In part 4 we began a discussion on how to assess your risk tolerance for business ownership by analyzing the way you think. I covered the 3 main ways to earn income, outlined the risks associated with employment, and how employees typically think. If you didn’t identify with “employee think” then maybe you’ll identify with franchise ownership.
Franchise owner think is:
I can run the systems, methods, and procedures that are already defined and documented. If you’ll show me how, I can pull the right levers and push the right buttons to make the business work.
If you’ve had middle management experience or if you’re a “systems” kind of person, if you like a broader scope of responsibility while staying within certain rules, if you can solve big picture problems but enjoy support when you’re having a tough go of it, if you want more personal freedom than being trapped 9 to 5 in an office cube, and if you want to build equity in a business investment that you can eventually sell, then owning a franchised business model is worth looking into.
Most people think of restaurants when they think of the franchise industry. However, there are literally thousands of franchised business models available in the US in at least 50 different industries, although in my opinion probably only a few hundred are truly robust or mature enough to consider investing in.
When you buy into a franchised business model you license the right to operate a business, usually within a prescribed territory, using the franchise brand name and their products, services, and methods of operation. You basically operate a “clone” of what other franchisees are operating.
Presumably the products and services have been tested and perfected, target markets have already been defined, marketing campaigns have been developed, store designs have been created, and the necessary equipment has been specified. You essentially operate the business model in accordance with the methods and procedures prescribed by the franchisor. Some feel that it’s a controlled way of getting your feet wet in the business ownership world.
In my opinion investing in and operating a franchise is more risky than employment, but has less risk than an unsupported entrepreneur-owned business. The franchisor has a vested interest in helping you succeed in their business model because they get a royalty cut of your sales income stream.
However, it is certainly possible to fail in business owning a franchised business model. If you don’t follow their system, if you refuse to market your business, if their business model, product, or service simply doesn’t meet the needs of the market place, or for any of a number of other reasons, then you can loose your entire investment (just like entrepreneurial business ownership).
If your risk temperament seems to be right for the franchise area, then I highly recommend retaining an independent outside advisor to guide you through your initial investigation and evaluation of the thousands of concepts available. Like independent fee-for-service financial advisors, getting professional counsel to help you navigate through this area will be money well spent.
Did you identify with “franchise owner think?” If not, stay tuned. In part 6 we’ll explore how entrepreneurial business owners think.