Can I just invest my money and then hire someone to run my business?
Maybe you find yourself in this situation: You have worked hard during your career, carefully saving your money, and now you want to make an investment for your future that will provide dividends to you and your family for years to come. You are looking at a franchise to be that investment. One challenge that you may face at the beginning of opening the business is that the income from your franchise isn’t enough yet to justify leaving your current highpaying position. You may consider investing in the business and hiring someone to run it for you. The questions that need to be answered in making this decision are:
- How can I find someone I trust to run this business?
- How much control am I giving up?
- What happens if things go wrong?
Finding someone you trust as a friend can be challenging; finding someone you trust with your money can be next to impossible. Generally, when you open a business the overall goal is profitability, so we’ll use that as the example for this scenario. As long as the person you are hiring is focused on profitability your goals should be aligned. However, profitability is not something an employee is generally concerned with – it is something a partner will focus on. For example, if a manager is asked to increase profitability they will likely
reduce prices to sell more products. On the other hand, if a partner is asked to increase profitability they will likely sell more products at a higher margin. The same request produces different outcomes.
One option is to take on an operating partner. In this case, a qualified experienced general manager is given the opportunity to buy into a small percentage of ownership of the franchise, either through a nondemand loan that is secured against some kind of asset or through a cash down payment for anywhere between five – 25 per cent ownership. Once they have a stake in the success of the business, the motivation changes dramatically and the outcomes are generally much better. This type of operating partner relationship can make investing in a business and having an experienced manager operate it a viable option. In general, the franchisor will want the operating partner to have 100 per cent of the control, so how much control is being given up in this scenario needs to be established upfront. That being said, the franchisor will recognize the partnership. If the business should stop performing to the standard of the franchisor and the majority shareholder then conversations need to be had about buying out the minority partner and bringing in someone who can play the role.
If finding a replacement partner is not an option, then, as the business owner, you may be required to give up your career to operate the business. This is highly unlikely, but can definitely happen. After all, this is your investment and savings and no one can protect it as well as you can. Hiring the franchisor to take over and run the business on your behalf until a suitable solution can be determined is another option as well. In this case you and your partner are now more closely aligned as the franchisor is interested in seeing you successfully sell your business or have it prosper in order to help the brand and allow them to achieve maximum royalty value.
At the end of the day, your success is decided by more factors than you can possibly control. The best method of entering a franchise system is to invest 100 per cent of your time and effort. Handing your investment over to operating partners can add a level of risk and an element of uncertainty that you need to be comfortable with if you are going to pursue that course of action.
Shawn Saraga
Senior Vice President
SRS Canada
[email protected]
416.847.6236