Show notes from Podcast episode 69.
Hi this is Drew from Brisbane – one of my business ideas is around beer line tap cleaning. There is a franchise in my area that I could buy into for a reasonable price. With the fees you pay they provide support and training however I have a technology background and I feel like I could do a lot of the things myself. What are your thoughts on franchises?
First of all you have a lot of questions you should ask and research you should do before you make the jump and purchase a franchise. A lot of them are great but others are designed for the franchisors to make money and the franchisees are left to figure out how to pay the fees.
There are two main pieces of the puzzle here to consider. The first is how your business looks and feels from the outside from the perspective of a customer. The second is how your business operates and looks and feels from the inside from the perspective of an employee.
Franchises hand you that structure out of the box. They hand out an appearance of professionalism to instantly put in front of customers. They also hand you a guidebook and a set of operational procedures on how the company should work from the inside. If this happens then that happens. If that happens then this happens. For any possible situation.
Lets start with #1 – the customer side of things. While the company can give you a legitimate website and software to manage your customers, getting customers is not a gift franchises can give you. They don’t just automatically get 300 calls a month heading for your phones. If you want to open up a franchise because you think its a sure fire way to get customers walking in the door you’ll be sadly mistaken. You’ll still need to do a lot of marketing and have your own sales strategy. They can likely do some of it for you but they’ll charge you a premium for that and you’ll still need to pay for the clicks or commercials or whatever you implement.
Then #2 – they hand you systems to manage your team. They have a customer relationship management system for collecting payment and sending bids. They have an organizational chart with positions and job titles. They have training materials to get employees up to speed on completing the job. They might have a call center for you to help with customer service in a centralized location. This is all important to consider and really try to figure out the value of this to you in your current situation.
The tools they give are often outdated and expensive. Before CRMs like Jobber were available for $100 per month companies were forced to spend hundreds of thousands to design their own software solutions that are now outdated and don’t do things like GPS tracking, text message customer notifications and other things.
The fees are brutal. In most cases you’re paying branding fees, equipment markups, marketing fees and franchise fees that can total 10-15% of gross sales + an upfront buy in. That sounds reasonable until you think about the bite out of your profit margin that comes out to be! 15% of gross revenue on a business that has a 30% profit margin (standard in most service businesses) would be 50% of your profits! These fees are forever as well. Operate a successful branch for 10 years and you’ll have spent millions in fees that would have otherwise went directly into your pocket or reinvested in the business.
You have very little control. There are often terms in the agreement that make you a drag along partner who is forced to follow along for any rebranding or corporate decisions that are made. Want website upgrades? Too bad. Want new updated tools? Not your call. Want to stop paying for a billboard or radio advertisements? Hush up already.
The investment and the risk are higher. If you aren’t a semi-experienced manager with capital and a plan there is some risk involved in buying a franchise. You’ll have immediate bills to pay. Fees to the franchise. Mandatory equipment purchases. Insurance. Etc. There is no taking your time and easing into it here in a low risk way.
Getting customers is the hardest part of running a business in the early days and while you might get some help here it will largely be up to you. You’ll need to execute and fund your own marketing.
Things to find out:
What kind of content marketing and SEO strategy are they implementing? Some franchises do a notoriously weak job of ranking for organic search results. I recommend hiring a freelancer to actually do an SEO audit on the company’s website before you buy a franchise. They’ll be able to tell you how good or how bad of a job they’re doing getting ranked in local search engines.
What kind of software are they using? Get a demo of Jobber and then also get a demo of whatever software your franchise provides? Does Jobber do the same things? Is it up to date?
What is the fee structure?
How much control will I have – if any?
You’ll want to see profit and loss statements from current franchisees. How are those branches performing?
There is generally no obligation to look into a franchise and begin speaking with the company about this and you can learn a lot. You’ll find out really quickly if they are working hard to sell franchises or working hard to support the franchisees and build a system that can be a win win for everyone. Unfortunately there are a lot out there that have the #1 goal of selling franchises and everything else comes second.
So the questions you should consider:
How hard would it be for you to build a website and some systems to manage your customers?
How hard would it be for you to acquire the equipment and develop simple systems to get started?
How hard would it be for you to implement a great content marketing and SEO strategy to get your business ranking in your local area?
How hard would it be for you to implement your own marketing strategies to drum up some early business?
What are the advantages of being backed by a major brand in your potential space? Do people prefer a national brand or are they happy to shop local and is it a level playing field?
How profitable are the branches that are currently operating in cities with similar demographics? What are the worst performing branches? Why are they doing poorly?
If this happens then what? If that happens then what? What if I want to sell? What if I start losing money? What if I want to purchase and embroider my own employee uniforms? All of those unique situations should be discussed with the franchise. I also recommend an attorney to take you through the process if you’re interested in finalizing something after your initial audit and research.
As time goes on and technology gets better it gets easier and easier to get the tools set up to appear professional in the eyes of customers AND set up systems inside your business to organize and manage your team. The value proposition of a franchise in a local service business (being a business in a box) is shrinking every day.
Out of the box software as a service is getting incredibly powerful and incredibly cheap. It’s easier than ever to operate a business from anywhere with location services and blazing fast internet anywhere.
It used to be really hard to find specialized work to help you with the day to day tasks of running a business. Content marketers, web developers, accountants, bookkeepers, graphic designers are all available in the form of freelancers at very reasonable rates to help you where your skillset lacks. Gone are the days of needing to hire all of these people in your office in your local town or depend on your franchise offices to take care fo this for you.
We live in a time where everyone wants to spend massive amounts of money on digital marketing and social media campaigns. While it can be effective and generate a positive ROI its competitive and also simpler than ever to outsource to a digital marketing freelancer**. I personally believe the marketing opportunities right now are in the local grassroots guerrilla marketing and sales approach.** There aren’t many advantages to be part of the franchise when it comes to marketing and sales unless they have a specific strategy you like.
I personally would not buy a service franchise unless there was a special opportunity to do so or a unique circumstance where you had the opportunity to take over a currently thriving business or one you could turn around.