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Questions About Becoming A Successful Franchisor and Also Wealth Creation Through It

WheelsRCool

Contributor
Aug 12, 2007
447
51
25
Hey all, well I have read that becoming a franchisor can be a good way to become wealthy, and I really love franchising, but I have some questions regarding it.

First off, I'm just wondering, but wouldn't franchising still take some time to build up wealth? The reason I ask is because, like, think of it like this: You start up a retail store and it makes around, I'm just making up numbers, $500,000 a year in revenue and also is very profitable. You decide to open up a second one and it is profitable too, with revenues at around $500,000.

So then you decide to franchise it.

Now the average franchise royalty fee from the franchisees is about 6% of revenues, so 6% of $500,000 would be $30,000. And let's say the required startup money required for a franchisee to start up a franchise from you is $100,000.

Now let's say you take around five years to build up to 200 franchisees. Well that means 200 * $100,000 over five years, which is $20 million over a period of five years. In addition to that, at your fifth year, assuming all 200 franchises are in operation, you will be getting approximately $6 million per year from the franchisees ($30,000 * 200).
Well I mean, 200 franchises is a lot for the average franchisor from my understanding, and if your franchise company has gotten $20 million for franchising startup fees, well I mean you can't just do as you please with that money. There are laws, you must reveal to the franchisees exacly how that money will be spent. And then the $6 million in royalty fees each year, well I mean again, you can't just do anything with that, I think there are laws regarding how that is spent too, regarding marketing programs, improvements in the franchise system, etc...so I mean, how exactly does one get wealthy from franchising? It seems that after all that, unless you can get up to at least 1000 franchises, you aren't going to be making much (1000 franchises * $30000 = $30 million/year in revenues, I think you could pay yourself nice from that).

Now I understand one could sell their franchise after that, but from my understanding, on average, business sell for about three times their annual revenues, so if you 200 franchises bring in $6 million a year, it would sell for $18 million?

I have read about a lot of recent startup franchises though and most of the fairly good ones seem to take around seven years to get to 200 franchises.

Now my other questions regard financing. I have read that obviously you want at least one, and preferably two or even three, company-owned units already in operation and profitable in different areas to show potential investors or loan people that this is a potentially successful business concept.

What confuses me is this: If you are FRANCHISING it, why would you need investors? Isn't the idea of franchising to be an inexpensive way to expand your business? With a chain, I could see investors being needed to help the company have money to open up additional units, but if you are doing mostly or all franchising (many companies do a combo franchising/chain) why would you need investors? Wouldn't you only need around $100,000 to $200,000 to franchise, and then basically you are in the "business of selling businesses."

So technically to start a franchise, would you just need say a loan to start up the initial business, then you'd use the money from it to open another operation, and then save up a few hundred grande and franchise, and then the franchising itself takes care of the expansion? You shouldn't need investor capital?

I have about five franchise ideas, in markets I really love. Two are already being done and the one is highly successful (the other just started), and I am just dying to get in on the market, they are a real example of, "Do the same thing as the competitors, only do it better!" I really love these markets though and I want to jump in too, but I don't have the $$$ right now, so it is really murdering me. I have to build up the money first.

Hopefully I'd have four to five franchises that would add up to 1000 units at least for the whole overall company and then I could pay myself a lot out of them, hopefully one would get toe 1000 units itself and the others could add another 1000 :D
 

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Z5 FILMS

Contributor
Aug 13, 2007
462
75
48
The Woodlands, TX
Re: Questions About Becoming A Successful Franchisor and Also Wealth Creation Through

So technically to start a franchise, would you just need say a loan to start up the initial business, then you'd use the money from it to open another operation, and then save up a few hundred grande and franchise, and then the franchising itself takes care of the expansion? You shouldn't need investor capital?

I have about five franchise ideas, in markets I really love. Two are already being done and the one is highly successful (the other just started), and I am just dying to get in on the market, they are a real example of, "Do the same thing as the competitors, only do it better!" I really love these markets though and I want to jump in too, but I don't have the $$$ right now, so it is really murdering me. I have to build up the money first.

Hopefully I'd have four to five franchises that would add up to 1000 units at least for the whole overall company and then I could pay myself a lot out of them, hopefully one would get toe 1000 units itself and the others could add another 1000 :D

Not so fast...

Because unless you're lucky your business is not going to make money for a couple years. That's why they usually go out of business in the first couple years.

Brick & Mortar businesses have high operating expenses and slim margins normally. You're probably going to have to grind out a profit. This takes time.

On top of that, you're going to need cashflow to tread water long enough to survive. Do you have this money?

And if it does make money, it's probably not going to be a killing. But it will be profitable. So unless you want to wait and save up for 10 years before you can open a second location, you're going to need to get some money from somewhere. Loan, investors or whatever..


I'm not saying it's not possible that you could open up a ice cream store and it's a hit right from the start, you make tons of cash, and quickly open a second one. Possible? Yes. Likely? No.

Hope for the best, plan for the worst.
 
OP
OP
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WheelsRCool

Contributor
Aug 12, 2007
447
51
25
Re: Questions About Becoming A Successful Franchisor and Also Wealth Creation Through

Yeah, stupid me, I forgot about that, yeah it takes at least a year usually before the store is profitable, oftentimes more. However, I have read of franchises that startup and then start franchising after one to two years, so I'm sure it's possible.

Regardless though, you'd probably just need a loan of some type still, I doubt any heavy venture capital backing.

Franchising really boomed when the internet got popular because the ability for franchisors to market widespread became so much cheaper.

I will do it somehow though! I also have a chain of stores planned too, and longterm-wise, I intend to start a successful airline and hotel chain too :)
 

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