then do that again."

You can't necessarily do that with most turnkey solutions.
 

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THE DIFFERENCE BETWEEN BUYING A FRANCHISE AND SELLING FRANCHISES!
I am disappointed to see how many have failed to get the point, so I want to make it perfectly clear.......

To me, it is a no-brainer.......
DON'T BUY A FRANCHISE ---- SELL FRANCHISES OF YOUR SUCCESSFUL BUSINESS.

If you buy a franchise you lose control. Even if you buy multiple franchises you are still under the control of the franchisor.

If you sell a franchise you retain control. A properly constructed franchise agreement gives total control to the franchisor.

Why not open branches? There are two main reasons.
1. You have to deal with employees. Don't pay employees. Have franchisees pay you to sell your product or service for you.
2. You have to finance the growth. But you don't have to borrow in order to scale, instead let your franchisees' licence fees provide capital for you.

For more on the subject see: Rapid Scaling a business by franchising This thread includes a section on "How To Decide If A Business Is Suitable For Franchising".

Walter
 
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