A Consumer Mindset Increases Risk for Franchisees

For new franchisees, investing in a franchise opportunity frequently begins with a consumer experience. A prospective franchisee enjoyed that brand’s food, had a need for a service or heard positive reports about a company from their family or friends.

The challenge is that using franchise services or eating at a franchise location is far different than investing in a franchise. There are often significant differences between a good consumer franchise and good investment franchise.

First, great food and a good customer experience matter – to both the consumer and investor. It is the number one priority for the consumer but should not be the basis for an investment.

A good number of prospective franchisees begin their search for a franchise investment as consumers. This mindset continues throughout the due diligence process and does not shift to the investor mindset as quickly as it should. This can lead to unfortunate outcomes when investing into an unhealthy franchise system.

Instead of remaining in the role of a satisfied consumer, the first and primary objective for an investor is a return on the investment. This requires that a prospective franchisee thinks and acts like an investor.

A healthy franchise investment requires two results; a fair return on the initial investment and strong revenues per year to generate an acceptable wage.  The initial investment needs to be recouped over the course of an initial franchise term. This can be described as the annualized cost of the investment. Profits from the business need to be large enough to support the annualized cost of investment. This calculation is simply the initial investment divided by the number of years on the initial term. This does not include renewal terms as there can be material differences upon renewal that may prevent you from signing a new agreement.

Since franchisees are active investors (i.e. you work and operate the franchise), the investment must also provide a reasonable wage, or market adjusted salary. This should be comparable to the cost of paying a manager or other employee to perform the tasks you would perform in the operations of the business.

Some very well-known consumer franchises may not be healthy investment options. Due diligence is not effective unless reviewed as an investor. An investor is not waiting in line at the drive-thru, buying lunch or dinner every few weeks, shopping in the store once a month or calling to schedule an appointment or service once a year.

A franchise investor works daily in the business attending to customer needs. This commitment deserves a reasonable return on your investment. If you are an individual that is considering a franchise investment, the first step is to move away from a customer mindset and focus on the franchise investment and return that an investor will achieve. 

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