Financial Lessons From a Franchise Industry Veteran

While so much has changed in the franchising industry over the past few decades -- think technological advances, new franchisee initiatives and digital marketing -- you might be surprised to learn that many of the most important guidelines to consider financially in the industry have remained relatively consistent.

When FranConnect founder Amit Pamecha first entered the industry 17 years ago, franchises were still grappling with how to use the Internet and other technologies to their benefit. Pamecha, with his technical background and entrepreneurial spirit, captured the demand for much needed solutions in franchising to help guide the industry into the new millennium. To this day, FranConnect is still one of the most utilized software development resources in franchising, helping businesses improve efficiency and better understand performance.

Throughout his career, Pamecha has seen his fair share of industry challenges and wins amongst franchisors and franchisees alike, providing him with a uniquely well-rounded perspective in regards to best financial practices. Such lessons could help countless individuals avoid potentially sticky situations. And while many of the following tips may seem obvious, others might surprise you.

“If you have a successful business unit, you shouldn’t just go franchise it unless you have the capital behind you,” says Pamecha. “Franchisors have to be careful when first franchising their business. You have to look at the data available to you. Do you have enough additional money towards growing your franchise system?”

According to Pamecha, a majority of people new to the franchise industry painfully underestimate the amount of money needed to build a strong franchisor system. To be safe, he says, most franchisors need to assume they’ll need to acquire around $2 million in capital in order to grow efficiently, meaning that they can offer a proven business model to franchisees, have knowledge about how much revenue that franchisee can expect within the first year of business and still be able to run things successfully at corporate.

From the franchisee perspective, Pamecha warns prospective franchisees to be wary of letting their emotions control their financial decisions. Many new franchisees take out major loans or invest their lifelong savings to purchasing a franchise, so they need to have confidence in their investments.

“It’s great to be emotionally involved in the concept, but it’s also good to look at item 19 and really come up with a budget that tells you whether you’re doing OK or not,” says Pamecha. “People think that once they write a check for a franchise the cash will start coming in, and they don’t set aside funds for operating or marketing. So having that plan laid out and understanding expectations makes a great difference. They need to know that it’s not just about the initial franchisee fee, but the cash needed for the first year and a half.”

If you don’t have the capital to sustain a business that doesn’t bring in revenue from day one, consider purchasing an existing unit. Oftentimes, buying a new unit costs less than building out a new one, and the existing customer base provides immediate cash flow. Just make sure you’re well aware of the businesses previous performance. Were they struggling, and why? Do you understand what needs to take place in order to turn that business around?

For those who are already running and maintaining a successful franchise unit, Pamecha suggests business owners consider the continued efficiency of their business and finances before expanding, which can often throw franchisees off in an unexpected way.

“It’s a very well known fact that three units can be the hardest to manage,” says Pamecha. “Your attention gets diverted and you have to hire managers, so the overhead increases. All these things add up and it becomes tricky. It could be helpful to get partners involved. At the very least, you don’t want to overextend yourself.”

For franchisors and franchisees alike, the most important factor to remain vigilant about is ensuring that it’s a win win situation. An increasing number of franchisors are heavily focused on helping franchisees understand their financial situation. And the best ones try to put out as much data as they can, so it’s clear to franchisees what they’re getting into.

“There are over 300,000 financial advisors in the U.S. and most people have access to good accountants,” says Pamecha. “When the franchise industry leverages their help, mutual success is much more likely.”