The FastLane to Franchise Ownership

How you plan to manage the day-to-day operations of your business will often determine which franchise brands meet your needs. The two general ways you can manage your business are as:

1. Semi-absentee owner, or...
2. Owner-operator

Let’s figure out which one is right for you!

Semi-Absentee Ownership

Do you plan to keep your job and run your franchise part-time? If so, then you’ll need to look for a semi-absentee franchise model. Great semi-absentee businesses are harder to find, and they take longer to break even. The reason why is simply because you’re going to have to pay somebody else a salary to manage your business. And unless you want to hire

Many semi-absentee franchise owners will go into business with a family member or operational partner to try and minimize some of the risks of hiring someone else to manage their business. But the truth of the matter is that you cannot eliminate risk entirely, and it’s going to be a challenge learning how to trust somebody else with your business. FYI, franchisors won’t approve you as a franchisee until they know and have met your business partner(s), and some franchisors don’t allow this type of ownership at all.

Here are some of the positives of running your franchise as a semi-absentee owner:

• You can spend your time working ON the business instead of working IN the business.
• You can protect your time and lifestyle.
• You don’t have to quit your current job if you don’t want to.
• You’re positioning the business to sell at a potentially higher price in the future.
• You have the bandwidth to scale into multiple brands and locations if you’d like.

Tip: You don’t have to start as a semi-absentee owner right away. You can begin as an owner-operator, learn the business, and then hire somebody to operate the business for you later on. That takes us to our next ownership model – owner-operator.

Owner- Operator 

If you yourself plan on operating the business day-to-day, we call that an owner-operator management model. If this is you, congratulations - most franchisors LOVE owner-operator franchisees.

Here are some of the positives of running your franchise as an owner-operator:

• You can really learn the business inside and out. If you’re hoping to become a serial franchisee, owning multiple units and/or brands in the future, this sort of experience is invaluable.
• You don’t have to pay the salary for a general manager to run the business.
• Many of the franchisors that only allow owner-operator franchisees can have lower initial investment costs.

Answer these questions to help you better understand who will be responsible for the different parts of the business:

Q: Who will be part of your ownership/leadership team? Put your answers in the named boxes.

Q: Who is responsible for the different responsibilities of the business? Put an “X” under the name and next to the responsibility based on who will manage that part of the business.

Here are a few responsibilities to get you started: Day-to-Day Management (Employees, Customers, Location, Equipment, etc.), Cash, Finance, Payroll, Taxes, Human Resources, Franchisor Relationship, Legal, and Marketing. I’ve included space for you to add more as needed.

Once you have determined your management model, move on to step 2.

It’s time to talk about how much you want to invest, which, for most, comes down to how much you can afford. Let’s first mention initial startup costs, and just keep three things in the back of your mind as we continue:

1. How much is the franchise fee to buy the unit/territory?
2. How much will you need to borrow?
3. How much will you need to sustain your lifestyle until the business can support you?

Next, let’s figure out how much you can afford, to make sure you don’t waste your time looking at brands whose startup costs are out of reach for your budget.

The easiest way to estimate what you can afford is to calculate your liquid capital (cash, stocks, 401(k), etc.) and multiply that sum by 3.5. Why 3.5? Most lenders will require a 25-35% down payment, and the remaining balance will need to be collateralized with assets (note: there are scenarios where lenders may require more or less). By the way, Franchise FastLane typically likes to work with candidates who have a 680-credit score or higher and can borrow at least $100,000. If you feel like you’re light on liquid capital, that may still be okay, as there are different ways to find more liquid capital and collateral.

There is a lot more we can discuss about this in a conversation, but here a handful of things you should be thinking about…

• ROBS Plan: One of the most used funding products is a Rollover for Business Startups (ROBS) plan. This is where you borrow against your own retirement account without the tax penalties.
   
  • To learn more, go here: https://www.franfund.com/401k-business-funding
    
    
  • Free Calculator: To determine what you can afford: https://www.franfund.com/tools-calculators#funding- calculator
    
    
• PFS: I would suggest you put together a Personal Financial Statement (PFS). This will help you in your personal assessment and you will need it when you start working with a lender. Here is a link for a summarized PFS: https://campaigns.franchisefastlane.com/net-worth-calculator
  
  
• Local Banks: A common mistake people make is going to your local bank for franchise funding. If you have a strong relationship with your local bank, then this may be fine. However, most local banks can get confused by franchisee funding, especially if they aren’t familiar with the brand you’re opening. Also, local banks usually don’t have as many alternative funding plans available, like the ROBS plan discussed above.
  
  
• Specialty Banks: I suggest you work with companies that specialize in helping franchisees find funding. The purpose of these companies is to work on your behalf to find banks across the country that understand franchising and your individual franchise opportunity. Franchise FastLane has relationships with the best franchise funding companies in the nation.

Once you have determined what you can borrow, move on to step 3.

What does your lifestyle cost you today? Are you ready to cut back on some things or not? Do you have major life events coming up that you need to be prepared for? How long can you go before you need to pay yourself? Or will you even need to pay yourself at all?

Answer the following questions to determine how much you would like to make from your franchise business:

If line 12 is a positive dollar amount, then you don’t need to worry about making income from your franchise right away. If line 12 is a negative dollar amount, don’t worry. You can still own a franchise; however, you may need to look for ways to reduce your lifestyle expenses, considering that even great businesses may not be cash creators in their first year.

Most people, even if they can afford not to, will borrow money to start their franchise. When you borrow money for your business, it’s customary to borrow enough to have some working capital. The early months of your business, while you’re building a customer base, are often accompanied by financial losses, so your loan will need to compensate for that. Otherwise, what’s the point in getting your business set up, but not having enough money to pay for operating expenditures? Use the funds set aside for working capital wisely so you don’t have to dip into more personal funds to make ends meet in your business.

If you are interested in a franchise whose Item 19 financial disclosures show its franchisees financial returns to be less than what you need to leave your job or support your lifestyle, you don’t necessarily need to look at a different brand. Something you can consider is buying multiple territories to cover the deficit. In other words, if the average net profit for Brand ABC is $150,000, but you need $300,000 annually to sustain your lifestyle, then what you can do is buy 2 or more territories. 2 Territories x $150,000 = $300,000 annually.

(By the way, Franchise FastLane’s Next Big Thing brands usually offer six-figure returns.)

If you were moving to a new city would you only go look at one home that was for sale by owner? No of course not! You would work with an expert real estate agent to identify the part of the city that offers the best commute to work, has the best schools and parks, is close to a grocery store, or whatever it is that is important to you, right? That agent is plugged into a network and has access to resources that give them the ability to best determine your needs, and then make several recommendations for you to tour and compare. Well buying a franchise is no different!

Franchise specialists (commonly referred to as “consultants”) are like real estate agents for franchising. They synthesize your goals, management style, budget, areas of interest, and market, etc. to help you quickly eliminate the thousands of franchise opportunities that won’t work for you and highlight the opportunities that will fit you best.

Of course, if you are working with someone from Franchise FastLane you can feel comfortable knowing you are only going to be introduced to franchise brands that have checked every single necessity box in our FastLane Discovery Process™ criterion.

Some things to remember about franchise specialists:

1. The franchise specialist works for you. They have your best interest in mind, like a real-estate agent.
2. They are a wealth of knowledge about a multitude of brands, and many of them are active franchisees.
3. Franchise specialists are FREE. Their fees are paid by the franchisor if you should choose to buy that particular franchise. The fees paid to the specialist are almost identical no matter which brand you choose, so the specialist is not concerned about which franchisor will pay better, but with which brand is the right fit for you.

If you would like to contact a Franchise FastLane franchise specialist to learn more you can email: thenextbigthing@franchisefastlane.com

Here is the general process our franchise specialists will take you through:

Once you have spoken to a franchise specialist, move on to step 5.

This is simultaneously the fun part and the frustrating part of the discovery process…

Imagine for a second that you are a highly coveted Division 1 athlete who has multiple offers to play basketball at several universities. You take official visits to universities, meet the coaches and players, review the college curriculum, and get a general feel for how you will fit in at that university. Then as the recruitment process continues, you continue to narrow down the schools that you are considering until eventually, you decide on one, and then sign their letter of intent.

The franchise discovery process is similar. You’re going to learn about some fantastic brands, which may or may not be the right fit for you, but the learning process is exciting. However, at the end of the day, you’re going to have to eliminate some really good options, until you narrow in on the right choice for you. And I’m sure I don’t have to tell you that this sort of exercise can feel overwhelming, especially if you aren’t a great decision-maker.

After you complete your Franchise Fit survey, you and your franchise specialist will schedule an introduction call with a few franchise brands that fit your needs. Most people are able to quickly narrow it down to only two brands after their introduction calls. Continue the discovery process with both brands until you have reached the step where you define your ideal territory.

Then, with all the facts gathered, narrow it down to your top choice and attend a Confirmation Day. It’s a best practice is to feel 90% confident that you are ready to move forward with a franchise brand prior to attending Confirmation Day. That way you can spend your time at Confirmation Day connecting with the franchisor, feeling out the brand culture, and asking important questions, rather than stressing about whether or not you actually like the business model. (We’ll talk more about this later, but once Confirmation Day is over, you should be prepared to sign a franchise agreement and pay for your franchise territories within 10 days.)

Koala Insulation D-Day Participants

Franchise FastLane does not recommend that you visit more than one brand’s Confirmation Day. If you follow the process step by step, you’ll learn most of what you need to know about the brand prior to attending Confirmation Day. Franchisors do not want candidates attending Confirmation Day if they are skeptical or not ready to make a decision soon. These franchisors are giving you a behind-the-scenes look into what makes their brand special, and that’s incredibly sacred. Take care that you honor their openness by only attending a Confirmation Day if you’re truly serious about the brand.

Some important things to note about Confirmation Day:

The franchisor is “interviewing” you just as much as you are interviewing them. There have been many instances where a candidate is eager to buy territory, but the franchisor doesn’t feel like the candidate is a good fit for the brand.

While Confirmation Days are traditionally attended in person, most franchisors have adjusted to the realities of COVID-19 travel restrictions and offer a fantastic virtual Confirmation Day experience.

If you wait too long to make a decision after Confirmation Day, the franchisor is likely to retract their offer to sell you territory. Waiting too long displays indecision, which isn’t exactly a quality that brands are looking for in their franchisees.

Once you have made it through your introduction calls with a franchise brand, begin preparing for step 6.

Validation is the MOST IMPORTANT part of the process. Validation is where you, the candidate, get in contact with active franchisees to discuss what owning the brand looks like, and validate what you’ve learned in the Franchise Disclosure Documents and/or introduction calls. FDD’s can tell you a lot about a brand, but validation completes the picture and clarifies franchisee expectations.

You’ll typically spend a few weeks in validation, as it runs parallel to the other stages of the discovery process, although each brand manages the validation stage a little differently. Sometimes you are given a list of names and numbers to call whoever you want, while other times 1-on-1 or even group calls are scheduled on your behalf 1-2 times/week.

There can be some advantages to 1-on-1 calls. However, “next big thing brands” are growing quickly, and it’s just not always practical for them to ask their franchisees to take private calls repeatedly with innumerable incoming candidates.

If a brand offers a franchisee contact list or schedules 1-on-1 calls for you, then they usually won’t offer it for very long. Pretty quickly they find that franchisees start to miss calls and forget to call franchise candidates back because they’re truly busy. If this happens to you, remind yourself that this is NOT an indication of a poorly run brand, but rather a symptom of a fast-growing company. This is why many next big thing brands invite candidates to participate in one or two group validation calls every week.

We have received a lot of positive feedback about our group validation calls because the group usually asks more compelling questions compared to just one individual candidate and you will probably learn a lot from the questions asked by others.

10 Questions You Should Ask

You will typically get an opportunity to speak with the franchisor leadership over the course of these weeks. Come to these meetings prepared and attentive. Again, they are interviewing you just as much as you are interviewing them.

10 Questions You Should Ask The Franchisor

Note: According to franchise law, anyone employed by the franchisor cannot answer financial questions that aren’t documented in the FDD, so please be respectful and don’t ask.

Speaking to leadership and franchisees aren’t the only ways to validate. You can also check…

• Google reviews
  
  
• Yelp reviews
  
  
• Glassdoor company ratings
  
  

• Ask the franchisor if they have performed a franchisee satisfaction survey

• If there is a location near you, go experience what it’s like to be a customer!

These are all great ways to enrich your understanding of the business.

Once you have completed validation, and it supports your excitement for the brand, move on to step 7.

I’m going to shoot you straight – an FDD can be overwhelming. At its core, an FDD is simply a document that informs you about the business opportunity that the franchisor is offering you to participate in. It usually is a couple of hundred pages long, filled with legal language, and favors the franchisor’s rights.

So why would anybody want to sign a document like that? Good question. At the end of the day, the FDD serves to protect you the franchisee, just as much as it protects the franchisor. The FDD ensures that every franchisee follows the same brand protocols to deliver a consistent experience to every customer nationwide. If franchises are delivering a quality, consistent product/service to their customers, then their reputation and positive brand awareness grows, which ultimately means more business for every franchisee. Additionally, it ensures that the franchisor supports its franchisees sufficiently and consistently so that each franchisee is set up for success.

When you get the FDD it is a good idea to have a lawyer review the document, although it is not required. Here are a few things to know beforehand:

1. Most franchisors consider their FDD a non-negotiable document. So, you may be asking yourself “Why would I spend thousands of dollars on an attorney to review it?” We think it is a good idea, so you are aware of what you are signing up for. Both you and the franchisor have responsibilities laid out in the FDD, and an attorney can help you better understand those responsibilities.
2. Even though the document is usually non-negotiable, we still see attorneys come back with requested changes and that makes sense. You are paying the attorney and it is their job to get you the very best opportunity they can. You, of course, can send these changes over to the franchisor but don’t be surprised if they come back with a “No.” Other franchisees have already signed the document “as-is” prior to you, and it wouldn’t be fair to them for the franchisor to offer you a better agreement as a newcomer to the brand.
3. A common mistake that we want you to avoid is using an attorney with no franchise experience. We all like saving money, and if you are close with an attorney, it can be appealing to want to use them. However, in this case, not all attorneys are created equal. We highly recommend that you use an attorney that has reviewed many FDD’s before. If you ask, Franchise FastLane can connect you with a franchise attorney.

As a reminder, FDD’s are typically non-negotiable and written in a way to protect you, the franchisor, the brand, the suppliers, and more. If an attorney aggressively redlines the FDD, and you send it to the franchisor, the franchisor may be fearful that you are “difficult” to work with and reject your candidacy as a franchisee.

Every franchisor defines territory differently. Some offer no protected territories at all. Some have mapped out the entire country so you can select one of their defined territories. And then you have a few franchisors that are more flexible and will listen to your input to help define your territory.

Service-based franchisors and retail franchisors will usually map territories out a little differently.

When deciding which territory, you would like to develop, there are many things to consider.

Here are a few questions to ask yourself:

Strategy

It goes without saying that which territories and how many territories you purchase are a big decision. If you buy too much territory, you bite off more than you can chew and jeopardize your success. On the other hand, if you buy too little, you may limit your earning potential and future with the brand. In general, if you’re uncertain it’s okay to buy one territory now and then more later. However, many next big thing brands sell out of territory quickly, so don’t be surprised if the territory you wanted to buy next is no longer available by the time you get around to it.

Here are a few reasons you might consider buying multiple territories in your market:

1. So, you can lock in territories you might want to develop later.
2. To protect yourself against other franchisees cannibalizing your business.
3. If one location underperforms, you have other locations that may still perform well to counterbalance.
4. To share resources across locations or territories.

In the territory definition portion of the process, it will serve you well to take your time and really understand the mapping tools, target customers, competitors, and needs for the service in the area. It’s okay to ask as many questions as you need to have a firm grasp of the territory in your market and learn how or why it was mapped out that way.

Here are two stories I experienced with later stage territory selection and why identifying the next big franchise brand early is so important:

Once you have determined which territory you are comfortable buying, move on to step 9.

Has your funding been approved? Do you liked what you have heard so far, and can you see yourself as a franchisee of this brand? Good! Now it is time for Confirmation Day.

We already discussed Confirmation Day a bit in the steps above, so we won’t need to go into granular detail about everything discussed previously again here.

Just like with many other things in the franchise discovery process, each franchisor may manage Confirmation Day a bit differently. Some do them in person, others virtual, while others still may not require a Confirmation Day at all.

2020 Koala Insulation Confirmation Day

If you’ve reached Confirmation Day, you’ve already spent weeks with the franchisor, learning as much as you can about the business, and you’re truly wanting to become a franchisee with this brand. Hopefully, by now, you’ve already made a great impression on the franchisor since they’re trying to see if you’re a good fit for their brand! It’s a lot like dating, to be honest. The Franchise Development Director you’re working with will certainly report to the franchisor what you were like throughout the discovery process. So, if you’ve not made a great impression with the Franchise Development Director by the time you get to Confirmation Day, you’re not giving the franchisor a lot to work with in terms of evaluating your candidacy for their brand.

• Come prepared with whatever questions you have or points of clarification you may need.
  
  
• Remain engaged and attentive during sessions.
  
  
• Don’t be afraid to speak up and talk with the franchisor but give plenty of room for other candidates to speak and ask questions too. Plenty of people have been disapproved for taking too much of the franchisor’s time, and not allowing others to enjoy the Confirmation Day experience.
  
  
• Be prepared to decide soon after Confirmation Day.

• Plan to manage your fear. Reality sets in at Confirmation Day, and it can feel daunting. Be prepared to do some self-talk and remind yourself about why you are there in the first place. If you need help, look back to your “Why” that you defined at the beginning of this process.
• Beware of pessimists and complainers. There will undoubtedly be folks attending Confirmation Day with you who have an overly skeptical and/or glass-half-empty attitude about everything. Whether that be complaining about franchisee responsibilities or looking for insignificant causes for concern. Tune that out, and make sure your mindset is clear.
• Have fun! Sure, there’s business to conduct, but it’s supposed to be enjoyable. It’s okay to smile and enjoy your time.

Once Confirmation Day is over, there are a few questions you should be asking yourself:

Once you have answered yes to these three questions move on to step 10.

Prior to Confirmation Day, someone on the franchisor’s team should have explained their expectations for your final decision once Confirmation Day is over. Next Big Thing franchisors are going to want you to make a timely decision, and they aren’t going to hold any territories for you while you wait to decide.

At Franchise FastLane we like to use our 90%-10-day guideline. What this means is that before a person attendsConfirmation Day, you are 90% sure you want to move forward, and you are ready to move forward within 10 days. Let’s break that down.

The franchisor’s Development Director should give you a call within 24-48 hours after Confirmation Day. Hopefully, they’re calling to deliver the good news that the franchisor would love for you to become a franchise partner. If you accept their invitation, then the Development Director will schedule a sign-and-pay call for
the following week to finalize the franchise agreement and pay the franchisee fee. Once you’ve signed the franchise agreement and paid the franchise fee, you will officially become a franchisee!If you’ve reached this point, then hopefully you completed each step as thoroughly as possible. Franchise FastLane does not guarantee that everybody is going to be a successful franchisee. The discovery process
exists to help you determine if franchising is right for you, and if so, help you find the next big franchise that aligns well with your needs.

We love seeing franchise ownership change people’s lives for the better, and our hope is that we can help make that happen for you.