Learning the Business Appraisal Wheel
Module 5 • 8 Lessons
List of Modules
Module 0 • 1 Lesson
Module 1 • 1 Lesson
Module 2 • 1 Lesson
Module 3 • 1 Lesson
Module 4 • 2 Lessons
Module 5 • 8 Lessons
Module 6 • 4 Lessons
Module 7 • 2 Lessons
In Module 5, you will access a tool which will help you to evaluate any business. Our approach to the appraisal wheel will allow you to focus on vital facets like cost versus potential, overhead considerations, the significance of location, and the essence of scalability. As you navigate each lesson, you’ll transition from grasping theoretical concepts to honing tangible skills.
Lesson 1: Mastering the Art of Business Evaluation
As a Franchise Broker with FBA, your primary role is to uncover the true value and potential of different businesses. Please don’t think this is just about assessing financials or considering popular trends. Rather, it involves a deep dive into the heart of each business to understand its unique narrative.
The general public often has misconceptions about franchising. They might not understand what makes a franchise successful or which type of franchise would be the most suitable fit for their goals and lifestyle.
As an FBA Franchise Broker, you help bridge this gap. You become a guiding light, enabling buyers to better comprehend the world of franchising, understand business models, and even help them gain deeper insights into their own preferences and abilities.
Also, people frequently overestimate their own self-knowledge. They may not recognize their potential as managers or leaders, and thus might misunderstand the responsibilities and realities of owning a franchise. As Brokers, our primary mission isn’t to follow short-term trends, but seek to help build long-term, generational wealth.
Your journey as a Broker starts with mastering the art of business evaluation. To do this, you need to compare and contrast businesses across industries, learning to ask the right questions and look for the most telling insights.
That being said, we’d like to introduce the Appraisal Wheel – a tool designed to examine various aspects of a franchise business’s value. In the upcoming lessons, we’ll cover each slice of the wheel and how to use this tool effectively in your evaluations.
In this Module, we will cover key elements of business appraisal, including:
- Cost vs Potential
- Overhead Costs
- Owner’s Role
- Support & Leadership
This part of the course is where theory meets practice. Consider it like slipping into your Franchise Brokerage training shoes. By actively learning and applying these concepts, you’ll take significant strides towards becoming an exceptional Broker.
Lesson 2: The Cost vs. Potential Equation
Appraising a franchise first and foremost involves understanding the balance between the initial investment and the prospective opportunity.
A commonly followed rule in this context is that the initial investment should ideally be recouped within a span of 4 years.
To make this concept clearer, let’s look at an example.
Suppose a franchise investment costs $200,000. In order to ensure the original investment is recovered within 4 years, the business should yield a net return of at least $50,000 annually.
This calculation can be visualized as follows:
Annual Net Return (Yearly Profit) x Payback Window (Years) = Original Investment
or, in numbers:
$50,000 x 4 years = $200,000
This simple equation gives us a 4-year payback window, which is typically seen as an indicator of a sound investment.
Now, let’s consider another franchise scenario.
Imagine a franchise with an initial investment of $750,000 that yields an annual net return of $100,000.
To calculate the payback window for this investment, you’d perform the following calculation:
Original Investment / Annual Net Return = Payback Window
or, in numbers:
$750,000 / $100,000 = 7.5 years
In this case, the payback window is 7.5 years. This doesn’t automatically disqualify the franchise as an investment, but it does imply that other value parameters need to be strong to justify this longer payback period. Lower-cost investments are generally easier to recover and thus create a shorter payback window.
The key principle here is examining the correlation between the investment cost and return potential. This knowledge will empower you to make informed recommendations to potential buyers.
2-1 Key Equations
To summarize, here are the key equations:
Annual Payback Calculation:
Annual Net Return x Payback Window (Years) = Original Investment.
This equation determines the period required to recover the original investment based on a specific yearly net return.
Payback Window Calculation:
Original Investment / Annual Net Return = Payback Window.
This equation calculates the length of time needed to recover the initial investment with a given yearly net return.
To summarize, use these two formulas to help you calculate any business opportunity. These equations serve as essential tools in your Franchise Broker toolkit, offering crucial insights into the financial dynamics of potential investments. Always remember that the goal is to find a balance between cost and potential, enabling sound investment decisions.
2-2 Reflection Questions
- Think about the two scenarios presented in this lesson. How would you approach advising a potential buyer on these opportunities?
- In what ways do you foresee the Payback Window Calculation impacting your discussions with potential franchise buyers?
- How could you utilize this tool to communicate the long-term financial implications of a franchise investment?
- While the Cost vs. Potential Equation offers crucial financial insights, it does not consider other aspects of a franchise opportunity (e.g., brand reputation, market trends, etc.). How would you incorporate these additional factors into your franchise evaluations?
Lesson 3: Overhead & Maximizing Net Profit
One significant measure of a business’s strength is its overhead or ongoing operational costs. In your role as a Franchise Broker, understanding these operational expenses is key. These costs may include facility costs, payroll, the cost of goods sold (COGS), and marketing expenses.
A healthy business typically nets a profit between 12-25%. If a business can net more than 20%, it’s considered to be performing exceptionally well.
Let’s use a typical retail business to break down the standard set of expenses:
- Combined COGS and Labor: A well-run retail business usually assigns 45-55% of its revenue to labor and COGS. Labor expenses should range from 18-30% of revenue, while COGS should account for 25-35%. Combined, these two should not exceed 55% of total revenue
- Facility Costs: These costs, including rent and utilities, are expected to consume about 11% of the revenue
- Marketing Expenses: These range between 5-20% of revenue, often dictated by the product’s price. Most retail shops allocate about 5% to marketing
- Office Administration and Systems: These miscellaneous expenses, such as insurance and CRM systems, typically account for 5-7% of revenue
Now, let’s consider a hypothetical business that generates $500,000 in annual revenue.
If the combined labor and COGS costs are 55%, facility costs are 11%, marketing costs are 10%, and office system costs are 7%, you’re left with a net profit of 17% or $85,000 per year. This is a standard retail cost model in franchising.
Now, let’s imagine what could happen when you start reducing expenses. Consider:
- What if the business could function remotely or onsite, thereby removing the facility cost? That’s an 11% saving added directly to the net profit. Hence, 17% net profit + 11% facilities savings = 28% net profit.
- What if the business didn’t require many licenses or insurances, thus reducing office and administration expenses from 7% to 4%? That’s an additional 3% saving: 3% extra + 28% previous net profit = 31% net profit.
By optimizing expenses and tweaking business processes, you can boost the bottom line, making the franchise opportunity far more enticing. Regularly reviewing and minimizing overhead costs is a standard practice for business owners and managers.
In conclusion, a deep understanding of a business’s overhead costs is critical when evaluating its profitability. Identifying areas where expenses can be reduced can lead to significant increases in net profit, making a franchise more attractive to potential buyers.
3-1 Reflection Questions
- How can you leverage your understanding of overhead costs to better assess a franchise’s profitability? Can you identify key areas where savings might be possible?
- Imagine you’re advising a potential buyer about a franchise with a relatively high overhead. How would you communicate this information, and what strategies might you help them with to improve the business’s net profit?
- How does the concept of reducing overhead costs fit into your understanding of the overall business evaluation process? How will you integrate this into your practice as a Franchise Broker?
Lesson 4: Evaluating the Franchise Owner's Role
When appraising a franchise opportunity, the next factor to consider is the role of the owner and the prestige associated with it. Take yourself out of the shoes of a potential Broker for a moment and think about buying a franchise yourself.
Every business has different expectations for the owner’s role, ranging from hands-on labor to high-level strategic decision-making. Some franchises have people behind the counter, others are managing managers, some are district managers with many locations. The work that each franchise and its owner does varies, and some brands are looking for owners with marketing and sales experience as key skills, others are looking for operational experts. It really depends – therefore, asking questions about the role of the owner is critical in the evaluation process.
Now back to being a Broker. You will need to determine the role that best suits your client’s skills and preferences. Ownership of a business comes with its freedoms and rewards, and every role can be fulfilling in its own right – but what’s right for one, is not always right for another.
4-1 The Role YOU Play
As a Franchise Broker, you’ll find yourself in a sophisticated group of likeminded business owners and professionals. This is because our industry is typically dominated by sales-focused individuals, managers, and marketers.
At FBA, we hold the view that leadership skills are the most important attribute for success. This goes beyond just the buyers you will work with, but for you too. A strong leader can recognize talents in others and foster their growth, rather than suppressing them. Leaders maintain a positive attitude and help others face and overcome their fears.
So your main role as a Broker will be to navigate the questions, conversations, and exploration process for your clients – identifying their strengths and honing in on yours as well.
4-2 Three Conversations You’ll Have
Franchise Brokers focus on three types of conversations: leadership, strategy, and communication.
First, you will identify the buyer’s leadership style, then guide them in formulating strategies for acquiring the franchise that suits them, and finally communicate the expectations of their role in its entirety. This also includes communicating with the franchise, acting as the bridge between brand and buyer.
4-3 Building Your Professional Network
Working with other leaders offers Franchise Brokers a network of sophisticated, intelligent, and experienced professionals.
Brokers learn a great deal about business analysis, sales leadership, management, marketing, and investment business models throughout their early career in the industry. They gain the opportunity to review financials and evaluate opportunities – which can aid in other aspects of their career pursuits.
This profession is fascinating, and Brokers can both contribute to and learn from others through small group sessions and regular networking.
4-4 The Importance of the Company You Keep
The company you keep can significantly impact your journey. Surrounding yourself with motivated and inspiring individuals can foster personal growth and enhance your potential. This interaction can be as much of an asset as the financial gains from the profession.
This is why we’re so big on community and who we bring into our network. We want you to be surrounded by healing, uplifting people – so you can be that positive beacon for those you’re leading, too.
4-5 Reflection Questions
- Given the three types of conversations that Franchise Brokers have (leadership, strategy, and communication), how comfortable do you feel navigating each of these topics? Are there any areas where you feel you could improve or learn more?
- Think about the company you keep and how these people might contribute to your success as a Franchise Broker. Are there gaps in this network that you’d like to fill?
- Consider the idea of being surrounded by “healing, uplifting people.” How does this concept resonate with you, and how might it influence your work as a Broker?
Lesson 5: “Location, Location, Location”
5-1 Location from the Franchise Buyer's Perspective
When appraising a franchise opportunity, territory and location are critical elements to consider.
However, prospective franchise buyers might come to you, the Broker, with a location already in mind. They know the brand they’re interested in and say to you, “I’ve found the perfect location!” But it’s not that simple.
Identifying the perfect location tends to be a later step in the franchise award process. Franchise brands prioritize assessing the suitability of potential franchisee–the future owners who will bring their brand to life–before focusing on precise locations.
This strategy aims to protect brands against potential threats from competitors or independent businesses who may exploit their location scouting resources to set up rival stores.
Choosing a territory involves several steps, including:
- Market research
- Territory mapping
- Competitive analysis
Equipped with the right tools and information from both the franchise and external resources, prospective buyers (and their Brokers) can make informed decisions about territory options.
5-2 Location (and its Perks) from the Franchise Broker’s Perspective
The aspect of location for a Franchise Broker is distinctively different.
One of the greatest perks of this career is the ability to run your business from virtually anywhere in the world. All you need is a reliable internet connection and a computer, and you can manage your business seamlessly. This flexibility allows Brokers to operate while on the move, visiting family, or even managing another business.
For instance, some Brokers live on boats, in RVs, or Airbnbs, continuously changing their environment. Others might divide their time between visiting family members or managing other business ventures. This flexible work schedule enables Brokers to adapt their work to their lifestyle – not the other way around, which has been the norm for decades.
This degree of freedom in location makes Franchise Brokering incredibly attractive to those seeking a flexible and mobile career.
5-3 Reflection Questions
- How would you navigate a conversation with a buyer who is set on a location before going through the selection process?
- How does the flexibility of location for a Franchise Broker appeal to you personally? How might this flexibility affect your work-life balance?
Lesson 6: The Role of Quality Support in Franchise Opportunities
6-1 The Importance of Support in a Franchise
Quality support is a critical factor to consider when evaluating a business or franchise opportunity.
This support is essential for both new franchisees who may need guidance in launching their business, and even more seasoned business owners who might otherwise ‘reinvent the wheel’ instead of utilizing existing systems and support structures.
It’s not uncommon for enthusiastic business owners to overlook the resources provided by the franchise, as shown by my experience as a first-time franchisee. Trying to reinvent established processes instead of leveraging the franchise’s support resulted in financial losses. It was only after seeking help and guidance from the franchise that I managed to realign with their proven path to success and then went on to become one of the most successful owners in the Central Florida market.
Don’t make the mistake I made – encourage buyers not to make the same mistake, too. Follow the proven process provided and they will be more successful, as will you.
6-2 Proactive Support from Quality Franchises
Quality franchises understand these scenarios and proactively offer support. They schedule regular meetings with new owners, provide development plans, and ensure accountability. This approach ensures new franchisees receive the support they need, even if they’re initially hesitant to ask for help. A structured support system with the franchise taking the initiative is key to the success of any franchise owner.
As a Broker, this is an important thing to look out for and ask – is the brand proactive?
6-3 Support System for Franchise Brokers
At FBA, we apply a similar principle, offering intensive, proactive support programs.
These include monthly one-on-ones (included in the BOS Broker package), specialized mentoring, small group sessions, and educational events. This support structure helps our Brokers develop their skills and perform at their full potential. We have seen remarkable growth in Brokers who actively participate in these programs, with the gained knowledge and insights significantly impacting their businesses.
While we operate similarly to franchises, we differ in one significant aspect: we don’t enforce participation or usage of our services and tools.
Our Brokers have the freedom to run their businesses as they see fit and engage with our programs at their own pace. Something you’ll hear often in franchising and at FBA (and franchising in general) is: “You are in business for yourself, but not by yourself.”
We’re always here to offer support when needed, creating a support system that enables Brokers to succeed.
6-4 Reflection Questions
- Think about a situation in your career where you could have benefited from more support. How might this experience inform your approach as a Franchise Broker?
- How would you assess the quality of a franchise’s support structure when guiding potential franchise buyers?
- Reflect on FBA’s approach to support. How does this approach align with your personal working style or philosophy?
Lesson 7: Is This Business Scalable?
Another significant aspect to consider when assessing the long-term value of a business is its potential for scalability – whether the business can grow with or without your active involvement.
This scalability potential is often well-met by franchises, as they are designed for expansion into multiple territories or locations.
Franchises usually offer comprehensive systems for business growth. These may include:
- Checklists for construction build-outs
- Established vendor and supplier relationships
- Customer relationship management (CRM) systems
- Employee management tools
These consistent, learnable processes are easily delegated to managers as the business expands, allowing the owner to scale their success.
7-1 Wealth Creation Through Scalable Business
Successful businesses can finance the acquisition of assets like real estate, equipment, shares of other businesses, and customer accounts. They also allow for tax deductions and pre-tax expenses, potentially increasing the quality of life for business owners due to lower tax liabilities. Furthermore, small businesses have access to high-capacity pre-tax retirement accounts.
Think about this – the business spends pre tax money to buy assets… What additional assets could you buy if they were pre taxed?
In sum, business ownership can create substantial wealth if used strategically and businesses are one of the most important wealth creation tools that accounts and the most wealthy among us use.
7-2 Scalability as a Franchise Broker
Now you may be wondering, is Franchise Brokering scalable? Traditionally, it’s a one-person operation and thus not set up for scale. However, we recognized the desire for scalability as a Broker and set up programs to support that, such as:
- An agent program, enabling Brokers to build a sales team and transfer their knowledge to a junior team (speak to your representative for more details).
- Customization of HubSpot to create the Broker Operating System (BOS), allowing Brokers to finally achieve scale.
7-3 What is BOS?
- Sales assistants
- Appointment setters
- Pipeline managers
- Deal strategists
- Support masterminds
- Customer-facing automation
- Educational content
- Sales reporting
- Business coaches
- Regular marketing events
- Evergreen content
…and much more.
BOS directs daily activities, engages potential buyers, and helps retain opportunities. It allows Brokers the freedom to live their lives, manage their businesses, and travel without the burden of management, offering a highly desirable form of growth.
It’s one of the main reasons why our Brokers–even the latest to our association–have been so successful.
7-4 Reflection Questions
- How do you understand the concept of scalability in the context of a business or franchise?
- Can you identify any businesses you know that exhibit strong scalability potential? What makes them stand out?
- Think about how scalability can contribute to wealth creation for business owners. How does this influence your perspective on evaluating business opportunities?
- Consider the scalability of the Franchise Brokering profession. How might the use of BOS or building a sales team help to scale a Franchise Brokering business?
Lesson 8: Reviewing Key Aspects of Business Appraisal
In Module 5, we covered the many ways to appraise a business. This was an exercise to help you assess any franchise or business opportunity – including our business opportunity!
To appraise our program to become a Franchise Broker with the Franchise Brokers Association, you would follow several key steps, applying many of the concepts we discussed throughout this module:
- Understand the Role and Responsibilities: You must have a clear understanding of the role and responsibilities of a Franchise Broker (Lesson 4). Consider your skills and interests and how they align with the demands and rewards of the job. Are you comfortable with sales, management, and marketing? Are you a natural leader, able to inspire and guide prospective franchisees?
- Consider Location Flexibility: As a Franchise Broker, you can work from virtually anywhere (Lesson 5). This flexibility can dramatically impact your lifestyle, so evaluate whether this aspect aligns with your personal goals and preferences.
- Assess the Training and Support Available: It’s critical to assess the quality of training and support provided by the organization (Lesson 6). Consider the training programs, mentoring, ongoing support, and resources the FBA offers to help you succeed in your Brokerage business.
- Evaluate Scalability: Consider the scalability of the Franchise Brokerage model (Lesson 7). The FBA has programs and tools in place to allow Brokers to expand their businesses, such as an agent program and the Broker Operating System (BOS). Evaluate these offerings and how they align with your growth aspirations.
- Check Out the Leadership and Community: Assess the quality of the leadership and the community (Lesson 4). You’ll be part of a network of sophisticated, smart, and savvy professionals. Consider whether the vision, values, and style of the FBA leadership resonate with you and how the community can support your personal and professional growth.
- Cost vs Potential: Finally, compare the cost of becoming a Franchise Broker to the potential earnings and rewards (Lesson 2). Consider the training and membership fees against the potential commissions and other benefits. You can use the formulas Annual Net Return (Yearly Profit) x Payback Window (Years) = Original Investment & Original Investment / Annual Net Return = Payback Window to understand the financials.
By following these steps, you’ll be able to appraise the FBA’s Franchise Broker opportunity thoroughly, making an informed decision about whether this career path is a good fit for you.