He Lost $400K and Wants Everyone to Know
Brought to you by Farmers Insurance®After a major success, one entrepreneur gambled and lost. Here's what he tells fellow entrepreneurs, so they might gain from his loss
Tom Scarda, a professional franchise consultant, gained his insights into franchises the old-fashioned way: first as a highly successful franchisee, then one who lost it all. "That's when I became an expert," he says. Read Scarda's personal story about winning (and losing) big in the franchise game, along with success tips for future franchisees.
It all started out so … smoothie.
I used to be a conductor in the New York City subway. I was the guy opening and closing the train doors and making those announcements you can't quite decipher.
One day, an old-timer said to me, ‘Hey kid, this is a great job; you'll always have a shirt on your back. It won't be a silk shirt, but you'll have a shirt.' That stuck with me, and maybe not the way he'd intended. I started to realize that by staying with the subway, I would never be my own boss and would never really be in control of my income. So I started to think about what my next move might be.
A year later I was visiting my brother in San Diego when I noticed the line out the door for a high-end ice cream franchise. I looked it up online thinking, ‘Hey, maybe that's my ticket.' The initial investment was steep at about $350,000. And, it appeared you'd only make about $70,000. It was an example of a franchise agreement slanted toward the company. The math just didn't work.
But the franchise seed had been planted. I looked into a bagel shop and some other options, but with about $70,000 to my name, I had to go smaller. That's when I decided to buy a mobile unit in 2000. It was sort of a tiki hut on wheels with smoothies. The lure was that I wouldn't have to commit to an actual retail location, which is no small feat to find and support, particularly in New York City. While the smoothie cart was initially designed for street fairs, Sweet 16 parties and the like, I struck up a deal with Jacob K. Javits Convention Center in Manhattan and started selling there.
Business boomed, and I bought two more locations. Five years later, I sold the whole operation for quadruple my investment and semi-retired at 41 years old.
How I lost $400K (and still love the art of franchise ownership).
Three years later, my wife Gina was flipping through a magazine and an article caught her eye. It was about a business where you go to a commercial kitchen and assemble meals to take home and freeze. Then families can bake a homemade meal even on those crazy, busy nights. She said “This is it. This is what I want to do next.” She was about to retire from the New York Police Department and was looking for her next move.
It seemed like a no-brainer. Who wouldn’t want the convenience of healthy meals waiting in their freezer? Even better—or so it seemed—there was nothing similar in New York. (Note to potential franchise owners: Being the one and only game in town is not always a good thing.) We contacted a similar company that offered better terms (including some equipment) and bought in.
That’s when we realized a good concept is not enough. Other factors can quickly make or break your franchise.
“The real estate adage ‘location, location, location.’ Well, it’s true.”
Let’s start with real estate. We all know the real estate adage
“location, location, location.” Well, it’s true. We opened a studio
kitchen in a storefront between a restaurant and a dry cleaner because
it was close to the house. The franchise company let us pick it
out—which I now know is a red flag. Most established franchises will
have a siting team that uses sophisticated demographic information to
choose a favorable location.
At first, we were sure we were on to something. The grand opening
garnered incredible media attention. I remember one reporter gushing
that we were going to change the way Americans eat.
“Being the one and only game in town is not always a good thing.”
It didn’t take long to realize we had a big problem. No one knew what
we did or why they should patronize us. To make it work, we needed to
sustain a steady drumbeat of marketing and education to persuade people
to prepare freezer meals instead of ordering pizza.
Ironically, today meal prep and delivery services are at an all-time
high, but when we were slogging along in 2007 the concept wasn't an easy
one for most people to grasp. That was a key moment of truth: Unless
you have lots of time and money, it’s almost impossible to change
people’s habits, especially when it comes to food.
Within 19 months, our location failed, and we lost $400,000.
We Know From
We've seen almost
everything, so we
know how to cover
Five critical elements of getting into franchise ownership.
Today, I work with would-be franchisees to help them identify good franchise fits. Here are some of the lessons I share with them.
1. New doesn’t equal awesome.
If there’s no competition, look for a reason. I advise people not to be infatuated by a 'ground-floor' opportunity. Depending on your circumstances, it may be best to avoid any franchise without at least 25 units operating for more than 24 months.
2. Find something people need—not something they want.
When people ask me what the next hot franchise will be, they think I’ll pick some trendy new food concept: a new donut hybrid or something with kale. But I tell people to think: recession-proof. In my opinion, the coolest franchise out there right now is a water restoration company. You show up when a pipe breaks, and the homeowner is staring at two feet of water soaking his man cave. That guy has never been so happy to pay someone—you take care of the water, remediate for mold and you’re done. No matter what the economy is doing, this is the type of service everyone might eventually need.
3. Don’t focus on your hobby.
"I have people who love golf or baking and want to find something related. And while I like the adage, "if you love your job, you’ll never work a day in your life," owning a franchise is not just a job—you're building an asset based on consumer demand. (Hey, I've even heard of vegetarians franchising burger joints.)
4. Do your financial due diligence.
This part is crucial. First step: read the Financial Disclosure Document (FDD), which is required by the Federal Trade Commission and shows two years of audited financials, depending on the age of the company. The FDD is also your new best friend in the due diligence process, because it contains contact information for every franchise owner in the company, including units that have been closed or sold. The best way to get clarity on a franchise, after reviewing the FDD, is by talking to those franchise owners. Call a few who have a one- or two-year history with the operation, as well as new owners who have had the most recent training and contact with the corporate office. Call an owner whose franchise failed.
Second step in due diligence: get your own financial house in order. Quitting your job? That means you'll need six months of living expenses (minimum), above and beyond what it costs to open and operate the business. Many franchise owners don't make a profit for months. Talking to current franchisees can help you gauge if your financial goals can be achieved. In franchising, the break-even point is when you start generating enough operating revenue to cover monthly expenses and start paying back the initial investment. What are your break-even expectations?
5. How will running a franchise impact your life and family?
At the end of the day, this is my number-one factor to consider. Food franchises, for example, will likely require working nights and weekends—these franchises' busiest times. How will that work with your own family? (Don’t assume the crazy hours will "settle down" or that "the business will eventually run itself.") If your cashier doesn’t show up, for example, the back-up person is likely you.
Alternately, a business-to-business (B2B) operation could offer more regular hours and weekends off, if that's a key to your family's happiness.
The bottom line: Remember, the ultimate goal of owning your own business is freedom. With some careful planning, I can tell you—it can be a reality.