Passion & Risk in the Franchise Buying Equation

If I had a nickel for every time I heard someone dispensing the trite advice, “Follow your passions”…well, I’d have a pretty good stash of copper. But, what …

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If I had a nickel for every time I heard someone dispensing the trite advice, “Follow your passions”…well, I’d have a pretty good stash of copper. But, what I wouldn’t have is good advice. Sound crazy? Isn’t passion a necessary ingredient in any successful business owner?

Nope.

The ‘passion imperative’ has been overused and much-abused. It can cloud one’s judgment. It can encumber one’s objectivity. Moreover, it does not necessarily translate to profit and long-term market viability. All too often I find buyers walking away from strong opportunities because they did not have an out-of-body experience when initially checking out a particular category or specific brand. They seem to think they need to be doubled-over in bliss in order to pursue something.

My philosophy has been shaped over the years working with countless buyers and concluding that there is not a correlation between passion and profit. The R2, as statisticians would say, simply is not tight between the two. I have just seen too many people try a golf business or bait and tackle shop or the like (their ‘passions’) only to burn out quickly and/or find that they got crummy advice to contrive their passion/diversion/hobby/labor-of-love/et al into their business. Bottom line, passion won’t pay the bills.

Risk Is Our Oxygen

What does seem to be a common thread is RISK. Yes, that dreaded four-letter word. I am here to tell you, though, that risk allows us to breathe better air in the business world. While risk does involve possibility of loss, failure and uncertainty, it does come with a potential of greater upside, wealth creation and return on capital invested. Investment theory has long supported that notion – that higher-beta (risk) stocks (in this case, franchises) tend to be more volatile and therefore riskier, but provide the potential for higher returns.

To put it into a sports analogy, if you want to control the game and your competition, you, by definition, need to swing for extra-base hits (doubles, triples and the occasional home-run). Singles and walks won’t give you enough runs/wins over the long haul. And extra base hits can only happen if you swing aggressively and, for the fences. Yes, a lot of the long-ball hitters strike out a lot, but they also top the list of the highest-paid players in the game. Singles and play-it-safe hitters are nowhere to be found on the list.

Staying on the baseball theme (please indulge me, baseball is my passion – and thankfully I did not make it my business, although, lack of talent had something to do with that) I see the best time to get in the game is in the early innings (ie, ‘ground floor’ opportunities). These opportunities, due to the lack of a long track record, certainly do have higher risk but also have higher upside. Don’t you wish you were one of the visionary, pioneering franchisees that caught on with McDonalds, Holiday Inn, or Jiffy Lube early in their games? So, play ball!

Do Not Throw Caution to the Wind and Don’t Chase Windmills

All this is not to say that one should not conduct rigorous Due Diligence and mitigate some of the risk. To the contrary, my message is for all Buyers to apply a methodical, no-nonsense process to your search for the right franchise. Just don’t be spooked by risk and don’t be misguided by passion. If you do not temper both appropriately, your business could soon have its tombstone in the graveyard of failed franchises.     

Also, do not harbor the illusions that there are businesses out there that offer a ‘perfect’ risk/reward equation. No such thing. Reminds me of the Buyer (let’s call him Don Quixote for now) that came into my office and stated that he wanted:

“a business where I can make a high 6-figure income, in my first year, putting little or no money down. I want the business to have very high margins with no direct competition. It must be something that is very proven and established, and of course not yet in my market. I want to be able to not work nights, weekends and I would rather not have to deal with many customers or employees. Oh, and put in on hold for me for 6 months while I make mind up.”

As I told ‘Don’ then, the only thing that comes close to that business model is playing Lotto. Aside from that, there ‘aint no such animal. The fact of the matter is that you will need to be able to stare risk (and customers, etc) in the face if you are ever going to be successful. Otherwise, better to be honest with yourself confront the fact that the self-employment temperament is not in your DNA.  And you should not have to make any apologies for that – just is who you are.

But if you are cut from the self-employed mold, you realize that the greatest risk is not taking one…and that passion can be the real four-letter word!

David Omholt is the Chief Executive Officer of eAuth.com, a franchise brokerage firm representing prospective buyers. He is a Certified Franchise Executive (CFE) and frequent speaker on talk shows, industry conferences and college campuses on the subject of Franchising. In his career, Mr. Omholt has been both a Licensor, as well as a Licensee and offers a real-world, balanced view of Franchising. Omholt can be reached at 866.246.2884 or domholt@eAuth.com

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