← Business with Beers
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As a new entrepreneur, your first decision could define your entire future. Do you buy a franchise or an existing small business? Now the right decision could accelerate your family's journey to financial freedom and give you the life that you've been dreaming of. And the wrong choice could leave you drowning in debt, over on the stress and questioning why you left your cushy corporate job in the first place. So let's go.
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First, let's discuss the risk of buying a business that does not fit you. Owning a business is personal. You will eat, sleep and breathe the business. You will think about how you're going to grow it all hours of the day. And buying a business should be like buying a house. So when you go out and think about your dream house, you have a checklist in your head. You know how many bedrooms, how many bathrooms, the size, the condition, the school district, maybe even the zip code that it's in. And your business should have the same clear picture like do you want something that is in sales or high ticket or services or has low capex or minimum real estate requirements. The ability to earn over $1 million a year. Whatever it is, it could be operational heavy. It could be one where you hire semi skilled employees, specialized equipment such as recession resistant. Many buyers spend months if not multiple years looking for an independent small business that meets the checklist criteria. Or trying to come up with an idea of their own that fits what they're looking for. What happens is their lives pass you by while watching other friends, family entrepreneurs on LinkedIn and Twitter and YouTube here crushing it. And eventually they just get so tired of sitting on the sidelines that they want to get into the game. And now this sense of urgency causes them to consider a wider range of opportunities, potentially leading them to choose a business that does not fit them at all. And now all of a sudden they're struggling to run a business that is completely outside of their comfort zone and that is completely off that original checklist that they had in their mind that they defined as their dream business. Franchising naturally provides a solution to this business fit problem because there's over 3,000 franchises in almost every industry you can imagine. So no matter what you are looking for, there is a great chance that you can find the perfect business model that matches that checklist you created. If you want to get into high ticket sales driven business. Roofing, fencing, flooring, painting, cabinets, all great options if you want in something that's recession resistant. Restoration, drain cleaning, crime scene cleanup. If you want recurring revenue, you can get into commercial services, spas salons, people with subscription services, cleaning businesses. There's a great opportunity in senior care, non medical assisted living homes, transportation, estate sales if you want to get into business to business staffing, cost reduction, supply chain, facility services like I can guarantee that you will find something that fits your situation and checks all the requirements off your list. And by the way, if you're new here, my name is Brian Beers. I built a multimillion dollar franchise portfolio and I now help other people find operating scale profitable franchises. So if you enjoy this video, hit that subscribe button. It helps me a lot. Doesn't cost you anything. Subscribe. So what's the risk with the franchise? Well, a lot of it comes down to expectations versus reality. If you picture yourself running the business by looking at numbers and motivating the team, making high level strategic decisions and other executive tasks, you may be smacked in the face when the reality of running the business means estimating selling, managing jobs, hiring and training employees. Getting a call at 2am from a police station because an employee got a DUI while driving your company owned vehicle. And while you might be able to step into the owner's high level role when you buy an existing business and skip the low level, work like that is a possibility. But when you buy a franchise, you start at the ground level. You're starting from zero and it's important that you learn every role. Like you should want to know every role because you are building this thing from the ground up. And as the sales grow though, you start to replace yourself. You move yourself up the ladder, you start to delegate off things and you go from maybe a technician to an estimator, to a salesperson, to a project manager, to a district manager, to a CEO to whatever it is, you slowly start to replace yourself as you grow. And it all comes down to how long do you think it's going to take. So if you expect to spend the first nine months really in the weeds in the truck every day, working with your team, really putting some work in and it ends up being six, seven, eight months, you're probably going to feel pretty good that you accomplish your goal in a much quicker time than what you expected. Now on the other hand, if you expect to spend like three weeks in the truck and it ends up being six months, you are going to feel trapped and frustrated even though you got maybe out of it quicker than the guy who thought it was going to be nine. So that's all expectations versus reality. In some franchises though, there's a huge risk that the owner cannot remove themselves and they forever have bought themselves a job. While in others it's a lot more systematized. It's easier for people to pick up, it's easier for them to get trained. Everything is just a little easier because it's not as customized and there's better processes in place, there's better training in place, there are other people who've already done it that you can learn from. So this is a super important topic to discuss with other franchisees when you validate it, when you talk to them, you want to know about what it's like to be a franchisee. You really want to understand how long were in the weeds until they were able to get themselves out of it. The second big category is operational risk. So the first is training and support. When buying an independent business, you are placing a huge bet on the seller properly training and supporting you during the transition period. Because think about it, you're going to get into a business that you probably know nothing about and you're going to write into the contract the seller will provide hands on training for X number of weeks and then be available by phone, text, email for the X number of weeks longer. But here's what reality is. You have have no idea on the quality of training that the seller is going to provide you. Does he have a whole bunch of written sops and checklists and all this stuff? Or is everything locked up in his head and training follows? Just like whatever he remembers that morning when he's eating breakfast. And just because someone has the knowledge locked up in their head does not mean that they're going to be a great teacher. He could be a horrible communicator and get frustrated with you very easily. And the seller who just cashed a check could mentally be totally out of the business. And in the weeks that follow, maybe he's on a beach somewhere sipping a Mai Tai and ignores your emergency calls, texts, emails, you know, maybe he'll call you back after his massage, maybe next week, whatever it is. The other thing is the seller may have personally cultivated some of the biggest customer relationships. It could be his country club buddies for all you know. So what happens after he sells? Will that business stay with you or does it move to somebody else compared to a franchise? Now, franchise ors are by definition in the training and support business. And here's what the best ones do. They have systematized processes regarding Legion, estimating, sales, process operations, the back office. They take decades of knowledge and experience and they compress it into days of training for you. And after signing up New franchisees will go through 40, 60, 80 hours of online training. Once completed, you start working through some massive checklist of everything you need to do to launch the business. Then you will fly out to the corporate headquarters for like a week or so of in person training. You fly home, you hit the ground running field support could come out to you, work shoulder to shoulder during the first couple of weeks, but the training doesn't even stop there. Weekly check in calls with a coach to make sure staying on track. And you connect with other franchisees to share best practices challenges, wins. Like you join this community of owners who want to see each other thrive. That all sounds great, but what's the risk with the franchise? The biggest one is they're not all equal. There's 3,000 of them, as I mentioned before, and some of them provide very thorough training, tons of support, just as I described. While others are complete shit, to be totally honest. They leave things to be desired. They say they have training, but it's actually very weak. There's a lot of gaps. You go home feeling like, what the hell am I supposed to do? Everything is on paper instead of an online platform. They don't invest in the support staff. It's hard to get answers. You don't even know who to call. They intentionally, possibly make it hard for franchisees to communicate with each other. This is where your due diligence in a franchise plays a major role. You want to talk to current franchisees about the training and the support they receive. Did they feel properly trained when they launched a business? How quickly do they respond? If you have a question or some sort of problem, how strong is the franchisee community? And if you end up working with my team, we help people buy franchises. We will give you a list of over 440 due diligence questions that cover all of these bases and a whole lot more. There's a link below if you want to grab that. So moving on is key man risk. The final operational issue when buying an independent business is known as the key man risk. There is probably an employee who's been there for years and knows the business inside and out. They know all the big customers. Their title may be general manager, operational management, coo, vp, something like that. And they are often known as the key man. And depending on the seller's involvement, it's possible that this person is actually running 90% of the business. And it usually goes 12 ways. With the key man, they could be very positive about the sale. The seller could have been holding them back for years and they are very excited about the growth and the energy and everything that you plan to bring. Or they can be very negative. Especially if the owner had implied or even discussed selling the business to them, the key man, it could be a huge blow to their ego, their confidence. They could just like say, ah, I'm just going to like go do something else, start my own thing, like I'm over here. So what happens if they quit on day one? And as the buyer, you will probably ask them what salary keeps you around at least for the next few months. And all of a sudden your perfect Excel cash flow model are now out of whack because you just gave a huge rage to the main person that you need to run the business and help you get up to speed. Another way to reduce this risk is to get into a business that you already have experience in. But the problem is that significantly reduces your options. You could have a business partner who has experience in that industry, but now you got to be able to make double the amount of money for both of you to get paid. Plus, having a partner is a huge commitment. If you buy a startup franchise, there is no key man risk. All that knowledge you gain through the training and support now when you go to acquire another existing franchise, that key man risk can appear, but it's usually just limited to like sales or ops of that specific location, the territory, maybe the group of the stores, but it's not the entire business. And you will already have people in your organization that you'll be able to put into that role if that person falls out. You know, as I've grown our empire to over 33 stores, this has happened multiple times through the years. And it's much easier when we already have a solid bench than to rely on somebody who we don't even know how they're going to perform. So finally, let's get into financial risks. This is all about the money. And this is the most appealing part about buying an existing business is that you are generating cash flow from day one. This is the reason you pay a premium versus starting any business from zero. The biggest risk is just validating that that cash flow, those profits that you believe in there are legit and that they will continue after you buy them. So when buying a business, you will spend a lot of your due diligence time on the financials. You're going to review three or more years of tax returns, three or more years of profit and loss stations, balance sheets, cash flow statements, inventory, equipment list. You're really going to dive into the numbers you're going to look at year to date, month to date, you want to see the current trends, you want to get employee rosters. You're going to hire a CPA or financial analyst or whoever it is to do some sort of like quality of earnings. They're going to make sure that all the numbers, everything lines up, everything makes sense. And some of the big questions that you need to make sure you answer are this. Number one, what is the seller's role? And other family members in the business? They could tell you that they only work 10 to 20 hours a week. It's like mainly accounting work, whatever. But in reality, like the husband and wife together spend 80 hours a week doing sales, operations, back office. They're the glue that holds everything together. Their lead sales guy is their son. And like, as the new owner, what role are you going to take over? Maybe you're strong in sales, maybe you're going to take over that son's role. But now you have nobody to run operations, you have nobody to run the back office. And a huge mistake that I see buyers make is underestimating the payroll cost that it's going to take to replace the daily functions of the sellers and their related family members members who are going to exit the business when you buy it. So that is a huge question that you really want to dive into. Specifically you probably want to see it in action is what are their roles in making sure that like you can step into them or have a really good idea of what it is going to cost you to replace it at the same level? The second question is, are the margins normal for the industry? If they are in line, there's less to worry about. If they are very high margins compared to what everybody else is doing, I would be cautious. Do they have unsustainable business practices or some unethical sales process that you aren't going to tolerate? Maybe they've got some secret sauce, maybe that's why you're buying. I would just be very careful because you really want to understand if they're very low, I would really want to know why. Is it a very tough competitor market? Is there a trend that they're just getting smashed with through technology or automation? Is there a better mousetrap out there somewhere or are there just easy wins and that they've been checked out for years and on day one you're going to be able to raise the prices, make a few changes and get those margins back to where they should be. And the third question I would want to know is what is the future of this industry. You know, look at changes in technology, demographics, consumer behaviors, regulation. Ch are you were taking on a ton of debt when buying a business. You know, because most people want to buy business that's big enough to support their team, their debt payments, the owner salary. And you just want to make sure that you are riding a way that is going in the right direction. Because if you're not and it's going against you and AI and all this new stuff is going to come crashing down, it could weigh heavily on you through combinations of fighting it, of having the debt and deciding like, what do you do next? How do you get out of this thing? And you're going to feel very, very trapped. Now let's get into the financial risks of a franchise. A franchise startup will cost significantly less than buying a profitable small business because you were starting from zero. And it's possible that you can pay in cash or you can take on debt, but the risk that you're going to have is that you're starting from zero. You don't know how long it will take you to become cash flow positive. Some franchises make money in the month one, while others take months, if not over a year to become profitable. And that is the biggest problem with franchising, is a franchise is not like real estate where there's some predetermined rate of return. There's no irr, there's no roi. Right. A franchise is a business and results vary significantly by the individual operator. Which to me is honestly the most exciting part because I'm able to open up a new territory, I'm able to buy a new franchise and my own efforts is what is going to make me money. Because you were given all the tools, you're given the resources, you got the support. You can run the wheels off the business if you choose. And there are a number of factors that go into how quickly you grow and how quickly you become profitable. And these are the three big ones. Number one, every franchise is in the people business. And to succeed, you need to assemble the right combination of people. Building a team is like flipping through a deck of cards. The first three employees that you hire might be a king, a six and a three. You discard the three, they don't work out, you flip over the next one, you got a seven, the team got better, then the six resigns, but it's okay. You flip over another card and now you get an 8. Then you hire Jack. And the longer you're in the game, the better you do at identifying the 6, 7, eights. Versus the jack, queens and Kings during your hiring process, the second biggest factor is your expenses. In the beginning it's very easy to throw money against the wall and see what sticks, especially when it comes to payroll to be very careful not to over hire and finally is due diligence. You will speak to as many franchisees as you can, the ones who just started and the ones who've been there for a few years. You would ask them questions like how long to take for them to break even? What are the biggest challenges? Would they do it all over again? What does it really look like in three years from now? And then you want to build out conservative financial models based on your findings. So the trade off. You know there are pros and cons to both buying an existing profitable small business versus a franchise. With a small business you have cash flow from day one and you have a team. But it comes with a significant price tag and the risk of the unknown. With a franchise it costs a lot less and it can be built exactly how you want it. But it starts from zero and you don't know how long it is going to take you to get to your goal. There's no right or wrong answer. It's a question of what fits you better. So subscribe to this channel to learn more about franchising and drop a comment below. What risks do you see by buying a business versus starting a franchise? I'd love to hear what you got to say. Cheers.