Many people seem to think that buying a franchised business may be the way to own their own business, thereby owning their own future and securing financial independence.While this may be true for some, franchise ownership comes with it’s own set of inherent issues, some of which fly directly in the face of owning your own business and being your own boss. Let me say up front that I am not against franchising, I just believe that owning a franchise may not be for the true blue entrepreneur who must have total independence.
But let’s start at the beginning.
I have 2 friends who invested in a Direct Buy store. The capital required for start up was $300K for the franchise fee, $750K to acquire space and build a showroom, and they are required to pay a 22% royalty on sales, ostensibly to pay their share of corporate marketing, advertising, etc. Boom, right out of the gate you’re in the game for $1,000,000+. With the above business model, they sell a membership which gives people the opportunity to buy directly from over 700 manufacturers at confidential insider prices, just like the stores do. A sales staff must be hired and trained in sales. Meaning that the store owners, must already have or be willing to learn the necessary sales skill sets. Which also requires further investment in time, material and resources. The truth of the matter is that whatever type of business one starts, you should always be learning how to sell.
As in many small businesses, revenue must be grown and reinvested in the beginning. Which means that if you’re smart, you will put yourself on a minimum salary for anywhere from 2-5 years, until the business can actually support paying you a profit. Not in all cases, but in most. And most franchise companies won’t provide actual, real time information regarding the earnings potential. And if they do, they will generally use numbers before any expense deductions. That’s just not very helpful when trying to decide to invest a boatload of cash into a franchise.
So we’ve covered high start up costs and questionable profitability.
Keep in mind that in the above example, we’re not even talking about a McDonald’s store here folks. Not even a Burger King or Wendy’s. A McDonald’s start up can run between 500K and upwards of $3 Million, depending on the location. Now, if you already own a corporation that can support that kind of up front investment, this type of arrangement can make sense. But if you’re an individual with somewhat limited capital, I believe that investing in a top tier direct sales business is a much smarter investment.
Another factor to consider is that when you buy a franchise, you’re not just buying the right to use the franchisor’s name and a store, you’re buying the business plan as well. You’ll have to adhere to the design, price and appearance standards of the company in question. This limits the way that you are able to operate your franchise. This can help promote uniformity, however if you are a true entrepreneur, this will severely limit your creativity and independence, usually a death knell for the serial entrepreneur. Having said that, if you’re the type of person that needs to be micro managed and told what to do,how to do it and so forth, it might work out for you.
As far as royalty payments, it is what it is. However, keep in mind that these payments will eat into your profits.
Most companies have post term competition restrictions. Meaning that if you decide to open your own burger joint after a few years, due to standard non competition clauses, you would not be able to open a similar business after your agreement has run it’s term. In effect, you may be unknowingly limiting your opportunities to do business for many years after the expiration for your contract.
And there is also the chance of unfair termination. The slightest impropriety on your part, even unwittingly, may constitute cause for the franchisor to terminate it’s agreement with you. These include, but are not limited to, being late on a royalty payment, violating standard operating procedure or many others. And if you’re store happens to be not as profitable as a franchisor would like, trust me they will look for ways to pull the plug, leaving you no recourse. Now, in all fairness, most franchisors are not this strict but the possibility of losing your entire investment is a scary possibility.
There are other considerations also, such as encroachment, advertising fees, lack of legal recourse, and more.
Now let’s compare this to a top tier direct sales business. In most top tier direct sales models, there are different investment levels. This would be comparable to owning one corner versus another in a franchise model. Better location equals higher investment. For the purpose of this example let’s assume that there are 3 levels of investment:
Level 1: 1695.00 = $1000.00 Commission on the sale of this product.
Level 2: 8995.00 = $5000.00 Commission on the sale of this product.
Level 3: 14,995.00 = $9000.00 Commission on the sale of this product.
Total investment at all 3 levels = 25,685.00
Total Commission on sale of all 3 products = $15,000.00.
Let’s assume that you start at the top level and invest 26,685.00. This entitles you to commissions on all three products, meaning that if you sell all products to one customer, you earn $15,000.00 in total commissions. Two sales recovers your total investment. For the sake of simplicity, let’s say the cost of these two sales is 10% of the total commissions earned or 1500.00. This is an extremely high number, so that we can keep your ROI conservative. You’ve still recovered your initial investment back and then some, in only 2 sales. Also, there are negligible overhead costs, as you are working from your home office. In fact, these costs should be tax deductible, but I’m not a tax professional so be sure to check with yours. If you are doing what is taught, you should be able to recoup your initial investment within 60-90 days of getting started, most people sooner. After your initial 90 days you will have you’re sales funnel full and should begin seeing 1-2 sales minimum per month. Let’s assume that you make only sale of all three products per month per month for the remaining eight months after your 90 day start up period. 15K in commissions per month times eight months equals 120K, plus your original 30K in commissions that you earned in your first 90 days equals 150K. I’m no rocket scientist, but a 150K ROI from a 26K investment in 12 months is pretty impressive. From year two on, your direct sales business should be producing 250K or above in revenue. There are those who earn in excess of seven figures in this industry.
Quite obviously this doesn’t just happen, there is work involved. You must be working on your marketing, sales skills, etc. Some organizations offer total marketing support, even systems that can accelerate your marketing and sales efforts. We offer our associates a full marketing suite as well as full sales training and mentoring. We use a selling system known as Natural Selling, which is a dialogue based selling system. This is another point. What is your concept of selling? What if selling isn’t what you thought it was? What if there was a way to sell without the tension, stress, pressure and objections associated with traditional selling? There is and it’s what we teach.
So, as mentioned earlier, the potential ROI relative to capital invested is quite substantial.
There are many other advantages to operating a direct sales business from home. Such as no need to hire and baby sit high school kids. No royalty fees and other associated franchise ownership costs. The biggest benefit for me is the total independence that working from home provides me. No corporate messenger boy stopping by to tell me that my bathroom floors are not up to company code. (Don’t misunderstand, I’m all for clean bathrooms, just using an example.)
The fact that I get to take and pick up my grand daughter up from school is a huge bonus. And when she rambles her pretty little self into my home office to give me a hug, that’s pretty awesome too.
To your success.