Litigation

Running a profitable franchise

By Tracy Coenen

Owning a franchise can be the best and the worst of times. Franchises are successful because the parent company has a proven business model, excellent training and business development guidelines, a brand that has a lot of goodwill with customers, and advertising leverage that a single owner could never have.

On the bad side, they are expensive to get into, can create a lot of restrictions for your operations, and can be very inflexible. One of the worst aspects of franchising is having a  parent company that puts stores too close together, cannibalizing the sales of the established franchise locations in an effort to gain greater overall market share.

Check out the downtown of any large city. How many of these franchises do you see: Starbucks, Subway, Quiznos, McDonalds, and other fast foods. It’s not unusual for a busy downtown to have several of each of these within a close radius.

Michael Webster posted some interesting comments from a Quiznos owner over at his blog, The BizOp News.

It’s expensive to keep a Quiznos running. The ideal labor cost is 20% of sales, but the owner commenting is falling in the range of 22% to 25%. The ideal food cost is 30%, but this owner ranges 30% to 33%. (Can you see how a small variance in both of these numbers can quickly set you on the path to being unprofitable?)

The owner was losing $3,000 to $3,750 per month with this Quiznos location even though it is one of the highest rated locations by customers. Unfortunately, customer satisfaction doesn’t really translate into profits.

The Quiznos owner ended up selling their location for $90,000. The person buying it did so because he can make a profit of at least $30,000 per year if he only pays $90,000 for it. The cost to open a new location from scratch (including the franchise cost plus constructing the store) is in the $200,000 to $250,000 range.

After factoring in start-up costs and operating losses, the owner of this Quiznos and her husband only recovered a little more than 1/4 of their investment. Ouch. They also mention that this buyer looks for locations that are in distress, knowing that he can buy them for a fraction of what they cost new, and therefore can operate profitably very quickly.

Full post as published by The FRAUDfiles Blog on May 18, 2008 (boomark / email).