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Veterans Looking to Franchise? Fear No More

Veterans Looking to Franchise? Fear No More

Transitioning out of the military is stressful for long-time servicemen. However, where there is an end, there is always another beginning. Veterans looking for a great new opportunity, franchising is a great way to start again.

Veterans also make great franchisees. After years of being resourceful, driven, and motivated, those skills are best used in the business world. Servicemen learn different leadership styles and can use them for many different situations. Becoming a business owner requires all those qualities to be successful. Thus, the next steps are to find a franchise that fits personal goals and implement that “go get ’em” attitude.

Screenmobile, like other franchises, have proven their success for veterans. The tools are already provided and the business model has given way for profit. Screenmobile also provides training and hands-on support, so becoming a business owner is smooth sailing.

Other benefits include:

  • working towards a true passion
  • opportunities to expand the franchise
  • becoming your own boss

To learn more, visit HERE, or if a current veteran, check in with a military-focused nonprofit organization, like MOAA, to help find the right franchising opportunity for you.

Why You Should Buy a Business (and How to Do It)

Why You Should Buy a Business (and How to Do It)

Richard S. Ruback and Royce Yudkoff, professors at Harvard Business School, spell out an overlooked career path: buying a business and running it as CEO. Purchasing a small company lets you become your own boss and reap financial rewards without the risks of founding a start-up. Still, there are things you need to know. Ruback and Yudkoff are the authors of the HBR Guide to Buying a Small Business.

SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green Carmichael. There you are in your downtown office tower as the sun goes down. It’s where you’ve worked countless hours and late nights. And from your window, you can see other offices with the lights on across the street, other people burning the candle at both ends for the corporation, just like you.

Not everyone with a deserving resume ends up on the executive team and not everyone can be the CEO, except, maybe you think to yourself a little dreamily, but those kids dropping out of college starting start-ups and running their own companies with big valuations changing the world. But entrepreneurship, that’s a big risk for you at this stage in your career.

If only there were a third way, if only there were a way to be in charge, be the leader you know you are, get more value out of your experience, but do so without the roller coaster ride of a high growth startup that’s more likely to fail than not.

Well, there is another way, an open path rarely taken that is laid out in a new book, the HBR Guide to Buying a Small Business. The authors are Rick Ruback and Royce Yudkoff. They’re here with me now to talk about it. Rick and Royce, thank you guys so much for coming on the HBR IdeaCast.

ROYCE YUDKOFF: It’s a pleasure to be here. Thank you for having us. ?

SARAH GREEN CARMICHAEL: So you’re both professors at Harvard Business School, where you teach an enormously popular class on this topic of buying a small business. And I have to say, I’m a little surprised to know that so many Harvard MBA students are interested in this path, because I associate them with this stereotype of, oh, they want to go into finance or consulting or maybe go out to Silicon Valley and start some high-growth startup.

Why do you think so many of your students are really interested in this topic?

ROYCE YUDKOFF: One of the factors that has excited our students about this is the opportunity to have a leadership role very early in their career, not 10 or 15 years out as they’ve climbed the ranks in someone else’s company. And also, it avoids the tremendous risks of starting something from scratch and proving that you have a working business model. Instead, they’re able to buy a proven business and become the CEO. And within a year or two, they’re really fully functioning as an entrepreneur CEO.

RICHARD RUBACK: There’s also the sense of building the world you want to live in. So people want to be home with their families, people want to be able to build the work environment that they want employees to live in and work in. And by buying your own company, you get to shape it in a way that allows you to both thrive as a human being, executing the responsibilities you have, as well as making a great living. So you get sort of the best of both.

SARAH GREEN CARMICHAEL: I was interested to see in the book and in your HBR article some of the examples of things that your students have gone on to do. Could you just maybe give us a couple of examples of the kinds of businesses that they’re running now?

ROYCE YUDKOFF: Sure, both Rick and I can do that. Great small businesses operate in small off-the-run-niches. In other words, they’re not small because people don’t want to buy their product or competitors take away their products, they’re small because they are a terrific competitor in some small defensible niche.

So our students have bought businesses like companies that process the insurance claims for local emergency ambulance services, companies that clean the windows on high-rise skyscrapers, companies that test the fire hoses for safety at firehouses in large regions of the country.

RICHARD RUBACK: Yeah, there’s just lots of examples. These are businesses that are small for the right reasons, not the wrong reasons. And by the way, I should say what we mean by small. We don’t mean your corner grocery store. We mean businesses that have profits of about $500,000, maybe $750,000 to upwards of a $2 million.

And there are businesses of that size, probably 100,000 of them, Royce, in the United States and hundreds of thousands more throughout the world. And we have students at the Harvard Business School from everywhere. And our students go out to buy businesses all around the world.

We have a student who was in sub-Saharan Africa.

ROYCE YUDKOFF: Yes.

RICHARD RUBACK: Who bought a yogurt–

ROYCE YUDKOFF: Manufacturer.

RICHARD RUBACK: A yogurt manufacturer in sub-Saharan Africa.

ROYCE YUDKOFF: And we have many students who’ve done it in Latin America, we have many students who’ve done it in Western Europe, we have some students in Southeast Asia. Because the phenomenon is universal– founders create these businesses, they build them over 20 or 30 years and, inevitably, they approach retirement. And for many of these people, they don’t have a daughter or son who wants to take over the business and they need to sell the business. Because the business not only needs to give them the capital they need to retire, but it also needs to have a successor CEO.

SARAH GREEN CARMICHAEL: I think of the examples we’ve talked about, yogurt might be one of the more exciting ones. And I don’t mean that disparagingly.

RICHARD RUBACK: We think dull is really good.

SARAH GREEN CARMICHAEL: Dull is good.

RICHARD RUBACK: Being dull is really good. You want a business that is dull in the sense that there’s no exciting growth. It’s growing by a little bit every year, a business where customers come back and purchase from you year after year because you’re providing a great product or a great service. They have no desire to look for somewhere else. You’re not a big part of their business. That is to say, your service isn’t a big part of the costs of their business. So it doesn’t pain them to shop. So it’s kind of dull, but dull is really good.

SARAH GREEN CARMICHAEL: And dull is good because it’s predictable?

ROYCE YUDKOFF: Exactly so. The customers will buy from you year after year after year because it’s in their interests not to switch. And it’s a lot of work to switch, there’s some risk involved. And so the financial performance of that business is really secure.

I’d add one more thing to Rick’s comments. Our students who go off and do this or who examine this divide in two groups. There are some students who are passionate about a type of product or service they want to be associated with. But there are many students that are really passionate about being CEOs and managers. And they’re somewhat agnostic about the service itself.

In other words, what excites them is that every one of their skills is tested every day as a manager. They’re hiring people and teaching people and selling to customers and negotiating with vendors and handling finance issues. And at the end of the day, they walk out and feel, today, I used all of my capabilities. And that’s what’s exciting to them, not the particular product or service.

SARAH GREEN CARMICHAEL: As a reality check, are there downsides? Are there things people should think about maybe before they decide if this path is right for them?

RICHARD RUBACK: Sure, and one of the biggest things I think people need to think about is whether they really want the independence and responsibility that comes from running your own small business. Most of us believe we would like to set our own agendas. But most of us really like having a boss deep down inside. We like having that person that says, this is what you should be doing. We don’t want to tell you exactly how to do it, but generally, this is what you should be doing, and try to get that done in the next couple weeks.

That level of direction, everybody likes a boss to set broad agenda items. And when you run your own small business, the most important part of your day is setting your own to-do list. And it’s up to you, you have to decide what’s important and how you allocate your time. And you’ll either succeed or fail based on your decisions and your ability to execute that to-do list.

And some people, that’s too blank a sheet of paper and that’s too much flexibility. Some people like to know that work starts at 7:00 AM or 6:00 AM and ends at some time. It just doesn’t always go with you because you’re always thinking about what the next thing you’re going to do. So it’s not for everybody.

SARAH GREEN CARMICHAEL: Yeah, if you’re running a business with 50 employees, it’s not just you who’s unemployed if you mess up, it’s 50 other people, too.

ROYCE YUDKOFF: That’s a good point, Sarah. I think that, when you’re an entrepreneur, the responsibilities really do end with you. In a way, you don’t feel they do when you’re part of a large organization and responsibility is on many people’s shoulders. So when you’ve had a bad day, you’ve made everybody you care about’s life worse– yourself, your family, your investors, your employees. And that really feels terrible.

Now conversely, when you’ve had a good day, you really feel like you’re at the center of it all. And so these emotional ups and downs that entrepreneurs report having are really big. And you have to be able to handle that as an entrepreneur. You have to look inside yourself and say, yeah, the great offsets the bad, and I am perfectly comfortable managing those emotional oscillations.

SARAH GREEN CARMICHAEL: I don’t think of people who go into these businesses or even acquire them and run them as entrepreneurs. And I’m just curious to know why that is a word that you do use?

ROYCE YUDKOFF: Rick and I feel like this space has been overlooked by many people who thought of their choices as being, I can go work in someone else’s company or I need to come up with an idea and rub two sticks together to make fire, which is of course fraught with risk.

But here, overlooked, are thousands and thousands and thousands of businesses all over the world that have been around for 20 and 30 and 40 years and have an enduring profitability. And when you buy that company and run it, you are in every sense an entrepreneur. You’ve just skipped the part with no scale and where you had to prove out whether you could create a business model. So what they do every day is exactly what an entrepreneur does.

RICHARD RUBACK: And if you think about a startup, most start-ups maybe begin with blank sheets of paper. But for us, the most interesting part of a firm’s life is taking an idea that is proven and scaling it, making it reach out to many people, making it to be at the scale where you can actually employ those 50 people you talked about.

So having it be a secret enterprise with you and your buddies eating potato chips is perhaps a wonderful activity. Lord knows, there’s nothing wrong with potato chips. Maybe they upgrade them to French fries in the winter. But it’s that next step, which I think is extraordinarily entrepreneurial.

SARAH GREEN CARMICHAEL: If you’ve decided this is the right path for you, how do you search for one of these businesses to acquire?

ROYCE YUDKOFF: Well, the very first step is probably creating a budget for yourself so that you can afford to do this. And there are two broad paths. One is that you have some savings or a working spouse who can fund this activity as you proceed to source opportunities to buy. Almost everyone needs to raise money for the actual acquisition from investors. We can talk about that later. And in this path, you raise that money when you’ve found a specific opportunity.

But there are also many people who don’t have those resources to search and they’re not stopped because it turns out there is a network of active investors who will invest in funding a search in return for a first look at the right to invest when that opportunity comes up. So one of the early decisions is, do I need some backing to fund my search and the advice that comes with it. Or can I afford to actually go out on my own and look for a companies to buy.

RICHARD RUBACK: I think it actually starts even a little bit before that. You have to put yourself in the right mindset. And the right mindset is to tell yourself, this is a full-time job. That is, searching for a company to buy is a full-time job. It’s not something you can do occasionally on the weekends, like refurbishing your playroom in the basement. It’s not like that. It’s full-time.

And the reason it’s full-time is, one, it’s an enormous amount of work. So to find a company to buy, most people report that they work 12, 16 hours a day sourcing potential acquisitions. So it’s not something you do casually.

So it’s really a mindset. It says, you have to say to yourself, self, I’m giving up the rest of my working life, I am focusing on this activity. This is going to be my passion.

The other thing about the mindset that’s really hard, if you think about it, you may be searching for a year or two to find the right business. It takes that long. And for every day that you don’t find the right business, the day sort of kind of ends in failure.

SARAH GREEN CARMICHAEL: Oh no.

RICHARD RUBACK: Because when you go home and you talk to your loved one, even if it’s just a dog– maybe it’s best if it’s just a dog– and you say to the dog, you know, I left at 5 o’clock this morning or I started work in my bathrobe on my desk at 5:00 o’clock this morning and I’ve been working for 12 hours and I haven’t bought a company today. I haven’t even talked to somebody who wants to sell to me today. Or I talked to somebody who might be interested in taking another phone call in two weeks, and I’m calling that a victory.

So in the end, there’s a big victory. But it’s a victory that’s made up of lots and lots and lots of failure along the way, if you call it failure.

SARAH GREEN CARMICHAEL: So one of my really basic questions here is how do you even find these companies. Because there’s not like an eBay or a Craigslist where you can just find them.

ROYCE YUDKOFF: Well, actually are there is. Let me start with the United States. But what I’m going to describe is replicated in virtually every developed market around the world and many emerging markets. So in the United States, there are about 3,000 small business brokers.

So one of the first steps most searchers do is they do outreach to several of hundred of these. And very quickly, you’ll find that you’re getting a flow into you of somewhere around 20 opportunities a week of companies that are currently for sale.

In addition, there are a couple of electronic databases where brokers or sellers will list their companies. And you can go to those portals and access this, too. But within a couple of months of starting your sourcing, you should be seeing at least 20 companies a week that are for sale and filtering those. And Rick, some searchers actually supplement that by direct outreach to sellers.

RICHARD RUBACK: Right, so sometimes, you’ll decide you really want to buy a business in a particular geography. Two searchers who are searching together, former students whose spouses were both tied to New York City, so they knew they had to buy a business in New York City. So they drew a circle and said, we’re just going to visit every Chamber of Commerce meeting, we’re going to talk to every business we can within that circle. And we’re going to buy a business within that circle. And they did. They bought a business– what was it, two or three years ago– and they’re doing great– a travel business.

Other searchers decide that there is an industry they really want to be in. We’ve had examples where people fall in love with odd businesses, the porta potty business. Had somebody fell in love with the porta potty business. Really wanted to buy a porta potty company.

And you can see why, by the way, right? They’re a low-cap–

SARAH GREEN CARMICHAEL: Not immediately.

RICHARD RUBACK: Really? Really? It’s an exciting business. They’re plastic, so they’re not very expensive to buy. They’re a quick service item, right– somebody services them. I think we saw it was like a minute per porta potty to clean and whatever. It’s like an essential thing, right. It’s not nobody’s going to say–

SARAH GREEN CARMICHAEL: When you got to go, you got to go.

RICHARD RUBACK: Right, right? And nobody’s going to renegotiate the price of the porta potty. If you think about what you want in a porta potty, you want it clean and available.

SARAH GREEN CARMICHAEL: And there.

RICHARD RUBACK: And there, right? And so people don’t shop for porta potty providers. So it’s a great business.

SARAH GREEN CARMICHAEL: So this is interesting to me. Say you find a business like that, that is desirable in many respects. How do you start doing the research to know that this company is a good buy?

RICHARD RUBACK: Well, first of all, let me answer the question we started this porta potty excitement one, which is, well, OK, suppose you fall in love with porta potties, what do you do. And the answer is, you get on Google or some other search engine and you find out all the porta potty service providers in the place you want to live in. And you research them all and see how much they all charge and how big they are and how many trucks they own and all this stuff.

And pretty soon, you’ll know a lot about the porta potty business. By then, you’ll know how much they cost, you’ll know what the profit rates are, you’ll know what the market penetration is, you’ll know how many competitors there are in the region. You’ll know a lot about the porta potty business just in a particular region with a couple of hours on a search engine, maybe less.

So that’s how you begin to discover. And then you’re going to get a list of companies, and you’ll figure out which are the biggest and which are the best. And you’ll start calling them. And you’ll say, hi, this is Sarah. I used to host podcasts or the like. But now I’ve decided to become an entrepreneur and I really want to buy one business to run. And I’m really excited about your business because I’ve always wanted to own a business that services porta potties.

And what’s it going to feel like when you go to that cocktail party and everybody else is talking about whatever else they do. And they’ll say, what do you do. And you’ll say–

SARAH GREEN CARMICHAEL: I am the porta potty queen of Greater Boston.

RICHARD RUBACK: I’m the porta potty queen of Greater Boston.

SARAH GREEN CARMICHAEL: Yes, I love it. OK, I’m starting to see why this actually is appealing.

RICHARD RUBACK: And suppose you made $1 million a year as the queen of porta potties in Greater Boston.

SARAH GREEN CARMICHAEL: That would be a really good feeling.

ROYCE YUDKOFF: And answer to no one.

SARAH GREEN CARMICHAEL: Yeah.

ROYCE YUDKOFF: Right, you’ll answer to no one. This is one of the things Rick and I have found as we’ve traveled across the country meeting with a lot of entrepreneurs– is in any small city, there are many of these people who lead these quiet lives of great independence in businesses you might not give a second look to, and they’re making $1 million, $2 million a year for their families and doing work that they actually love– disassociated from whether the product is a humble one or an intensely exciting dramatic one– and they find great satisfaction in that.

SARAH GREEN CARMICHAEL: So let’s say you’ve found the business, you’re really excited about it, it looks like a business where the fundamentals are strong, and you call them up. And maybe they’re not interested in selling, maybe they are. How do you have that conversation in a way that starts the negotiation? How do you get the ball rolling with a business you’re serious about buying?

ROYCE YUDKOFF: There are at least a couple of early steps because you’re trying to screen down to a small number of businesses that are likely prospects from the large number of businesses that will be flowing into you. And so one of the early conversations is actually about the seller’s price expectations.

Because just like you’re a first time buyer, your seller is likely to be a first time seller. And some of these sellers understand what market prices are for smaller firms. And some have an imaginary price that most might be associated with how much they want to have for when they retire. And it’s very important that you husband your time so that it’s spent with people who have a realistic sales price. So early on, getting a sense of price expectations is very important.

And then second, you really want to be buying a business which Rick has used the phrase– enduringly profitable smaller firm. And that means you want to be finding out some basic facts, like over the last half decade, has the business been steadily profitable. Is it cyclical or non-cyclical? Do the customers recur from year-to-year? So as a year starts, I can count on almost all of my revenues being repeated. Basic questions like this will quickly clue you in to whether this is a transaction you’re likely to close on.

SARAH GREEN CARMICHAEL: OK.

RICHARD RUBACK: To Royce’s very good list, I would add that you want some evidence that convinces you the seller is really serious about selling. And you can imagine what might compel somebody to sell– they’re ill, their spouse is ill, they fall in love and they want to go off to a different place with their new love, lots of reasons why people do this.

But nobody does it unless there’s an outside reason. Because people who say, maybe I want to do something different, and they’re in their 50s, seem to be in good health, you want to be suspicious of that. And the reason you want to be suspicious of that is you don’t really want to spend three months of your life pursuing an acquisition when the person can, at the last moment say, you know, I’ve been thinking about this, you’re so excited about the business, maybe I should get excited about the business again. I’m not going to sell.

SARAH GREEN CARMICHAEL: Yeah, that’s good advice. Let’s say you make the deal happen– that and it doesn’t fall through, it actually happens– what are some things to be aware of as you’re transitioning into the leadership role at that company?

ROYCE YUDKOFF: Almost always, part of the negotiated deal is that the seller will stick around for three to six months to help in the transition. That means teaching you the specifics of the business, the history, making sure you have introductions to important clients and vendors, and just smoothing that take over of the business. So that eases a lot of the learning process.

The second thing to be aware of is that, it’s a very good idea when you go into one of these businesses not to make any big changes early on because you’re going to be learning that business over the first year. You’ll still make lots of decisions, little decisions will come up every day. And if you’ve bought the kind of business that Rick and I recommend, which is a sturdy, enduringly profitable business, these businesses are very resilient and will permit you a gradual patient period of learning.

RICHARD RUBACK: Yeah, I would say that the other thing to think about is just the people management as you walk in. So it’s really important to be very respectful of the people who are working there. They know more about the business than you do. And it’s really important to be humble.

When we teach our class, we have maybe 20 or so first time CEOs come in to visit the class. And one of my common questions is, what did you wear on your first day. And they all talk about, if they’re buying a business that has a blue collar workforce in the Midwest, they’re getting rid of their designer jeans and they’re buying Carhartts or Levi’s or whatever is the appropriate jean for the region they’re in. And they’re probably not coming in with a multicolored PowerPoint presentation their first day there.

They’re trying to be respectful of the culture of the place and they’re trying to show that they’re going to fit in. Because just as you’re afraid your employees are going to quit and you’re going to be left with a hollow shell, they’re afraid you’re going to fire them.

So you need to build some trust and credibility. A couple of other things that are really important. You need to be willing to do everything. One of our graduates talks about how he bought a very blue collar business in Nebraska and it was a business that put threads on pipes that are used in oil wells. Odd business, right? Very profitable business, it turns out.

And so the guys are on the lathe cutting the threads. And the toilets won’t work. And he went out to the hardware store and bought a plunger or a snake or whatever you do to unplug a toilet and unplugged all the toilets and became the hero. Suddenly, he got enormous credibility because he was willing to do that. And nobody else could do that. So I think you have to do whatever it takes.

And the other thing I would add is that’s building credibility inside. You also should build credibility outside. So certainly within the first month, as Royce mentioned, you have the seller staying with you for a transition period. You and that seller need to go out how to visit all your major customers and get a proper introduction and say, we’re going to maintain all the quality, we’re going to keep the services exactly the same. We’re all committed to providing you at least as good a business as you had before. We really respect the legacy of the seller, all those right things that people say.

As well as, what is it we could do for you that we don’t do for you that would be appreciated in what you pay for. And that’s how you cement those relationships, which are key both, inside and outside.

SARAH GREEN CARMICHAEL: Pipe threading businesses, porta potty businesses– why do you think this profitable work-life balance, relatively friendly way of working does not get more attention from the business press? Why does this fly under the radar?

ROYCE YUDKOFF: Well, one reason is that these businesses don’t change rapidly. So there’s an absence of newsworthiness about them, right? They’re not introducing new products. They’re not growing from $5 million in sales to $100 million in sales. They are steady, profitable, fascinating businesses to run, but they lack the newsworthiness of high-tech or giant companies opening new markets.

RICHARD RUBACK: The other thing is small business owners crave confidentiality. If you think about what it’s like to be a competitor in a big business, if you’re competing with a company that’s a public company and you’re a public company, one of the things you see is your competitor’s strategy. You read it in analyst’s reports, you read it in the company’s annual reports, you read it in the transcripts of the conference calls.

But if you’re a private company, you don’t have to tell anybody anything. You have to tell your investors, but it’s all private. There are no filings that are public. It’s between you, your bankers, your investors. So you could have a tremendously profitable business that nobody knows is tremendously profitable.

And think about how valuable that is, right? Because your workers don’t say, wow, you know, Joe, the CEO and owner, is making $1 million a year and I know everything Joe does and I’m making $80,000 a year. I think I’ll go be Joe, I’m going to set up my own business. I’m just going to move across the street and set up my own business. I’ll know the clients, I’ll be able to compete.

If that general manager who’s getting paid $80,000 doesn’t know how profitable the business is, he can’t really do that. Competitors can’t come in. Our students, who are always looking for startup opportunities, can’t say, wow, I just read in the magazine how profitable that local business is. I think I’ll go do that. So there’s a real economic incentive to keep that information confidential. So they generally don’t seek this out.

ROYCE YUDKOFF: And so the profitability of many of these small businesses is extraordinary. The high-rise window washing business I referenced earlier makes $2.5 million in profit a year. This regional insurance billing company for emergency ambulance services– $1.5 million a year. So all over the world, these private, proven, profitable businesses exist discretely, flying below the radar screen.

SARAH GREEN CARMICHAEL: People seem to obsess over growth, both at the business level and the national level. Is it important for these businesses to grow, or do they just have to sustain?

ROYCE YUDKOFF: Well, most of them grow modestly, although some new entrepreneurs who buy them revitalize them and take them to the next level. And that’s very exciting. But let’s talk about the economics of owning one of these businesses.

The most magical thing about buying a small firm is the price at which you get to buy it. Because these firms sell for about four times their annual pretax profit. So if you buy a business with $1 million of profit, you’ll pay $4 million for it.

And so every year, your investment will earn a 25% dividend, even if you don’t grow one bit. Most people buy these businesses using about 2/3 debt and 1/3 equity. And because of that, the dividend on the equity piece they’ve put up becomes around 40% a year, because so much of the purchase price was paid for by debt.

So before you start to grow this business, you’re earning a return on either your money or your investor’s money or both of about 40% a year. If you’re able to grow the business, it gets even better, quicker. But it takes a lot of the pressure off in terms of having to reinvent the business or hit high growth targets, because you’re experiencing huge success just through purchasing and running.

RICHARD RUBACK: Just remember, with growth comes risk, right? So the dollar is really good. Having most of your customers be customers who purchased from you before is really good, because you don’t have to market very much, you keep costs low, you know what they want, you can satisfy them. They stick, they’re sticky.

If you’re growing rapidly, many of your customers are new, and they don’t have that long-term relationship with you. You have to build that relationship. It’s a much more difficult business to run. It’s much more stressful.

So a high-growth business isn’t always a high-risk business, but it’s much riskier because you have these new customers that don’t have this preexisting sticky relationship with you coming all the time. So it’s a much harder business to get this unbreakable, enduringly profitable business.

SARAH GREEN CARMICHAEL: So this is all sounding very, very appealing. Is there anything else about the personality or the type of person that we haven’t touched on about the kind of person who should really think about these opportunities?

ROYCE YUDKOFF: Sure, because entrepreneurship through acquisition isn’t for everybody. The people who are drawn to it tend to be people who want a high level of professional independence. They like being in a world where they make many decisions. And they are happy being on their own in the sense they won’t have a lot of people like them in their small firm.

But for many people, they crave other things in life. They want to be surrounded by colleagues who have the same educational background aspirations. They want to be part of a brand that they can tell people, I work for Harvard Business School Press or I work for Google, and that matters a lot to them.

And as Rick said earlier in the interview, that they, in some sense, have their professional life more structured by a larger organization. And those are perfectly legitimate feelings. So going down this path in a way begins with a self-assessment of what’s really important to you.

RICHARD RUBACK: Right, who do you like to have lunch with? Because if you’re the owner, Sarah the porta potty queen of Boston is going to have lunch most of the time by herself at her desk, if she even gets lunch. And that’s very different than the social interactions that you get in a more established, larger enterprise that have lots of successful professional, well-dressed people hanging around.

SARAH GREEN CARMICHAEL: What are some of the things that might go wrong with buying a small business? What are some of the things people might have to watch out for?

ROYCE YUDKOFF: Of all the people we see who march down this path, about 75% succeed in acquiring a small firm of the type we describe. And usually they accomplish that in about a one to two year period. So 3/4 of those people accomplish this. The remaining quarter don’t and usually go back and get a job that’s similar to the job they had before they did this.

When they buy these businesses, what we observe is that, if they’re buying the kind of enduringly profitable small firm Rick and I describe, it’s very hard to find anyone who has gone out of business or failed because these companies are so resilient, although some of them, of course, will face a downturn like marching through a big recession. But it is a pretty resilient economic opportunity, in our observation.

Can I just add one thing to this? When you ask about risks, I feel compelled to remind us about the alternative, which is that, when you go to work in someone else’s company, that’s not without risk. You can be denied the promotion you think you deserve. The division you work in can be shut down. For any particular reason, your boss can take a disliking to you and you could find your self shoved out of that company.

RICHARD RUBACK: Or if I may interject, your boss’s boss may take a disliking to your boss. And that won’t be good for your career, too. And that has nothing to do with you.

SARAH GREEN CARMICHAEL: Yeah.

RICHARD RUBACK: So the real truth about any career in which you have aspirations is there are no guarantees. If you want a guarantee, buy a toaster.

SARAH GREEN CARMICHAEL: Excellent. It’s been great doing the podcast all these years, but I think I’m going to go start my business now. No, seriously, thank you both for coming in today.

ROYCE YUDKOFF: It’s a pleasure. Thanks for having us.

RICHARD RUBACK: Thank you for having us.

SARAH GREEN CARMICHAEL: That’s Harvard Business School professors Rick Ruback and Royce Yudkoff. They’re the authors of a new book, The HBR Guide to Buying a Small Business. You can find it at hbr.org. I’m Sarah Green Carmichael. Thanks for listening to the HBR IdeaCast.

Franchising’s Million-Dollar Question: How Much Money Can I Make?

Franchising’s Million-Dollar Question: How Much Money Can I Make?

By Rick Bisio

Like most worthwhile career ventures, the answer lies in due diligence and conversations with people already in the business.

As a franchise coach, I get a lot of questions from people who want to become business owners. Understandably, the biggest question on the minds of prospective franchisees is, “Will I make money?” 

It’s worth developing a detailed answer before committing to a franchise system. Buying and running a successful business involves a lot of hard work, and business ownership isn’t much fun if you aren’t making any money. While it’s true that franchising is a more structured and transparent way to become an entrepreneur, it still can be complicated and confusing to navigate the process on your own.

 How can you ensure your chosen franchise has the ability to make money? As always, the key is doing your due diligence.

Doing your due diligence.

Before buying a franchise, it’s important to learn what your experience will be like as a business owner. Those who skip this crucial step don’t often remain business owners for very long because they end up with a franchise that isn’t a good fit for them.

Financial viability is a key criterion for most people. If you’ve never run a business before, your natural instinct might be to focus on the bottom line. You’re used to receiving a salary, and you want to know how much the business will be able to “pay” you. Unfortunately, it doesn’t work to ask, “What is your profit?” or “What is your income?” when you’re researching a potential franchise.

Looking beyond the bottom line.

As a business owner, your take-home pay at day’s end isn’t normally a good indicator of the business’ full financial benefit. In fact, many successful business owners purposely minimize their salary. Look over a franchisee’s profit and loss statement (P&L), and you may notice the business appears to make very little profit — or maybe even runs at a loss. This might seem like a huge red flag to someone who hasn’t run a business. Dig a little deeper, though, and you’ll notice the owner legally is allowed to list certain personal expenses as business expenses.

These owner benefits aren’t reported as part of salary income. From the business owner’s family cell-phone plan to travel expenses, a wide variety of costs could be categorized as business expenses. This causes the company’s bottom line to appear lower than it actually is. In some cases, an owner will pass income through a retirement account or pay dividends instead of salary.

Business ownership has a large number of tax advantages. New franchisees would be wise to seek out an experienced accountant or other professional adviser. Diane Kennedy’s “Loopholes of the Rich” can be a helpful primer to learn more details before your appointment.

Taking a top-down approach.

To understand a business’ true earning potential, you must start at the top of the P&L.

  1. List each type of income and expense. This is called a Blank P&L, and most franchisors will provide you with a copy, if you request one. Of course, you always can make some educated guesses on likely categories for both income and expense based on the type of business. As another resource, you can refer to samples of Blank P&L formats in Step 11 of “The Franchisee Workbook.”
  2. Examine the Franchise Disclosure Document. This document, known as an FDD, may provide additional cost information — generally reported in Items 5, 6 or 19. The Royalty and Advertising Cost is one example. You might also find Ticket Average, Product Cost or Average Gross Sales. Insert any real figures from the FDD into your (no longer) Blank P&L.
  3. Talk to franchisees. Confirm that your list of income and expenses is complete. If a franchisee mentions any expense you’ve forgotten, such as insurance, add it to your list.
  4. Request explanations. Ask the franchisee which expenses are the largest. As a follow up, ask him or her to explain how each expense works. For example, if product cost is the largest expense, ask how much these items tend to run. You might learn that product cost accounts for 45 percent of sale, on average. Once you understand product cost, ask about other categories. One by one and franchisee by franchisee, you’ll gain a greater understanding of how each income and cost category works.
  5. Seek more input. Widen your net, seeking out other franchisees to help fill in any areas of the P&L that you still don’t understand. If three franchisees give three different answers for the same category, work to discover the reasons behind the variance. With this context, you can choose the answer that is most similar to the way you anticipate running your own business.
  6. Do the math. Now that you have a complete P&L, you should be able to identify when the business will hit a cash flow break-even point.  Determine how much volume you’ll need to create your targeted income goals.

Obviously, figuring out your earning potential as a franchise owner is much more complicated than simply asking a salaried employee, “How much do you make?” But the real world doesn’t offer any shortcuts. You must do the work. If you try to rush your research or skip steps, you won’t understand the franchise’s financial reality. Just as important, you’ll never realize the business’ true profit potential. A firm grasp on the numbers will enable you to make decisions confidently.

Many aspiring business owners seek help from franchise coaches, lawyers and publications. In addition to “The Franchisee Workbook” mentioned above, “The Educated Franchisee” offers useful tips.

Finding the right franchise fit is the most difficult part of franchise ownership. The rest might not come easy, but you’ll feel like it’s what you were meant to do — and you’ll be earning more while you do it!

7 Rules for Succeeding as a Franchise Owner (Instead of Retiring)

7 Rules for Succeeding as a Franchise Owner (Instead of Retiring)

Maybe you can’t afford to retire. Or maybe you’re like serial franchisee Bob Thomson, and you don’t want to. At 91, he owns several restaurants within the Subway Sandwiches and Pancheros Burritos franchise organizations, with the latter having recently named him “Franchisee of the Year.” Happily working decades beyond the magical age of 65, here are his words about how anybody can follow suit, and thrive doing so.

Rule 1. Use a positive cash flow to love the work you do.

The best guarantee for being miserable in business is to either not make money or not make enough for a comfortable living. A positive cash flow can make up for lots of little day-to-day problems in business. The absence of a positive cash flow will turn those little problems into an unending series of catastrophes. The result of that will be bitterness–at business and at life–and who wouldn’t want to retire if that’s the alternative?

Rule 2. Do everything you can to learn from other people’s mistakes.

Yes, courage and perseverance are virtues, but in business they should never trump common sense. Those virtues can be a prescription for disaster and years of misery. If you’re losing money, the market is probably telling you, “Hey, dummy, go do something else.” There’s no shame in listening to the market. It’s called “learning.” If you’re embroiled in some business endeavor that’s losing money, and the only way for you to make money is for a bunch very unlikely things to happen in just the right order, my advice is to throw in the towel. I know. I’ve done it.

Rule 3. Purchase experience from the experts.

I suppose there’s a chance that I could–with enough time, patience and capital–have come up with the perfect way to sell sub sandwiches at a profit in my hometown of Charles City, Iowa. Why on earth would I do the experimenting on my own nickel when, for a collection of relatively inexpensive fees and conditions, I can purchase expertise from the recognized world authority on sub sandwiches, the Subway organization? I don’t have to guess at how much mayonnaise to use or where to get the best Black Forest ham. I don’t have to scout out the best advertising deals or the best point of sale terminals, which are tasks that would probably bore me anyway.

Rule 4. Vet the hell out of any franchise.

I am involved in two franchise systems now, and I love them both. But I’ve been involved in several others, and I have looked at literally hundreds as possibilities. I have learned the hard way that time spent kicking the tires of a franchise concept cannot be overemphasized.

If you want to succeed, you need to get into honest conversations with people high, low and in between in several regions where the franchise operates. What’s the attitude of the line workers toward “corporate?” How many of the franchise owners currently in the system would make the same investment all over again? What does the P and L of that franchisee look like? How are merchandise “turns” supposed to work in the system? Who are the key suppliers, who picks them and are they reliable? Are there controls on franchisees to keep them from sourcing through competing, junky vendors? How does financing work for working capital, periodic upgrades, and the acquisition of new franchises? What do banks think about this franchise compared to its rivals? What does the secondary market for the franchise look like, and how does it work? What are the key indicators you can monitor daily to gauge the health of the business? Are there healthy groups of franchisees who come together to support the brand?

Rule 5. Make sure you want to be married to this job for the next several years of your life.

This is true for any business, but particularly a franchise.

Rule 6. Get a territory, or some similar protection against cannibals.

Rule 7. Never stop developing and reinforcing good habits.

Virtually every day since August 27, 1958 (the day of my daughter’s birth, and the day I bought my first store), I have checked the sales of my businesses, reconciled the sales to the cash deposit, and reconciled the deposit to the bank balance. I do this because no businessman can stay in business if he does not constantly monitor the cash drawer. This started out as a necessity–because I had very little capital and even less margin for error–but now it’s ripened into a good habit. Others that I recommend:

  • Keep active in the community of franchisees, even if some of them are tedious.
  • If there is a group of dissident franchisees, steer clear of them.
  • Make a point every day of doing several things to make you a part of the local business community.
  • Reward your trusted employees, especially with a sincere compliment.
  • Keep thinking of new ways to reward your employees.
  • Try to promote from within your organization.

Most importantly, never forget that all business is fleeting; the most important reckoning is the final one, with that Great Franchisor in the sky.

‘Every Franchisee is an Entrepreneur First’

‘Every Franchisee is an Entrepreneur First’

You’re reading Entrepreneur India, an international franchise of Entrepreneur Media.
By Sneha Banerjee

Apply now to be an Entrepreneur 360™ company. Let us tell the world your success story. Get Started »

Viswanath Pillutla, Owner of Triumphant Institute of Management Education (T.I.M.E), has navigated through the tunnels of education business at a time when this sector hadn’t seen the light of digital ways of the world.

An IIM and IIT graduate, Pillutla has been at the forefront in planning and implementation of the expansion of T.I.M.E and T.I.M.E Kids across the country through a large network of franchisees. Today, T.I.M.E is a formidable brand in the field of test preparation with the 236 offices in 112 cities across the country and 250 centers of T.I.M.E. Kids. Pillutla is actively spearheading the inclusion of digital education in the brand’s portfolio. In an exclusive interview with Entrepreneur, Pillutla shares his perspective on the importance of building and sustaining strong franchise partnerships for a brand.

What’s the secret to maintaining a strong franchise relationships?
The franchisors and franchisees must understand that it is a mutually beneficial relationship. However, it’s a bigger responsibility for the franchisor. Most people who seek to take franchise of an established brand would be aspiring to do something on their own without too much of knowledge or involvement in business. It’s the responsibility of the franchisor to ensure that there is a certain amount of responsibility into this relationship. In case of any dispute between the two parties, the franchisor needs to take charge of the situation to maintain a life-long business partnerships.

How should a franchisor treat his franchisees?
It becomes really important for the franchisor to realize that the franchisee is not an employee; he is also an entrepreneur like the franchisor. This sort of regard and respect should exist in such partnerships. The stronger the brand grows, the gap between the two parties could also become large. As the organization grows bigger, deal negotiations with the franchisees are done by people who are lower down at his organization. So the franchisor should also ensure that their executives deal with the franchisees in the same manner.

What are the qualities your brand hunts for in a prospective franchisee?
The company tries and understands the intention and quality of the people who are involved and are coming together to take a franchise of my brand. In our industry which is primarily people-based, it is the service that matters. The kind of people, the focus they have, the amount of care they would take of the students coming to our classes – these qualities take top most priority. Our executives take negotiations forward on these lines.

When is the right time for a brand to opt for franchising?
There are at least three to four levels of interactions that take place before we take a franchise relationship forward. There are three things that a business owner should check before he opts for franchising — having a good product or service in place, get a decent brand name and be fairly ready with your system and processes so that one can explain the business model to another person.

What have been your key learnings as an entrepreneur so far?
It’s very important for an entrepreneur to get an outsider’s perspective about his business model. At some stage, entrepreneurs should get external mentors or financial advisors to analyze their business process. Today a lot of people start ventures purely from a valuation point of view, the focus drifts away from the product somehow. Focus on product, service and valuations will eventually follow.

Today, when T.I.M.E has pioneered the brick and mortar domain of the education sector, the brand is trying to upgrade their skills in the digital front of the business. T.I.M.E as a brand believes that even though digital education can be used to supplement classroom coaching, India is not digitally strong to replace classroom education anytime soon.

Looking Ahead: Buying a Business in 2017

Looking Ahead: Buying a Business in 2017

By Bruce Hakutizwi

Is 2017 going to be a good year to buy a business?

If you’re an American entrepreneur with more than a year or two under your belt, you’ve already experienced drastic economic changes. In fact, the last 10-12 years have been a roller coaster ride that many business owners either wanted to – or were forced to – get off when it changed from fun and exhilarating to sickening.

Fortunately, in most sectors, things have slowed down in the last 1-2 years and have hit a steadier equilibrium that’s allowed for consistent, steady growth for many companies. But those companies are being run far differently now than they were in the late 90’s or early 2000’s. It’s a different world with a different frame of reference when it comes to risk and reward.

So, the thought of buying another business still gives some entrepreneurs cold sweats now when it would have been a thrilling concept years before. But is it possible that 2017 is actually going to be the best year in a decade to buy a business in the United States?

There’s at least one very good reason to believe it is.

Historic funding opportunities

In late 2015, the Wall Street Journal reported:

Together, 10 of the largest banks issuing small loans to business lent $44.7 billion in 2014, down 38 percent from a peak of $72.5 billion in 2006, according to an analysis of the banks’ federal regulatory filings.
Through August, banks this year originated 43 percent of business loans of up to $1 million, down from 58% for all of 2009, according to PayNet Inc., a tracker of small business credit.
Nonbank lenders increased their market share to 26 percent from 10 percent, with corporations that lend to their business customers or suppliers making up the balance.
However, just a few months later, large banks were right back into the swing of things. For example, in January of 2016, Citibank released a press release containing this powerful stat:

Citi’s pace of small business lending in 2015 ($10.0 billion) surpassed that of 2009 ($4.5 billion) by more than 120 percent.
Depending on your business strategy, industry, location, and other factors, there are more reliable and willing funding opportunities available to entrepreneurs right now than ever before. Between low-interest traditional business loans, government grants and loans, and a striking volume of venture capital available from individual angel investors, large corporations, and established VC funds, it’s easier and faster than ever before to fund a promising new startup or the expansion of an existing business.

As opposed to the relative risk of a brand new startup, obtaining funds to purchase an already established and successful business is even easier. This is doubly true if you’re purchasing another business that naturally extends or expands your own existing company or expertise since you can likely prove to the lender you’re up to the task of making the acquisition profitable.

This climate can’t last forever

If there’s one thing the Great Recession taught us all, it’s that nothing good lasts forever. There’s bound to be a point at which the Fed finally decides to start raising interest rates, where both banks and alternative lenders will begin focusing more on collecting than on lending. And after the dramatic hit, the economy took in 2008, you can bet that decision makers are going to be much faster to batten down the hatches and prepare to ride out another storm rather than get caught unprepared yet again.

So, while the economic climate is still favorable for small business lending, why not explore the option of buying an existing business or franchise location early in 2017? Use it as an opportunity to expand your current operations or to finally take that step into business ownership you’ve been dreaming of for years.

Then if things start to change going forward, you’ll be in a better position of control and more likely to ride out the storm yourself.