# Small franchises



## silverarrows (Aug 22, 2011)

Hi,

Went to the franchise show on the weekend to see if there was a place I could invest in a small side business. I'm mostly invested in securities and was simply looking at a way to diversify my income stream as well as capture some small tax credits for operating a business.

Does anybody here have any experiences with small capital franchises? I found it was tough in that compared to the stock market where there are reporting requirements etc., information is very one sided, and they have their own sales tactics to make everything look rosy. One opportunity I saw was to purchase private banking machines as a passive investor. One machine requires $15k. The ROIs look good, if not slightly overstated, although unlike dividends which can grow over time for example, I would expect no growth once cash hits a steady state.


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## Causalien (Apr 4, 2009)

Oh, that sounds like a good idea. Is there a way to insure the machine?

And where do you get info on these franchisee gatherings? I am interested in owning my piece of a money burning franchise too.


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## silverarrows (Aug 22, 2011)

The franchise show was this past weekend at the MTCC. http://www.franchiseshowinfo.com/exhibitor/toronto-jan/index.html Machine is supposedly insured with a portion from each transaction.


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## spirit (May 9, 2009)

*Don't*

I am interested in owning my piece of a money burning franchise too. 

A good friend and neighbor got into the vending machine business when he retired from the police force. Chips, pop etc vending machines in a high school. Those kids were masters at getting their snacks out without paying money. He lost a lot of money and went through quite a bit of aggrevation before he got rid of them. Sounds like this is a better opportunity to lose a lot more money


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## Causalien (Apr 4, 2009)

Yeah... I wouldn't want to put anything near a highschool. Even College is suspect.


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## Mall Guy (Sep 14, 2011)

All of these "side" businesses require more time and energy (and money) than anyone ever expects. Not sure why you need a franchise to own a 'white label' ATM, which by definition doesn't have a 'brand'. If they are finding you the location, just bet they have already passed on it for a corporate location. Only very high volume locations make money, and those are not going to be offered to you.

I often tell prospective tenants/franchisees to 'give me half your money now, don't open the store/franchise/business and you will still have the other half of your money, your health and most likely your family'. I've seen too many business failures, good people who didn't stop to say 'what if it doesn't work, what's my exit strategy'. AND who empty out their RRSP to try and save their "business".

I remember once walking into a guys office (early days of on-line dating I think, I was there to collect rent) and he was telling one of his franchisees "does Ford give you back your money if you don't have enough cash to put gas in your car?" (meaning the franchisee just figured out he was going broke, and the business model was never going to work). 

Even with a Tim Horton's or Subway you need at least three location, and an ownership team (husband and wife, etc.) to make it work. Oh, and NEVER put your money into a Quizno's franchise. Ever!

Maybe, and only maybe, if you know a very bright, capable person, who needs an equity partner . . . but even then, never someone you can't foreclose on !


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## donald (Apr 18, 2011)

Mallguy:You don't think a guy could'nt make a "go" with one franchise?It would seem one should,im guessing first off one would be lucky to have a chance at say a tim's capital requirement aside- and then im guessing you would need atleast 500k to back you(i don't have a sam scratch how this work so im guessing)anyways i'm interested in how a franchise breaks down...do you know how they work?what kind of roi a franhise owner makes?or how does the model/system works for a typical owner?(on say a tim's)i know it's vague and there is a lot of parts but just the just of things if you know what i mean(lol)


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## Eclectic12 (Oct 20, 2010)

donald said:


> Mallguy:You don't think a guy could'nt make a "go" with one franchise?It would seem one should,im guessing first off one would be lucky to have a chance at say a tim's capital requirement aside- and then im guessing you would need atleast 500k to back you(i don't have a sam scratch how this work so im guessing)anyways i'm interested in how a franchise breaks down...do you know how they work?what kind of roi a franhise owner makes?or how does the model/system works for a typical owner?(on say a tim's)i know it's vague and there is a lot of parts but just the just of things if you know what i mean(lol)


Depending on what the owner wants for an income, one franchise is likely fine. Three would be more stable as well as more money - though would also cost more.


Some interesting reading:
http://www2.macleans.ca/2011/04/18/always-profitable/
http://www.bizmagazine.ca/sitepages/?aid=3137&cn=&an=Double Double Trouble | Q4 2010
http://www.theglobeandmail.com/repo...ake-over-the-world/article1718843/singlepage/


Of course it would help to know how many have failed, especially where the failure was bad location.

Cheers


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## Causalien (Apr 4, 2009)

If the franchisee fees are the same, I'd like to have McDonalds over Timmies.

What's this must own 3 store thing I hear?


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## yupislyr (Nov 16, 2009)

Mall Guy said:


> All of these "side" businesses require more time and energy (and money) than anyone ever expects. Not sure why you need a franchise to own a 'white label' ATM, which by definition doesn't have a 'brand'. If they are finding you the location, just bet they have already passed on it for a corporate location. Only very high volume locations make money, and those are not going to be offered to you.


Exactly.

Not to mention you'll be competing against all the big bank's ATMs and the ATM manufacturers themselves. I know first hand that one of them is starting to ramp up aggressively going after the white label market. 

Oh, and they all have their extensive helpdesks/comms networks/service force to properly service and maintain the ATMs.


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## Mall Guy (Sep 14, 2011)

The three units came from talking to a few franchisees I know. The numbers in Eclectic12 article generally back up what I am saying. If you want to buy a job, sure one unit likely works, but not if you are trying to build wealth. The store profitability ($265,000 in one of the above articles) is before interest, taxes and a return on your initial investment. Somewhere along the line you will have put down $150,000 plus setting aside $50,000 in working capital, and signed a note for another $450,000. And if you have a $150,00 to 200,000 to put down, and can get financing for the rest you likely enjoy a superior income to start with.

The franchise fee for Tim's is something like $35,000 (and around $45,000 for McDonald's), it the cost of building, renting and equipping the restaurant that adds up. 

On a $2 million dollar store, you as a business owner, make 10-12% EBITDA (8.5% rent, 4.5% royalties, 4% advertising fee -all taken out of your bank account weekly, 30% food cost, 25% labor, 1% overhead, 4% for utilities, 3% realty taxes, 3% supplies (paper, etc), 3% property maintenance (that 24 hr drive-thru needs to be plowed) and 3% to cover the loan payments - that should add up to around 90% including a little for local marketing (the missing 1%), leaving 10% +/- EBIT profit. (These are strictly my rounded up estimates, not the companies). 

Don't forget you need to take that money out of your corporation at some point, and their's the government in your pocket again. Tim's also requires a minimum of two people (husband and wife team or other partnership) to work the franchise, so cut all of that in half again. And don't forget you need a return on your capital employed. That's why I mentioned tohe three store thing. Not that these are in anyway bad franchises to own, its just that its hard work, just like everything else in life. 

Somewhere it was mentioned, and I'll say it again, TDL and McD are real estate companies, with franchisees who just so happen to operate restaurants.


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## financeguru (Jan 18, 2010)

Mall Guy said:


> The three units came from talking to a few franchisees I know. The numbers in Eclectic12 article generally back up what I am saying. If you want to buy a job, sure one unit likely works, but not if you are trying to build wealth. The store profitability ($265,000 in one of the above articles) is before interest, taxes and a return on your initial investment. Somewhere along the line you will have put down $150,000 plus setting aside $50,000 in working capital, and signed a note for another $450,000. And if you have a $150,00 to 200,000 to put down, and can get financing for the rest you likely enjoy a superior income to start with.
> 
> The franchise fee for Tim's is something like $35,000 (and around $45,000 for McDonald's), it the cost of building, renting and equipping the restaurant that adds up.
> 
> ...


So on a cash investment of $200K, your annual return is $265K gross, am i reading this correctly? I've always been curious about profitability of a typical Timmies - they always seem like a cash cow to me.


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## colossk (May 11, 2011)

financeguru said:


> So on a cash investment of $200K, your annual return is $265K gross, am i reading this correctly? I've always been curious about profitability of a typical Timmies - they always seem like a cash cow to me.


My parents close friends own 5-6. It's almost imposible to become a new franchisee with Tims unless your already in. New locations are offered to exisiting franchisees first and exisiting franchisees almost never turn down another location. Tim Hortons are a cash cow, however the franchise is structured in such a way that you really only make money while you are operating the business. When you sell or retire there is very little to be had when you sell. They wouldn't go into explicit details but thats how it was explained to us.

We were looking at a Tims franchise and they couldn't help us at all to get our foot in the door. We had to apply to buy a franchise like everyone else and the process was give us your info, pick 3 cities that you would like to open a franchise in and if we open one up in those cities we will call if we are interested.. We had to pick 3 different cities, we couldn't fill out a generic form and you have to refile the application every 3 years. It's a don't call us we will call you application.


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## Eclectic12 (Oct 20, 2010)

Mall Guy said:


> The three units came from talking to a few franchisees I know. The numbers in Eclectic12 article generally back up what I am saying. If you want to buy a job, sure one unit likely works, but not if you are trying to build wealth. The store profitability ($265,000 in one of the above articles) is before interest, taxes and a return on your initial investment.
> 
> [ ... ]


Is the "before interest, taxes" part really true? 

The Macleans article is explicit that:


> ... the average Hortons outlet earned nearly $1.5 million (before interest and taxes) ...


So the earnings definitely are before taxes.


The statement


> ... how much cash the average Hortons store owner pockets in a year: $265,558.


suggests the $265K is after-taxes. Not many people I know would refer to "cash in the pocket" or "profits" where taxes are still payable. 

Both this and other articles I've found are vague so it is hard to tell.


IAC, I can see the need for more than 1 franchise where the aim is to build wealth as opposed to working for someone else.


Cheers


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