Many people seem to think that buying a franchise business can be the way to own your own business, own your own future, and secure your financial independence. While this may be true for some, franchise ownership comes with its own set of inherent problems, some of which go directly against owning your own business and being your own boss. Let me say up front that I am not against franchising, I just think that owning a franchise may not be for the true blue entrepreneur who must have complete independence.
But, let us start at the beginning.
I have 2 friends who invested in a Direct Buy store. The capital required for the start-up was $300,000 for the franchise fee, $750,000 to acquire space and build a showroom, and they must pay a 22% royalty on sales, ostensibly to pay their share of the corporate marketing, advertising, etc. Boom, right off the bat you’re in the game for over $1,000,000. With the old business model, they sell a membership that gives people the opportunity to buy directly from 700+ manufacturers at confidential in-house prices, just like the stores do. A sales staff must be hired and trained in sales. Which means store owners must already have or be willing to learn the necessary sales skills. Which also requires a greater investment in time, material and resources. The truth of the matter is that whatever type of business one starts, one must always be learning how to sell.
As in many small businesses, income must grow and be reinvested at the beginning. Which means, if you’re smart, you’ll put yourself minimum wage for 2-5 years, until the company can actually pay you a profit. Not in all cases, but in most. And most franchise companies won’t provide real, real-time information about earning potential. And if they do, they’ll generally use numbers before any expense deductions. That’s not very helpful when it comes to deciding to invest a lot of cash in a franchise.
So we’ve covered high start-up costs and questionable profitability.
Note that in the example above, we’re not even talking about a McDonald’s store, folks. Not even a Burger King or Wendy’s. A McDonald’s can cost anywhere from $500,000 to over $3 million to start up, depending on the location. Now, if you already own a corporation that can support that type of initial investment, this type of deal may make sense. But if you’re an individual with somewhat limited capital, I think 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 are not only buying the right to use the franchisor’s name and a store, you are also buying the business plan. It must comply with the design, price and appearance standards of the company in question. This limits the way you can 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 sentence for the serial entrepreneur. Having said that, if you are the type of person who needs to be micromanaged and told what to do, how to do it, etc., it might work for you.
As for royalty payments, it is what it is. However, keep in mind that these payments will affect your earnings.
Most companies have post-term competition restrictions. Which means that if you decide to open your own burger joint after a few years, due to the standard non-compete clauses, you won’t be able to open a similar business after your contract has expired. In effect, you may be unknowingly limiting your opportunities to do business for many years after your contract expires.
And there is also the possibility of a wrongful termination. The slightest impropriety on your part, even without realizing it, can be cause for the franchisor to terminate its contract with you. These include, but are not limited to, late payment of royalties, violation of standard operating procedure, and many others. And if your store isn’t as profitable as a franchisor would like, trust me, they’ll look for ways to take you offline, leaving you without recourse. Now, to be fair, most franchisors aren’t that strict, but the prospect of losing your entire investment is a scary prospect.
There are other considerations as well, such as invasion, 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 selling models, there are different levels of investment. This would be comparable to owning one corner versus another in a franchise model. A better location equals a higher investment. For the purposes of this example, let’s assume there are 3 investment levels:
Level 1: 1695.00 = $1000.00 Commission for the sale of this product.
Level 2: 8995.00 = $5000.00 Commission for the sale of this product.
Level 3: 14,995.00 = $9,000.00 commission for the sale of this product.
Total investment in the 3 levels = 25,685.00
Total commission for the sale of the 3 products = $15,000.00.
Let’s say you start at the top level and invest 26,685.00. This entitles you to commissions on all three products, which means if you sell all products to one customer, you earn $15,000.00 in total commissions. Two sales recover your full 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 we can keep your ROI conservative. You have still recouped your initial investment and then some, in just 2 sales. Plus, there are negligible overhead costs, since you work 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 your sales funnel full and should start to see at least 1-2 sales per month. Let’s say you only sell the three products per month for the remaining eight months after your 90-day startup period. 15K in commissions per month multiplied by eight months equals 120K, plus your original 30K in commissions you earned in your first 90 days equals 150K. I’m no rocket scientist, but an ROI of 150,000 on a 26,000 investment over 12 months is pretty impressive. Starting in the second year, your direct sales business should generate revenue of $250,000 or more. There are those who earn well over seven figures in this industry.
Obviously, this doesn’t just happen, there is work involved. You must be working on your marketing, sales, etc. skills. Some organizations offer full marketing support, including systems that can accelerate your marketing and sales efforts. We offer our associates a complete marketing package, as well as comprehensive sales training and mentoring. We use a sales system known as Natural Sales, which is a sales system based on dialogue. This is another point. What is your sales concept? 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 is what we teach.
So, as mentioned above, the potential ROI relative to the capital invested is quite substantial.
There are many other advantages to operating a direct sales business from home. For example, there is no need to hire or babysit high school children. No royalties and other associated franchise ownership costs. The biggest benefit for me is the complete independence that working from home gives me. No corporate messenger stops to tell me that my bathroom floors are not up to company code. (Don’t get me wrong, I’m all for clean toilets, just using an example.)
The fact that I can drive my granddaughter to and from school is a huge plus. And when she walks hers into my home office for a hug, that’s pretty amazing too.
To your success.