Should You Invest In A Franchise?

I had spent nearly a decade working my way up from fast food, minimum wage jobs to high-ranks in corporate America. Still, I couldn’t shake the dream of owning something that was entirely mine. I first learned the art of investing during my time with Chipotle, where I began my career washing dishes. Over eight years with the company, I rose in ranks and eventually became the director of operations, where I suddenly acquired a robust amount of stock options. I was approaching 30 and felt I had a choice to make: play it safe and settle for job security? Or do I bet on myself and take a risk?

I took a leap of faith and resigned from my position at Chipotle, where I left behind a good portion of my portfolio. I immediately dove into the emerging world of e-commerce, and started my first e-commerce business — a watch brand. Later, I partnered with a software start-up to lead their sales team, and by the time I left, I was their VP of client success.

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At this point, I had diversified my portfolio quite a bit, and having recently started a family, I once again returned to my dream of owning a business.

I began researching how small businesses adapted during the pandemic. Retail was dying, but e-commerce was thriving. Movie theaters collapsed, but restaurants never missed a beat. Food, coffee, delivery services. I thought: a cafe? I knew that my dreams of owning a restaurant were beginning to manifest, but I had minimal experience in coffee.

I knew that I needed some guidance before putting together an investor’s package for my own concept, so I connected with the owner of my favorite local coffee shop.

I cold-called him with a simple question: where do I start?

To my surprise, he presented me with the option to buy into the brand. He had just begun to license existing locations as the company was growing exponentially, and he needed the operating support. For a $50,000 buy-in plus the cost of build outs, I would have my very own Red Bicycle Coffee.

I knew that with my experience and Red Bicycle’s brand power, I could build on a strong foundation, save on massive marketing efforts and accelerate years of research and development – bypassing the many obstacles that a new concept faces early on.

Once again, I made another leap that paid dividends. Shortly after the acquisition of my first Red Bicycle location, the market came tumbling and faced historic lows. Still, even in recent economic turmoil, small businesses prove to be the driving force of economic growth. I strongly encourage anyone on the fence to add a small business to their portfolio of investments.

Let’s talk about the practical steps needed to successfully purchase a franchise or existing business.

1. Assess your pre-qualifications

Assess your qualifications with your financial advisor or accountant. Don’t overextend yourself and make sure that you have enough operating capital to keep your new business running if things go off track. Factors to discuss include timing, proposed location, experience, funding or cash available for investment, goals and interests, management and exit strategy.

In my case, I knew I could buy into Red Bicycle Coffee, but I wasn’t in a position to buy into McDonald’s. It’s important to remember that Rome was not built in one day, and to build an empire, you need to start where you’re financially comfortable. Keep your end goal in mind and if you plan to make an exit within three years, make sure that is included in your business plan. Similarly, if you plan on opening multiple units, the same advice applies — plan accordingly.

2. Prepare for the franchise application

Once you’ve done your due diligence on financials, location and management, start preparing for the franchise application process. Most franchisors require a specific amount of capital to get started, this ensures that you will be successful and that their investments are in good hands.

For me, this was another advantage to buying into a smaller, local brand. My application was personal and interview-style rather than lengthy and time intensive.

3. Deep dive into the franchise disclosure

You wouldn’t buy a car without knowing the specs, the same applies to your new business. Make sure you ask for the franchise and licensing disclosures to better understand the fine print and technicalities of what you’re in for. If it’s a smaller business or brand, ask for P&L’s and other financial reports. Understanding these documents will ensure that you have clarity on the financial state of the business, the challenges and the terms of your new business relationship.

Keep in mind, purchasing a well-known franchise will leave minimal flexibility or creative input — it’s a plug-and-play. If you plan to be more involved in the day-to-day operations, you’ll want to understand the limitations and parameters.

4. Take it all in on discovery day

This might be the most important step. This is where you get to pull back the curtains, meet the team, understand the operations and learn more about what you’re signing up for. Here, you will receive more information about the support available to you, real estate procedures, design, construction and local or national marketing support. Take it all in, you’re one step away from being a business owner.

Final thoughts

My larger goal has always been to achieve financial freedom and build generational wealth. Diversifying my portfolio outside of the stock market has given me stability in uncertain and unprecedented economic times. Being a franchise owner has been extremely rewarding, but also very demanding. There are several options for diversification, so take the time to evaluate your current lifestyle when you purchase a small business, as you may need to be more hands-on initially before it becomes passive income.