Over the past 5 years I’ve had the opportunity to buy, operate, and sell five franchised restaurants. The restaurant businesses, and specifically franchised restaurants, have provided significant additional cash flow for my family (on top of my earnings as a financial advisor 2002-2006, and now private equity fund manager 2007-present).

I think the key is to realize that 9 out of 10 new business ventures fail in the first 12-18 months. Conversely, a franchised business (franchised from an established, proven company) generally has a 90% chance of surviving that first year, and a 75% chance of surviving and/or thriving for up to 5 years.

The second key point is to understand the difference between (1) franchises that require the owner to operate them day in and day out, and (2) franchises that are designed to be operated by a manager and not requiring 8 hours of “on site” time from the owner. I’ve confused these two in the past and it has cost me dearly.

If you desire additional cash flow, you need to find a franchise concept that is designed to allow the owner to maintain their current career, but to “support and assist” a manager at their franchised business.

This is important, because if you purchase a franchise that is designed to have the owner live there, you have simply bought yourself an expensive job. It will own you, you will not own it! The key point of understanding a franchise as an investment is to employ the concept of return on equity.

Let’s say you purchase a hair care franchise for $100,000. With good credit you generally will need to come up with $20,000 of your own cash (you, family, friends, etc.) … and a bank will usually give you the other $80,000, spread out over a 5-year repayment term. If you hire a great manager your store may be profitable that first year. To illustrate, let’s assume your store did $200,000 in haircut sales that first year. You paid your manager, your employees, your rent, your supplies, utilities, franchise fees (royalties), taxes, interest on your loan, etc. Then your accountant tells you that you have $20,000 left over at the end of the year… your profit! You may look at this and say, “Wow, I made a 20% return, because this hair care place cost a total of $100,000…Great!” But from the standpoint of Return on Equity, you have actually made a 100% return on your invested dollars! The actual equity that you have into your business is only the $20,000 that you had to come up with to secure your $80,000 bank loan. $20,000 invested, $20,000 profit, 100% annual return. (If things go well…and there is a lot that can go wrong! This is not for the faint of heart, no matter how much you like a franchise.)≡

This post was written by The Almost Millionaire. If you have follow-up questions or would like to know more about any aspect of starting or buying your own franchise for cashflow, you can contact him on his blog at http://thealmostmillionaire.blogspot.com, where he posts regular updates about his businesses.

Here are the stocks I’m watching lately, supported by votes of confidence from the guest analysts brought in lately on BNN:

Arc Energy Trust - (AET.UN-T): $28-29
Crescent Point Energy - (CPU.UN-T): $33-34
Husky Energy - (HSE-T): $43-44
Freehold Royalty Trust - (FRU.UN-T): $21-22
Diana Shipping - (DSX-N): $28-29

Interesting that most of them are oil plays. Oil per barrel is really cheap right now, and that means all the oil stocks are on sale. I really want to take the opportunity to buy some up, but with limited cash, I can either do this or put some more money in US stocks for increasing my US cashflow (since most US stocks are superbly on sale right now, too). Not sure which decision to take.

The Loonie could be falling again if oil stays low. In that case I’d better buy my US stocks now while I don’t lose money in the exchange rate. On the other hand, because oil is low right now, all the great Canadian energy plays are on sale too.

Hmmm…. what would you do? If you’re Canadian, or living/working in Canada, how are you planning to take advantage or protect the recent highs of the Loonie?

This should be interesting.  I’m glad I won’t be a BCE holder much longer.  Today’s story in the Financial Post (Toronto) - Google Slams Bell for Throttling Internet - shows that Bell Canada is still being held to task for its bandwidth control practices.  I checked up on the share prices, but there isn’t much change:

BCE: TSX - is on somewhat of a downtrend at 39.08 (CAD), and
GOOG: NASDAQ - is inching upward at 546.02 (USD).

Can someone please tell me why you might want to own GOOG at $546? They don’t pay a dividend.  I imagine you’re expecting a stock split pretty soon.  If so, why hasn’t GOOG split yet? It’s a genuine question.  I’m ignorant in this area, so I’d love to learn.  Maybe they haven’t split because there’s been no decline in momentum going upwards.

As for BCE, remember, everyone, that the Ontario Teachers’ Pension Plan is buying them out and it looks like it’s all finally going to close this summer.  I’m glad my BCE have moved upwards a bit, back to their normal range - for a while it was looking like I was going to lose some good cash.