franchise dilemma.

Discussion in 'Economics' started by saxon22, Feb 23, 2008.

  1. Guys I have a dilemma. I just had a dinner with my brother and he asked me a question I was not prepared for. He wants me to be a partner in his franchise. I am the oldest sibling and was always wise/lucky/blessed with $$$$. He has about 200K of his own capital but the place is asking around 300K. For my initial 100K I would get 50% of profits and once paid in full I would get 20% for 5 years, then it is all his. I would not have to run the place and would be allowed full access to the books, the place and have a say in how it is run.

    I trust my bro but when it comes to franchises I am as green as they come. The company is: auntie anne's and it seems to generate a lot of business. Since I believe there are many people who frequent this site who are business savy and generally smart and intelligent MY QUESTION to you guys is:
    1. Should I go ahead and help him?
    2. Is this th right franchise?
    3. Anything else I should know?
    4. Are there any good sites with more info?

    Thanx guys!
  2. clacy


    Is it going into a mall or an airport? If not, I probably would not get into the pretzel business personally. Still no guarantee of success obviously, but if went into a busy mall or airport, at least you are guaranteed a good location, which is very important in that type of business.

    Also, how much are the franchise fees? This can eat up much of the profit margin. In my line of work (NOT restraurants) they rarely succeed due to no need for branding/name recognition which is something that a franchise usually brings to the table. And due to the slim profit margins, coupled with franchise fees eating away this slim figure.

    With that said, my father had franchised a restaurant and it has been very successful, but he had been in the corporate restaurant world for a long time with much success.

    Also, what is the expected (realistic) yearly profit margin? Your bro should be able to have 3 ROI's. One that is as realistic as possible, one that shows how it would preform if sales were less than expected, and one that shows how it would perform if sales were higher than expected.

    If the yearly profit is $40k, then 20% for 5 years would be too low, IMO. If it is $100k or more, then it might be worth while.

    Probably the biggest thing to think about, is how would you handle it (also how would your wife handle it) if it fails? Would it ruin your relationship with your bro? If so, then stay away. If you feel like you could be very forgiving, then it's something that is a good move if the numbers make sense.

  3. The location would be in a mall. If you are familiar with NYC it would be the Staten Island Mall. the fees are 7% and there is 1% fee.So total is 8%.

    He swears by the brand (maybe have already been brainwashed by the company) and says people love the product. I have seen the kiosk of this company out on Long Island and it looked busy, but then so did every other food joint in that place and it was the weekend. He wants me to go and check two of their locations tomorrow. he wants to sit in front of them for a couple of hours and see how they do. I know,I know, not the best way to spend Sunday, but in the name of brotherly love, I will have to attend. :(

    As for profit..... I have no clue, we just spoke and I was surprised to say the least.
    I want him to succeed and start making some $$$$. Poor guy is stuck in a 50K a year dead end job with no prospects. However, having said that,I am not about to blow 100K and hate my brother for a long time if it does not work out.
  4. clacy


    It's good that it is in the mall. I'm not familiar with NYC and their malls, but it would most likely have the foot traffic to support it which is a must.

    I would advise your bro to seek out some other owners, (same franchise), but not references provided by the company, as they would obviously be the profitable and happy ones. If you can't find any on your own, ask the company to provide you with some references that maybe aren't super profitable, happy etc. Ask any references you find if you can see their books, or at least get a real good idea of what the gross sales, labor, and food costs would be. Labor, food cost and rent (your bro should know that number) will be your biggest expenses. If you want, PM me and I can check with my dad to see what %'s those numbers should be in order to be profitable.

    The franchise fee seems reasonable, as my dad pays 7%, although his restaurant is a larger volume, full service restuarant that grosses much more than an Antie Anne, so to pay an extra 1% on a smaller gross is probably reasonable.

    And if you will hate your bro if it fails and you are out $100k, then I would not do it. With $200k, he should easily be able to finance the rest through an SBA note and it won't cost him as much interest.
  5. <i>"Guys I have a dilemma. I just had a dinner with my brother and he asked me a question I was not prepared for. He wants me to be a partner in his franchise."</i>

    Sax, I just had dinner with my 24-yr old daughter at a place called "Moes"... mexican food served Subway style for those who may not have heard of them. Only the second time I've been there myself.

    Food is sub-par at best... most anyone can make better tasting quality at home. But, they serve it fast, prices are reasonable and waiting line was out the door from 6pm ~ 7:30pm without pause.

    I'm looking to open some type of food venture myself, passive owner managed (mostly) by my daugher who has years of experience. That said, we're going the independent route and not franchise.

    There are some benefits to franchise versus no-name, for sure. But the startup and yearly fees on my end versus "Moes" isn't even close. If our food is good, served fast and priced correctly, name recognition takes on a life of its own.


    Your biggest decision should be what you get in direct benefit of franchise costs versus pure startup. A no-name pretzel store may start out slower traffic than a franchise and you may stumble thru a learning curve versus cookie-cutter approach of franchise.

    Would those factors be worth avoiding or paying the franchise fee? Rather than paying a franchise fee, would it make sense to hire experienced manager to learn the ropes? Start small and build bigger on your (brother's) own?

    Weigh the costs of no-name versus franchise, and don't rush into any decision. If it's a good idea now, it will remain a good idea into the future.
  6. 1in10


    Just something to consider, not only will you have the franchise fees, but malls will typically charge a per square foot rent and a percentage (upwards to 10% of profits). Be aware of this.

    You should have good margins on your product. For example a medium fountain drink will have a margin at nearly 20x cost.

    But it will take alot of soda and pretzels to cover your overhead.
  7. I have experience in valueing franchises...

    While auntie annes is a VERY good franchise, you should not be a franchisor mainly because it takes 8% of yoru GROSS.
    A very good restaruant grosses around 15% of GROSS, Them taking 8% right off the bat leaves you with 7%

    It puts you brother straight into the buying another job category but with tons of headaches with employees and such.

    That 8% gross cut is a huge cut off your profit, , its not 8% net but 8% GROSS, keep reminding yoruself that, 8% GROSS, walmart doesn't even make 5% NET , if you are not making money for the month you are still paying 8% GROSS.


    #2 sqft , with an auntie anne, your sqft is around 500 sqft at most, That makes it a class C franchise,
    which means you will have maybe 3 employees.

    That means yhour brother as the owner will be workign there for life, he will not be able to buy more franchises and build up from there.

    You want to own at least a Class A franchise , which allows you to hire more people and leverage your experience.

    With a Class c franchise, you are a working stiff.

    Class a franchise = 10+ employees where yo ucan hire a manager and become hands off. 3000+ sqft dining areas

    Class b franchise = 5+ employees , quiznos

    Class c franchise = auntie annes, those cookie shops, 3 employees max, you need to be working there or you won't be making ANY money.
    Not enough gross to cover a managers fee.


    What auntie annes is, you are spending $300k to buy yourself a $60k job.

    your rbother already has a free $50k job, why is he buying one for $300k?

    auntie annes = great busines

    Auintie annes is a GREAT business, don't get me wrong, its a GREAT busines for the franchisors, its a SLAVE business for the franchissees.

    I have NEVER seen an auntie annes that didn't get a lot of customers.

    long island city mall , I know that place, good location ,but still, will get you great business, but you will be paying your 8% gross to the franchisor

    8% gross = you slave worker that paid $300k to buy a $60k job.

    he will not be making more then $60k a year, guaranteed.
  8. ******most important theory in business propositiions*****

    any busniess proposition offered to the public masses almost always a lose lose situation.

    if you rememebr that you'll understand why its not a good deal.
    Good business propositions are found, not offered, or sold, or cold called, or advertised.


    Only businesss that require you to blood/sweat/tears with low income or even potential bankruptcy, are advertised.
  9. coolweb,

    Thanks for the good info. Any comments re franchise in mall location/traffic? Is the mall growing or losing customers (malls in general). How can you grow your business if the mall is not viable?
    #10     Feb 23, 2008