Starting my own business: Franchisee

[AAAgent]

I thought some forum owners could benefit from this journey.

Some reasons for this.

- I move way tooooooo much. Probably moved atleast 16 times in the last 16 years to 8 different cities and 4 different states.
- establishing a home base would make me less likely to move
- economy going downhill, have a high paying job but expected instability. This is a plan B.
- opportunity in my city. Large influx of traffic and target demographic fits my business
- Additional income if things go well.
- I have business experience in operating businesses on much larger scale for corporates.

To summarize:

Back in 2021, I saw shtf. I talked about it on the forum with real estate crash, market crash (not there yet but potentially still happening, inflation, debt, layoffs, pension problems, etc. Envisioned massive layoffs coming and a cycle as bad if not worse than the great depression. I've been working during that time to pay off ALL debts, stack precious metals, crypto, cash, food and supplies, and even buying and training on firearms.

Assuming worst case scenario on the financial side, I didn't want to have to rely on savings for years if I was laid off and couldn't be re-employed again. In 2021, launched a crypto project and made $30k and winded it down. In 2022, thought on less complex businesses, and decided on bubble tea shop. Large influx of Asians in my region with a lack of good asian foods. As restaurant was too much work, I decided on bubble tea. In 2023, things got worse economically, although i was fine, I decided to make a hard push. I started applying to different chains of bubble teas. Food in my area was really bad diversity wise, and the good restaurants and bubble tea places that opened up, exploded positively.

I knew some of the corporate people in this business, and applied. Got accepted to one of the top bubble tea brands from china just starting their expansion in the US. I went through the screening and passed the screening/feeler process to see if they wanted to work with me as a franchisee and passed after a few days. This was in early April.

 

[AAAgent]

Step 1 - application (passed)
Step 2 - screening (passed)
Step 3 - region selection & deposit (passed/done)
Step 4 - physical location/lease (in process)

There was alot of confusion on Step 3 and Step 4.

Background check issues:
They asked me to complete a background check form on their web portal. We were a week behind due to tax season. When we filled it out, they said it was done under the incorrect email address and they weren't able to find my application. They asked me to resubmit using the e-mail address I applied with which I did. This delayed the process by 2 weeks. 3 weeks in, they still couldn't find my application and thought I wasn't serious. finally they found my application and their system had it classified incorrectly and they had to manually fix this which took another week.

Deposit issues:
We're now waiting on choosing a location. We had already confirmed my city as the region, but the business director told me to lock down a location and once a location was confirmed by both parties, I could place down the franchisee deposit. This also took 4 weeks due to miscommunication. Week 1, they keep asking about location and the location we had scouted was too large/expensive so we passed. Week 2, we finally found a store location agreed upon by business director and myself. We reached out to broker to confirm the details and unfortunately, the location was scooped up. It was a sublease from a bankrupt tenant who leased during covid period which is why the lease was so affordable. Unfortunately, we didn't get it in time so back to the drawing board. Week 3, we find new locations and share them with the business director. We decide on a location and wait for the broker to confirm its available. halfway through week 3, corporate tells us there's someone else entering the market and we have to decide quickly if we want our region/location.

This is where the confusion takes place, as it doesn't make sense for corporate to allow franchisees to compete with each other in the same territory. I called them to get clarification, as maybe they didn't think we were serious and it turns out there was miscommunication. They were under the assumption that we didn't decide on our region yet, which we were decided on. We were under the assumption that they knew we decided on our city/region and were now in the process of locking down a physical location. They were under the assumption we didn't decide on our city yet. This was likely due to our screening call we mentioned starting in our city first, expanding to the burbs, and then finally expanding to a nother city hub in our state (this would be much later if at all).

Next we had to clarify if we already have confirmed out city, what was next. Business director confirmed next step was to place down deposit to secure our regional hub, and then find a physical location, secure a letter intent for a lease on the physical location, submit it to corporate leasing department for approval, and sign the lease within 30 days after approval. We immediately sent the deposit a couple days later to square that away. Now moving onto finalizing the location/LOI/Lease.

 

[AAAgent]

Step 1 - application (passed)
Step 2 - screening (passed)
Step 3 - region selection & deposit (passed/done)
Step 4 - physical location/lease (in process)

Leasing/LOI

A lot of back and forth with our broker and landlords. We lost the first place at a luxury mall. called many places directly before having a broker just to try and learn and get pricing. Spent a couple of calls with the broker to explain that I expected a massive downturn in real estate. He see's a decline already happening. I explained we must lower the cost per square foot as much as possible, work in more free months of rent to accommodate build out and extra (if there's any delay in build out), and also reimbursement on rennovation.

- We asked for 25% discount on their asking price per square foot.
- they offered 2-3 months free rent for rennovation, we asked for 5
- they offered $15 per square foot renovation reimbursement, we asked for $20 (33.33% increase)

Unlike that all or maybe even any get accepted, but the goal is to reduce overhead as much as possible to increase profit margins as well as keep costs minimal. Worst case would be that we end of losing money monthly on this place. We submitted our LOI on Friday to the landlord and are now waiting. Next step will be to send an approved LOI from the landlord to corporate leasing team for revenue on the physical location. Assuming they confirm, we need to lock down the lease by mid next month as there is a 30 day period from making the deposit.

 

[jaygreenb]

Step 1 - application (passed)
Step 2 - screening (passed)
Step 3 - region selection & deposit (passed/done)
Step 4 - physical location/lease (in process)

Leasing/LOI

A lot of back and forth with our broker and landlords. We lost the first place at a luxury mall. called many places directly before having a broker just to try and learn and get pricing. Spent a couple of calls with the broker to explain that I expected a massive downturn in real estate. He see's a decline already happening. I explained we must lower the cost per square foot as much as possible, work in more free months of rent to accommodate build out and extra (if there's any delay in build out), and also reimbursement on rennovation.

- We asked for 25% discount on their asking price per square foot.
- they offered 2-3 months free rent for rennovation, we asked for 5
- they offered $15 per square foot renovation reimbursement, we asked for $20 (33.33% increase)

Unlike that all or maybe even any get accepted, but the goal is to reduce overhead as much as possible to increase profit margins as well as keep costs minimal. Worst case would be that we end of losing money monthly on this place. We submitted our LOI on Friday to the landlord and are now waiting. Next step will be to send an approved LOI from the landlord to corporate leasing team for revenue on the physical location. Assuming they confirm, we need to lock down the lease by mid next month as there is a 30 day period from making the deposit.

I have experience with franchisees. Would just say make sure you speak with multiple owners not just the ones they hand select for you, some franchisors are great some are awful. Make sure you have a good handle on royalty %, advertising payments and any other hidden fees. Can be make or break on your margins. Also, try and get idea of how much control they have over your pricing and if they make you run any forced specials like subway does. Happy to help if I can be of any assistance

 

[AAAgent]

I have experience with franchisees. Would just say make sure you speak with multiple owners not just the ones they hand select for you, some franchisors are great some are awful. Make sure you have a good handle on royalty %, advertising payments and any other hidden fees. Can be make or break on your margins. Also, try and get idea of how much control they have over your pricing and if they make you run any forced specials like subway does. Happy to help if I can be of any assistance

7% fees based off total monthly revenue for royalty + service
$50k single store tax every 3 years

There are literally no franchises yet in the country. Less than 3 atm. so i don't really have many options of people to talk to but I have had family visit 1 of the 2 existing locations that opened earlier this year.

Corporate is doing heavy promotion at the moment all over social media for the brand.

Feel free to share any information you can as I will do my best to take it in. Doing my best to lower overhead as most of it comes from the rent/employees.

 

[jaygreenb]

7% fees based off total monthly revenue for royalty + service
$50k single store tax every 3 years

There are literally no franchises yet in the country. Less than 3 atm. so i don't really have many options of people to talk to but I have had family visit 1 of the 2 existing locations that opened earlier this year.

Corporate is doing heavy promotion at the moment all over social media for the brand.

Feel free to share any information you can as I will do my best to take it in. Doing my best to lower overhead as most of it comes from the rent/employees.

Few questions, assuming the $50k guarantees you some type of territory? You absolutely need some sort of guarantee on area and rights so another operator can not come in. If they only have a few locations, you can heavily negotiate fees and area rights. Without a doubt you need to do this. They do not have the track record or the demand for franchises to have any sort of leverage. They need you.

Is this an international company? If they have three locations, who is corporate? Biggest question, is what type of operating systems, IP, marketing reach that has been proven successful and repeatable do they have? Can take this off forum if you want too

 

[AAAgent]

Few questions, assuming the $50k guarantees you some type of territory? You absolutely need some sort of guarantee on area and rights so another operator can not come in. If they only have a few locations, you can heavily negotiate fees and area rights. Without a doubt you need to do this. They do not have the track record or the demand for franchises to have any sort of leverage. They need you.

Is this an international company? If they have three locations, who is corporate? Biggest question, is what type of operating systems, IP, marketing reach that has been proven successful and repeatable do they have? Can take this off forum if you want too

Yes, let's connect. I will still share as much publicly here as possible as i'd like for people to be able to reference and learn but will def connect!

 

[AAAgent]

Few questions, assuming the $50k guarantees you some type of territory? You absolutely need some sort of guarantee on area and rights so another operator can not come in. If they only have a few locations, you can heavily negotiate fees and area rights. Without a doubt you need to do this. They do not have the track record or the demand for franchises to have any sort of leverage. They need you.

Is this an international company? If they have three locations, who is corporate? Biggest question, is what type of operating systems, IP, marketing reach that has been proven successful and repeatable do they have? Can take this off forum if you want too

Update: Can confirm deposit is received on their end.

- Territory is locked in for my city. It's a large city but they gave me for now, the most important part of the city and if things go well, i plan to open a second location next year.

- negotiation will be difficult and their fees are listed publicly.

- They have a strong track record and are one of the largest brands in one of the most populated asian countries in the world

- corporate is asia, while they have US corporate that's first line of communication.

- they provide all the systems/services outside of contracting for renovation/hiring.

- all my asian friends are super excited for me opening this brand as they know its a big brand. they also mention seeing alot of the promotional ads.

 

[jaygreenb]

Update: Can confirm deposit is received on their end.

- Territory is locked in for my city. It's a large city but they gave me for now, the most important part of the city and if things go well, i plan to open a second location next year.

- negotiation will be difficult and their fees are listed publicly.

- They have a strong track record and are one of the largest brands in one of the most populated asian countries in the world

- corporate is asia, while they have US corporate that's first line of communication.

- they provide all the systems/services outside of contracting for renovation/hiring.

- all my asian friends are super excited for me opening this brand as they know its a big brand. they also mention seeing alot of the promotional ads.

Nice, sounds like you did your homework. Would just suggest try to lock in the most desirable high traffic areas or at least get 1st rights of refusal if another operator wants to purchase in your area. If your shop is popular, most likely happens quickly. I would bet there is a lot more flexibility on territory rights if they are hung up on set fees, no harm in trying at least. I was in Shanghai around 10yrs ago, there was a bubble tea shop every 10 feet it seemed like lol Everyone there was obsessed with it

 

[AAAgent]

Nice, sounds like you did your homework. Would just suggest try to lock in the most desirable high traffic areas or at least get 1st rights of refusal if another operator wants to purchase in your area. If your shop is popular, most likely happens quickly. I would bet there is a lot more flexibility on territory rights if they are hung up on set fees, no harm in trying at least. I was in Shanghai around 10yrs ago, there was a bubble tea shop every 10 feet it seemed like lol Everyone there was obsessed with it

I was basically told that once i secure my region by depositing, I get the entire territory for certain number of undetermined amount of miles. I didn't get a specific number of stores/miles. I will ask but they made it clear that atleast for my region and the surrounding cities around where im opening will be mine. It could be 2 stores or more, but it depends.

There is a southern region of my city. It would be nice to have that, but i'm not as focused on trying to lock that down and fight for that region as the target demographic isn't there. 2-3 stores currently would be max imo for this region and maybe 1 store down south.

 

[jaygreenb]

I was basically told that once i secure my region by depositing, I get the entire territory for certain number of undetermined amount of miles. I didn't get a specific number of stores/miles. I will ask but they made it clear that atleast for my region and the surrounding cities around where im opening will be mine. It could be 2 stores or more, but it depends.

There is a southern region of my city. It would be nice to have that, but i'm not as focused on trying to lock that down and fight for that region as the target demographic isn't there. 2-3 stores currently would be max imo for this region and maybe 1 store down south.

Nice, if you know anyone who owns food franchises or can get connected would definitely do that. Would not just take their word for it, have a friend who owns a bunch of subways, I can ask if anything specific. My experience isn't specifically with food franchises.

 

[AAAgent]

So glad I spoke with @jaygreenb

questions he asked me to inquire about

Question 1: " They give you a P&L of an average location? Its available and they legally have to provide that in order to franchise "

Question 2: " Maybe see if you can get 1st right of refusal on any areas directly connected to your territory, give you some protection and breathing room"

Question 3: I also asked for clarity on territory

---

Answer 1: No existing P&L available to provide as none of the new franchises have been in operation for atleast a year. They have no corporate locations to share financials for in the US. This was helpful but I was able to find that a typical low end tea shop profits on average $80k ish. This location should be the same if not better as it is higher end. likely will net $60k to $120k a year depending on economy. Enough as some pocket change and first foray I guess. Starting to seem like its not worth the time but we already have team available to manage.

Answer 2: first right of refusal was rejected. it's a first come first serve basis.

Answer 3: Territories are based on 0.3 miles up to 1 miles of protection. It's also based on demo of the region. Legally they only need to guarantee up to the 1 mile area, but they won't try to put us out of business if another franchisee wants to open 3 miles down and the demo doesn't support opening another location. I originally thought I would have atleast a 20 mile radius surrounding my store....wow was i completely wrong. I kind of think this is more effort than what I can make of it but still committed to seeing it through...

 

[AAAgent]

the landlord that we've been waiting on seems to be a bit unresponsive according to his broker/my broker as he is in israel. it's been 1.5 weeks now which is unusually long. Pushed my broker to push him a bit so we can lock down this LOI asap.

 

[BackInTheGame78]

So glad I spoke with @jaygreenb

questions he asked me to inquire about

Question 1: " They give you a P&L of an average location? Its available and they legally have to provide that in order to franchise "

Question 2: " Maybe see if you can get 1st right of refusal on any areas directly connected to your territory, give you some protection and breathing room"

Question 3: I also asked for clarity on territory

---

Answer 1: No existing P&L available to provide as none of the new franchises have been in operation for atleast a year. They have no corporate locations to share financials for in the US. This was helpful but I was able to find that a typical low end tea shop profits on average $80k ish. This location should be the same if not better as it is higher end. likely will net $60k to $120k a year depending on economy. Enough as some pocket change and first foray I guess. Starting to seem like its not worth the time but we already have team available to manage.

Answer 2: first right of refusal was rejected. it's a first come first serve basis.

Answer 3: Territories are based on 0.3 miles up to 1 miles of protection. It's also based on demo of the region. Legally they only need to guarantee up to the 1 mile area, but they won't try to put us out of business if another franchisee wants to open 3 miles down and the demo doesn't support opening another location. I originally thought I would have atleast a 20 mile radius surrounding my store....wow was i completely wrong. I kind of think this is more effort than what I can make of it but still committed to seeing it through...

Why are you looking to spend a lot of money for a garbage ROI? You are going to work like a slave for 60K? C'mon bro, you could get a job that pays more than that.

Don't make the mistake of making a bad decision simply because you have spent a lot of time and effort on this. Know when to walk away from a bad deal.

 

[CAPSLOCK BANDIT]

So glad I spoke with @jaygreenb

questions he asked me to inquire about

Question 1: " They give you a P&L of an average location? Its available and they legally have to provide that in order to franchise "

Question 2: " Maybe see if you can get 1st right of refusal on any areas directly connected to your territory, give you some protection and breathing room"

Question 3: I also asked for clarity on territory

---

Answer 1: No existing P&L available to provide as none of the new franchises have been in operation for atleast a year. They have no corporate locations to share financials for in the US. This was helpful but I was able to find that a typical low end tea shop profits on average $80k ish. This location should be the same if not better as it is higher end. likely will net $60k to $120k a year depending on economy. Enough as some pocket change and first foray I guess. Starting to seem like its not worth the time but we already have team available to manage.

Answer 2: first right of refusal was rejected. it's a first come first serve basis.

Answer 3: Territories are based on 0.3 miles up to 1 miles of protection. It's also based on demo of the region. Legally they only need to guarantee up to the 1 mile area, but they won't try to put us out of business if another franchisee wants to open 3 miles down and the demo doesn't support opening another location. I originally thought I would have atleast a 20 mile radius surrounding my store....wow was i completely wrong. I kind of think this is more effort than what I can make of it but still committed to seeing it through...

Just because you have a protected area doesn't mean they can't sell their products through other vendors which is exactly what companies like Mr. Beast Burger are doing for example, they are piggy backed upon the pre-existing infrastructure of other businesses.

I'd look at setting this up within a place that already sees traffic or going with an entirely other business but also franchise within it, if that is even possible although maybe the company would just do lateral deals with the entity as opposed to you being a middle

 

[Reincarnated]

Do you anticipate that the affiliation with a Chinese brand may create barriers /difficulties for you now or in the future given the current state of relations between our countries? I get that bubble tea is probably at the bottom of the list of potential threat industries, but it seems like the broad sentiment of being adversarial to their government could complicate things. Or is the entity you're working with a domestically controlled (US) subsidiary of the Chinese parent?

 

[jaygreenb]

Just something to keep in mind. To really make something like this work and worthwhile you need to be committed to 5+ locations where you can afford an operations management team, achieve some economies of scale and do not have to do that day to day work yourself. If only doing 1 or 2 locations you are essentially just buying yourself a low paying middle manager job. Subway franchises are very much the same way. The resale on these business's I believe is in the 3-5x net income range, so there is fairly minimal asset appreciation from your initial investment if you do choose to sell and it will take you 3-5yrs to recoup your initial investment and that is factoring in using your own labor.

Also the P&L numbers you are getting, assuming they are from China since they are not from here. Their cost of goods and labor is probably much lower, so probably not safe to assume you can achieve similar margins.

 

[AAAgent]

Why are you looking to spend a lot of money for a garbage ROI? You are going to work like a slave for 60K? C'mon bro, you could get a job that pays more than that.

Don't make the mistake of making a bad decision simply because you have spent a lot of time and effort on this. Know when to walk away from a bad deal.

ROI is not bad. I make much more than that already which is the problem.

The decision isn't bad because my wife wants to run it and it helps us add in an additional revenue stream. I think it's a net win overall and can be "okay" if we do well. Issue is I expect economy to go to **** so I'm just planning for bad scenario's for profit margins. Good scenario which can also happen as brand and location are both very strong and rent is reasonable could be $120k+/year.

As my wife and I will run it and my wife will work most of it in the background, it's acceptable.

I'd look at setting this up within a place that already sees traffic or going with an entirely other business but also franchise within it, if that is even possible although maybe the company would just do lateral deals with the entity as opposed to you being a middle

Yes, we have a great location lined up next to one of the hottest chinese restaurants in town. There's also another new hot pot restaurant which is run by the same owner of the hot chinese restaurant which has potential to do well. That is opening up early next year. Both major pluses.

Do you anticipate that the affiliation with a Chinese brand may create barriers /difficulties for you now or in the future given the current state of relations between our countries? I get that bubble tea is probably at the bottom of the list of potential threat industries, but it seems like the broad sentiment of being adversarial to their government could complicate things. Or is the entity you're working with a domestically controlled (US) subsidiary of the Chinese parent?

I asked and product is sourced locally. Entity is also what you mentioned, as corporate is protecting itself with their US corporate subsidiary HQ. All chinese companies do this.

Just something to keep in mind. To really make something like this work and worthwhile you need to be committed to 5+ locations where you can afford an operations management team, achieve some economies of scale and do not have to do that day to day work yourself. If only doing 1 or 2 locations you are essentially just buying yourself a low paying middle manager job. Subway franchises are very much the same way. The resale on these business's I believe is in the 3-5x net income range, so there is fairly minimal asset appreciation from your initial investment if you do choose to sell and it will take you 3-5yrs to recoup your initial investment and that is factoring in using your own labor.

Also the P&L numbers you are getting, assuming they are from China since they are not from here. Their cost of goods and labor is probably much lower, so probably not safe to assume you can achieve similar margins.

We do plan to scale into more locations. Second location mid next year. If that goes well likely a 3rd and potentially a 4th. I will definitely keep this in mind. I'm also in it for the experience. I do run operations for large tech conglomerate division but this is definitely different and interesting.

I don't plan on abandoning this business. Opportunity, brand, location, cost, are all positive. This is a my back-up plan A. I have another back-up plan B. Cash, precious metals, crypto, and full-time job (this is shaky). Assuming that I get laid off, I have another savings to weather the storm, but I definitely don't want to be sitting around idling. Job hunting in this market will be extremely difficult as well.

 

[AAAgent]

Got the LOI back from landlord's broker. He took 2 weeks to respond and because we need to respond within 30 days or our deposit, I kept pushing my broker to see what was up with the landlord. Usually landlords respond in 2-3 days so this was weird. We let the landlord know we were serious, have the funds, already deposited for the franchise, and would like to hear back.

We offered 30% lower than his asking rate and he came back 10% higher than his original asking rate. Rate is still cheap, location, great, and we don't have enough time to find another spot. likely will go with the 10% higher ask as there is "supposedly" competition. If I had more time, more options on locations (none of the other locations were better or cheaper than this), I'd try to hardball or even walk away but there just isn't better. It is below market rate as well.

 

[BackInTheGame78]

ROI is not bad. I make much more than that already which is the problem.

The decision isn't bad because my wife wants to run it and it helps us add in an additional revenue stream. I think it's a net win overall and can be "okay" if we do well. Issue is I expect economy to go to **** so I'm just planning for bad scenario's for profit margins. Good scenario which can also happen as brand and location are both very strong and rent is reasonable could be $120k+/year.

As my wife and I will run it and my wife will work most of it in the background, it's acceptable.




Yes, we have a great location lined up next to one of the hottest chinese restaurants in town. There's also another new hot pot restaurant which is run by the same owner of the hot chinese restaurant which has potential to do well. That is opening up early next year. Both major pluses.



I asked and product is sourced locally. Entity is also what you mentioned, as corporate is protecting itself with their US corporate subsidiary HQ. All chinese companies do this.



We do plan to scale into more locations. Second location mid next year. If that goes well likely a 3rd and potentially a 4th. I will definitely keep this in mind. I'm also in it for the experience. I do run operations for large tech conglomerate division but this is definitely different and interesting.

I don't plan on abandoning this business. Opportunity, brand, location, cost, are all positive. This is a my back-up plan A. I have another back-up plan B. Cash, precious metals, crypto, and full-time job (this is shaky). Assuming that I get laid off, I have another savings to weather the storm, but I definitely don't want to be sitting around idling. Job hunting in this market will be extremely difficult as well.

60K a year isn't bad for working literally 24/7 for an unknown period of years?