If you’re like 80% of Canadians, you’re enamoured by the idea of having your own business. You are likely struggling with a number of factors…
- What concepts are hot right now?
- What business suits you best?
- Can I start part time and then switch to full-time once the business is up and running?
- How much money can I make?
These are likely just a few of the myriad of questions that you need to ask, and answer before making the decision to buy a business… a far more important question is this:
Critical Question # 1: What problems am I trying to solve through franchise ownership that corporate employment can’t solve?
Rarely are there simple or easy-to-find answers here, and the answers are different for each person. When you do define the answers effectively, they often become the critical criteria to define your ideal business model… Regardless though of what your logical and emotional reasons may be for “moving away from” corporate employment, this type of self-motivation is typically temporary; if you can’t sufficiently define what you are “moving towards” then you run a significant risk of accidentally duplicating a similar negative scenario a few months to a few years down the road. It is for this reason that sufficiently defining your ideal business model is one of the most critical steps in the entire franchise research and selection process! My previous blogs “Finding YOUR Business – The Proper Search Methodology” and “The Most Important Analogy When Buying a Franchise” will help you define the majority of the critical answers. Now let’s move on to financial considerations…
In this blog I’m going to focus on one of the biggest challenges in franchise research – getting a complete financial picture… – how much money can I make through franchise ownership?
One of the biz biggest mistakes I see people making is that they are only considering annual income as the key measure… Essentially, they are trying to answer this question: Can my earnings through franchise ownership be similar to (or ideally more than) what am used to earning in a corporate job?
While this is an important question, it is only part of the picture that you will need to assess. You will need to assess the short-term, midterm and long-term picture for franchise ownership, AS WELL AS corporate ownership… because we are now in a “gig economy” where, for most people, corporate employment has been redefined.At the end of this blog I’ve linked a spreadsheet tool that can enable you to build a better long-term comparison based on your own unique factors.
Critical Question # 2: To what degree can I reach my long-term financial and lifestyle goals through continuing with corporate employment?
If you’re truly going to take a serious look at self-employment as a career option, then a very important first step would be to create an analysis platform that provides each option with the same assessment criteria… So we recommend a 12 year time frame to assess both options against – this will enable you to assess short, mid and long-term scenarios.
If you’re among the fortunate few who do have some long-term career security, you still need to consider this long-term cycle for comparison purposes. While you will still earn an annual income, you need to assess your savings patterns, specifically, what percentage of your earnings have you been able to save annually, because this, plus your RRSPs and pension is what you’ll have to project forward for comparison purposes to equity building in business ownership).
If you’re like most Canadians though (and not among that fortunate few), then you’re facing a different reality… In my previous blog The Harsh Reality of Corporate Employment Patterns we maintain that in today’s world, corporate employment for many is a 2-year to 3-year cycle including 6-12 month gaps timeline between jobs. Unfortunately though, most people do longer term financial comparisons (of corporate jobs to franchise ownership) assuming no employment gaps or income interruptions! Unless you’re in a public sector, union or other job where log-term employment is protected, you’re simply not being fair or honest with yourself to assume that whatever annual income you’re earning today will be able to be maintained for an entire 12 year cycle.
Defining a benchmark income for comparison purposes:
When annualized over a 12 year period, the above factors contribute to a typical annualized drop in pay:
- of 18% to 22% if you are able to keep your periods of unemployment between jobs to six months, or
- 35% to 40% if your periods of unemployment between jobs are in the 12 months range
There is also a tremendous amount of uncertainty and stress with this new corporate employment model because you rarely know where your next job is going to come from, and at what the new compensation level will be.
Apples To Apples – corporate employment
Think for a moment of what the long-term financial implications are of an annualized 20% to 40% decrease in pay would mean if you stayed in the corporate world… This is not a pleasant thought, but it is a harsh reality for far too many people! As unpleasant as this is, you do have to factor it into your long-term financial calculations.
Apples to Apples – franchise ownership:
One of the big challenges people have is assessing risk; they typically look at the initial investment and how long it takes them to earn money, then how much money they can earn annually… The nature of franchising is that there are numerous models with many differences, so it’s important to do the appropriate amount of work to get as complete a picture as possible regarding financial and operational considerations.
Financial consideration factors for franchise ownership:
- almost all franchises require some level of initial investment
- almost all franchises require a launch phase where there is little to no income (we recommend planning no income for 6 to 9 months)
- when operated properly, many franchises enjoy good profitability in their second year
- when operated properly any franchises are able to achieve “full stride” by their third year (full stride being where the owner is earning the level of income they originally aspired to achieve)
- once the business achieves full stride, historical data shows that franchising enjoys strong long-term financial health and performance
- One of the most overlooked aspects of franchise ownership is the equity value of the business… often a 2.5x to 3.5x multiplier factor of the annual profitability of the business
- Some businesses enable you to move into “passive engagement” at maturity, thus giving you an additional exit strategy, which is:
- hire a manager to run the business full time, while you manage the manager,
- enabling you to enjoy an annuity income,
- while still retaining full equity value for future realization
When you consider the 12 year cumulative factor of franchise ownership to corporate employment, think of it this way – you don’t earn income for the first year, you are and partial income in the second year, and you earn full income from years 3 to 12. In addition, you enjoy the equity increase of the business and thus build substantial additional value.This equity value should be compared to your savings patterns if you were to stay on the corporate employment path.
The following chart from the US Department of Commerce shows us a couple of things:
- the longer you own a franchised business, the safer it becomes, and
- the biggest decline in success happens in the first five years… while this chart only shows 10 years, it is easy to extrapolate that the business will continue on for as long as the owner wants to after the 10 year time frame – hence creating a significant, secure long-term income and wealth creation engine.
(Note: the Canadian government has no industrial classification codes or specific segmentation for franchising, thus deal like this is not available in Canada. Given the socioeconomic, cultural and geographic similarity between Canada and the US, we are comfortable with this data for comparison purposes)
Longevity like this is rarely available in the Canadian corporate employment world!
Assessing your own financial scenarios
To create a representative long-term wealth creation/retirement savings comparison between corporate employment and franchise ownership, here are some critical considerations:
- you’ll want to look at how many good years you have “left in you” that you want to continue working
- factor in your own personal considerations (if you stay on the corporate path) to create an accurate picture of your true earning potential on this path
- length of employment “per gig”
- length of likely gap in between jobs
- Ageism/long-term declining income picture from job to job (if applicable)
- Factor in your own personal considerations in franchise ownership (based on research on the specific franchise you’re considering buying)to create an accurate picture of your true earning potential on this path.
While there are a number of factors to be assessed, by making the comparisons outlined in this blog, you’ll at least be able to make a more fair (to yourself) and accurate long-term financial picture, which should lead to a more confident decision regarding how you can achieve your long-term financial and lifestyle goals.
About Gary Prenevost
Gary Prenevost is one of North America’s leading franchise matchmaking experts. He has been a licensor, a master franchisor, a franchise consultant and a franchisee. As a Senior Advisor with iFranchise Group, Gary also works with companies to franchise their businesses; he also helps existing franchise systems improve their systems and processes. Prior to becoming an entrepreneur, Gary was a banker for over seven years, so with over 20 years of experience “on all sides of the franchise table”, Gary truly brings a 360° perspective to helping his clients find and buy the optimum franchise for them.