Should You Buy a Franchise in 2024?
In today’s newsletter:
- Should You Buy a Franchise in 2024? The Inside Scoop on Winners, Losers, and What to Watch Out For
- Market Watch, Entertainment by the Numbers, and the End of Cushy Tech Jobs
- The Ruthless Elimination of Hurry
A Franchise can be an excellent investment, particularly in times of uncertainty, when you aren’t sure which way the market is headed. By investing in an established business model (which sometimes even comes with pre-existing clients) with a centralized corporate office that handles nationwide branding and gives you resources to help succeed, you can fast-track your way to your first successful business venture – or the latest in your portfolio. But as with anything, the devil is in the details, and knowing how to do your due diligence, picking the right industry, and following through can be the difference between your franchise becoming a dream come true or a real-life nightmare.
Today, we’ll be looking at a few popular franchises that are struggling, and a few others that show great promise. Along the way, we’ll be pointing out crucial steps to take as you consider whether or not buying a franchise is right for you.
Red Flag: Growth at the Expense of Franchisee Health
When considering a particular franchise, it can be a good idea to look at the growth rate of the space. Are more people needing home repairs each year or less? Are people buying fast food more than 5 years ago, or less?
You get the idea.
But while growth can be a key indicator of success, it can also be a serious red flag if the corporation values explosive growth over protecting its franchisees.
To take one example, let’s talk about Crumbl Cookies.
Crumbl is a cookie company that sells a rotating menu of six different cookies every week. They can be popular for seasonal occasions like holidays, graduations, and weddings, and in some cases, a Crumbl shop can even be a destination for people to hit up after dinner or coffee downtown. Their product is known for being high-quality, and the corporate office is good about coming up with attractive, novel flavors each week. The average Crumbl can earn around $1.8 million in yearly revenue. Not bad for a cookie stand.
But here’s the issue – Since 2020, Crumbl has sold enough franchises to more than double its total number of locations each year. There are reasons to find this alarming, but the real issue is a radius clause so lax that a competitor can buy a rival Crumbl franchise and open a shop just 5 miles away. In some cases, markets have been overwhelmed by Crumbl locations, with 6 in a 30-mile radius, and franchise owners complain of cannibalization and declining sales, with an already overpriced product ($4.25 per cookie), heading into uncertain economic times.
Those are some alarming statistics and anecdotes.
When considering a franchise, look at growth, but also dive into the corporation’s measures that they take to protect and foster the success of individual franchisees beneath them.
Red Flag: Complaints, Defaults, and High Transfer/Reacquisition Rate
Every company selling franchise opportunities is going to make their franchises sound glamorous, smart, and like a sure bet. Take that as a given – the marketing is probably going to be pretty good because selling franchises can be lucrative for the corporate office. But once you’ve looked through the marketing and resources offered by the franchise seller you’re investigating, dig into the data that they do not put out themselves.
Namely, pick up the phone and call a few existing franchise locations and tell them that you’re a potential franchisee who would like to ask the owner a few questions. Some experts suggest that you speak with 12-15 owners, if possible, and get a sense of how the corporate office treats them. Were the numbers fairly represented? Is the corporation FTC-compliant? What has their experience been? In many cases, you can even ask about profits, revenue, and expenses, as a central point of the franchise model is building a community of owners that can support one another, so you may find franchise owners more willing to speak openly about their numbers. Do a little digging outside of the central office and see what you come up with. If the owners are all unhappy, it’s probably a good idea to stay away.
You’ll also want to keep an eye on the SBA default rate, transfer rate, and reacquisition rate. In other words, if franchises are often sold, reabsorbed into the corporate holdings, or going into bankruptcy, it’s a red flag the size of Texas.
Speaking of barbeque – Dickey’s Barbeque Pit has been making the rounds on the internet as one of the worst franchises to own in the coming year, largely because of FTC complaints alleging false advertising, shady business practices that trap owners into unreasonable supplier contracts designed to enrich the host corporation, and a startling churn rate. For example, from 2020-2022, 27 Dickey’s Barbeque Pits defaulted on their SBA loans. True, those were tough years for the restaurant business, but something as takeout-accessible as Dickey’s should have been able to perform better – and even large, flailing brands such as Subway did not register as many SBA defaults, despite having many, many times more locations and franchise owners.
From 2019-2021, 217 out of 500 Dickey’s locations were transferred or reacquired. That’s over 40% churn in only 3 years. When compared to the retail food franchise sector, which has a 5-year FTR rate of just over 12.5%, Dickey’s doesn’t look so good.
Green Flag: Support
As we switch gears and look at a couple of the good signs to look for when considering a franchise, it of course goes without saying that the numbers have to work. With any franchise, you need to meet the net worth and liquidity qualifications and have access to startup capital. Beyond that, you’re going to want to make sure that the company you are investigating invests in its franchisees and makes it easy for you to find what you need to succeed.
Take Get-a-Grip, for example – a resurfacing company with around 30 franchises nationwide that does brisk business in the repair and refurbishing space. Get-a-Grip provides hands-on training, does educational conferences for franchise owners, and, as a source familiar to the author says, an owner can pick up the phone and call any executive from corporate at any time, even to ask technical questions.
There is, in other words, a lot of support. Some of the owners are friendly with one another, share tips, and I have even heard of franchise owners sending technicians to another city to help a new owner who got swamped with new business.
Green Flag: Consistent Demand and High Market Potential
“Recession-proof” is a word that gets thrown around a lot these days in business circles. In uncertain economic times, it is ideal to have a business (or an aspect of your business) that is not vulnerable to losing a huge share of volume during a hard economy. Perhaps this is one of the reasons why Taco Bell consistently ranks as one of the best franchises to own, despite its relatively high startup cost. Their food is inexpensive to the consumer, popular among people working service jobs who often need a quick, cheap bite, and Taco Bell has a strong, proven history of sales.
Consider the market potential as well – a company enforcing radius clauses, providing marketing support, and providing a product with broad appeal may be an attractive investment if the numbers add up.
You Have to Park Your Money Somewhere
At the end of the day, in this still-inflationary environment, you have to put your money somewhere where it is going to work for you. Real estate is one possibility, but given high interest rates, high costs, stiff competition, and low supply, this may or may not be a good time to buy, depending on who you listen to. The stock market or crypto is another option, but while some are extremely bullish, the bears warn of a coming bubble burst. You have to put your money into productive activity, so if you are considering a franchise as an investment vehicle, just make sure to consult an expert in franchise buying, see a lawyer, and do your due diligence. If you find the right opportunity, it just might be a big win.
None of this should be construed as financial advice.
INDUSTRY INSIGHTS
Market Watch, Entertainment by the Numbers, and the End of Cushy Tech Jobs
Market Watch
The Dow Jones continues to oscillate around 37,500, and the Nasdaq seems to be plateauing for the moment at just under 15,000, after a modest rally. The S&P 500 likewise seems to have stabilized temporarily at about 4,800 after its own modest rally. The SEC authorized spot ETFs for Bitcoin this past week, but strangely, BTC is down in the days after the announcement, giving the impression that high investor enthusiasm had already priced the decision in prior to it being made. Additionally, there are critics of the decision, including Vanguard, who says they will not make Bitcoin ETFs available to their customers and will pull their existing cryptocurrency futures. Gold continues to hold strong at around $2,050, the oil price is stable for the moment, but conflict with the Houthis could cause it to increase in the near future. The 30-year fixed-rate mortgage sits at just under 7%, with experts expecting it to decline further next year, which may lead to higher home prices.
Entertainment by the Numbers
Entertainment and leisure continue to post huge numbers, but it’s worthwhile to put those numbers against one another to see just what stacks up as the biggest moneymaker in the space. Using the year 2022 for comparison, since that data is readily available, here’s what some top entertainment industries rake in worldwide:
Music Streaming: $17.5 billion
Box Office (Movies): $26 billion
Video On Demand Streaming Services: $30.3 billion
Book Sales: $76.1 billion
Casinos and Online Gambling: $250 billion
Video Games: $347 billion
Sports (All Sports Combined): $486.6 billion
The End of Cushy Tech Jobs
In the wake of last year’s devastating layoffs in the tech sector, Elon Musk’s 80% layoff rate at Twitter (now X), and Meta facing increased pressure on billions of wasted dollars, those dreamy tech jobs seem to be getting less dreamlike – and harder to find. Apple is forcing dozens of its California employees to relocate to Texas or face termination. Google insiders complain of a changing company culture that is less fun and creative and more domineering. Other tech companies cut long treasured perks, and now, just two weeks into 2024, we have already seen thousands of tech layoffs. Some of those layoffs have been due to the fact that generative AI is making a lot of coding jobs unnecessary, and an uncertain financial climate may be contributing as well.
Sunday School
Q. Who wrote the Book of Jude?
A. Jesus’ disciple Thaddeus, sometimes called “Judas Thaddeus” or “Jude.”
The 14-hour workdays were starting to take a toll on their workers, so HR leaped into action with an additional 6 hours of mandatory self-care activities.
TIPS & TRICKS
Book Recommendation
Spiritual Health/Long-Term Productivity
The Ruthless Elimination of Hurry
By: John Mark Comer
As businesspeople, we love the hustle. If you can grind out an extra four hours a day, you’ll leave the competition in the dust! …until you collapse, and your productivity goes from 140% of the norm to 0% of the norm, because you’re going through a messy divorce, you’ve been admitted to a program for substance abuse, or you’re just so burned out that you’ve begun making terrible, job-costing decisions.
We don’t like to talk about burnout, but it is very real in our high-speed, digital world that expects high-performers to be on the clock at all hours. Not only is this a very difficult way to live, but at the end of the day, business is a marathon, and those who are able to keep producing at a high level across decades are the most successful among us.
In “The Ruthless Elimination of Hurry,” former megachurch pastor John Mark Comer gives us a glimpse into his stressed out life and unrelenting schedule until he decides to take seriously what the Bible says about rest, contentment, and other soul-healing topics. It is a must-read for leaders of all kinds, to sift through Comer’s musings, anecdotes, and concrete recommendations for reducing relationship strain, health problems, and burnout by incorporating biblical wisdom into our decisions.
You can check out The Ruthless Elimination of Hurry here.
Quick Hits
- Trevin Wax of The Gospel Coalition provides an outline for discussing the American church’s obstacles, and what we have to do to overcome them.
- CNBC releases a list of best “rewards” credit cards for 2024.
- Relevant Magazine writes on “How to Get Your Dream Going” for Christian leaders.
- Delays and flight cancellations abound as winter storm creeps across the U.S.
- Donald Trump wins the Iowa Caucus with 51% of the vote, after spending just $18.3 million, compared to Ron DeSantis who gained 21% on a $35 million spend, and Nikki Haley who gained 19% of the vote on a $37 million spend. Vivek Ramaswamy has dropped out of the race, after getting only 7.7% of the vote in Iowa.
Guess the Prompt
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