Investing in Franchises Could Save Professional Athletes From Financial Ruin
January 24, 2013 - Categories: Franchising
Let’s face it, we have all heard of one, two, or twenty athletes that fell into hard financial times after lucrative and illustrious professional careers. They had difficulties choosing the right investments and they ended up financially ruined. Franchising is a great investment tool for athletes to build and sustain their sports earnings because it can combat many of the recurring issues at the epicenter of their financial collapse. As a matter of fact, some prominent athletes already are investing in franchise systems.
Denver Broncos star Peyton Manning recently joined Papa John’s pizza as a franchisee and owns over 20 locations in Denver. New Orleans Saints Quarterback Drew Brees joined Jimmy John’s as a franchisee in Louisiana and owns a number of stores in the New Orleans area. Last year, tennis ace Venus Williams entered into a joint venture with Jamba Juice to open five stores in the Washington, D.C. area. A few years prior, three-time Pro Bowl and current Super Bowl XLVII contender Leonard Davis brokered a 30-unit deal between his business company and Smashburger to develop the brand throughout Dallas, Texas. And over the last two decades, Magic Johnson has owned numerous franchise businesses with marquee companies such as Starbucks, T.G.I. Friday’s, and Burger-King among others.
Those are big name stars, all of whom have grossed tens of millions of dollars during their careers. Nevertheless, franchising may be more beneficial for professional athletes that are not in the top 5% in earnings because they cannot afford the financial missteps that the top earners can endure. Organizations like the International Franchise Association (IFA) and the Professional Athletes Franchise Initiative (PAFI) realize this and have created various initiatives to connect professional athletes and franchising organizations. A deeper look into the specific problems that athletes face when managing their income and the options that franchising can offer displays why this form of business ownership is a natural fit for professional athletes.
Contrary to belief, athletes are no different than most American citizens when it comes to mismanaging their money. The main difference is the financial failures of the latter are not on public display. What percentage of Americans would successfully navigate this scenario: John has a lump sum of money and no financial expertise, yet must maintain an upscale lifestyle for his family over the next 40 years while no longer being employable using the skill set he trained half of his life cultivating? Most of us would fail. In fact, upwards to 70% of people who receive sudden windfalls lose that money within several years according to the National Endowment for Financial Education.
And yes, I hear the reader’s rebuttals. What about all of those stories of expensive cars, mansions, yachts, and copious amounts of jewelry that professional athletes buy? Such a retort is completely fair. The waste oozing from these lavish purchases is not to be discounted. Nonetheless, think about it for a second, if someone spent $20 million dollars on these items and lost the rest of their money, they obviously could liquidate these items at a discount and still recoup millions from the resale. Hence, while those purchases make for sexy headlines that clearly cannot be the reason that people go broke so rapidly after receiving sudden windfalls of money. The biggest culprits have to be expenditures that do not provide anything in return (“empty investments”) such as: giving money away, theft by financial fiduciaries, poor tax planning, and failed private investments. In short, the sexy items are at least salvageable, while there is no return on empty investments.
The most devastating empty investments maybe failed private investments. According to wealth management expert Edward Butowsky, most Americans over allocate into private illiquid investments such as real estate and a multitude of other private businesses even though the majority of these investments return absolutely nothing. Athletes similarly over invest in illiquid private equity but in higher end ventures such as night clubs, new inventions, and high risk real estate even though only 1/30 of these pan out as advertised. Butowsky believes that people, athletes included, make these mistakes because they lack good sources of financial education. The lack of diversity within these private investments suggests that he is correct.
Common citizens place most of their private investments into relatively few (often just one) familiar entities like the company in which they work or own. Athletes do not have that option as the major professional sports leagues do not provide avenues for which the players can reinvest their income into the leagues. Therefore, while athletes spend inordinate amounts of time training and enduring the rigors of professional sports, they too place much of their investment hope in entities that are familiar to them such as the businesses and recommendations of friends, family, and personal advisors. Unfortunately, it is well documented where the story normally goes from there. Given their understandable lack of investment expertise and the absence of time to properly equip themselves of said skills, professional athletes should utilize franchising as an investment tool to grow and sustain their sports earnings.
Franchising can simplify and streamline the business owning process for both experienced and inexperienced entrepreneurs alike. The prototypical franchise system is structured as follows: a business will spend a considerable amount of time and resources creating a trademark, cultivating a business system, and marketing its brand throughout a targeted area. When the business is ready to begin franchising its brand and system to outside investors, it creates a holding company to hold the trademark and then licenses the right to sub-license the trademark to a franchising company that usually bears the same name as the business itself. Thereafter, the franchising company (franchisor) enters into franchise agreements with new investors (franchisees) who will possess the right to operate under the trademark, duplicate the business system, and capitalize on the brand awareness that was created by the parent company at the outset.
There are a plethora of options available to potential franchisees shopping for new opportunities, ranging from having total control over where and how to open a storefront for a relativity new brand to opening a turnkey operation under a well-known, long established trademark. It is the latter that makes franchising such a great fit for professional athletes.
Capital aside, which is less of an issue given today’s professional sports salaries, the most important aspects of a business are brand strength, operational efficiency, and quality products. Investing in a turnkey franchise with an established brand fulfills all of these requirements and more. New entrepreneurs spend a lot of time marketing their brand as one that provides quality products at competitive prices. And even if they succeed in the end, they are guaranteed to have wasted many marketing expenditures along the way. Whereas, opening a franchise under a previously established brand allows franchisees to piggy back off of the franchisor’s brand development legwork and immediately commence business with the wind at their back in that regard.
In addition to brand awareness, investing in a turnkey franchise with an established trademark propels new business operations towards optimal efficiency at a faster pace than in a conventional context. Many franchisors compile detailed operations manuals that have been refined to iron out recurring issues. Some franchisors also provide specific information on which equipment and supplies to purchase, which vendors to use (particularly those with whom the franchisor has negotiated discounts), how to prepare the products from start to finish, how to design the storefront, product placement, and staffing among other issues. Collectively, this information can serve as a how-to guide to operations for pro athletes allowing them and their management teams to better learn the business during the off-season and have the latter carry-on the day-to-day operations thereafter.
Finally, there is the product itself. If an entrepreneur gets this wrong, they might as well have lit their investment on fire. Sadly, that is what many athletes are essentially doing with their hard earned money. Everyone has a great idea to pitch to pro athletes that the general public absolutely needs and that will surely generate a recurring customer base; that is, until that great idea flops and the athlete loses his entire investment. The funniest of those stories that I have come across was a star athlete investing in a friend’s concept to build manually inflatable rafts into furniture so that the furniture could float in the event of a flood. Needless to say, the concept did not work out. Instead of searching for the next big invention or opening a new record label, pro athletes would be better off investing in tried and true products that have already been accepted by the public at large. Furthermore, franchisors continue system modification and product innovation within the franchise apparatus on their own dime, and thus the output of the franchise should remain relevant within the marketplace as it is adapted to consumer demands moving forward, providing for steady growth over time.
In addition to brand strength, operational efficiency, and quality products, franchising can provide other benefits to professional athletes as business investors. Site selection can be tricky when opening a new business. An investor may have a good product to sell but struggle to generate traffic because the business is poorly located, or he could find a good location for the business but mishandle lease negotiations and lose precious margins. Franchisors can aid franchisees in procuring site locations and leasing terms that are congruent with their particular product or service.
Ongoing support is another key ingredient to the success of a franchise that conventional private businesses are not often afforded. As previously stated, franchisors can provide continual support in numerous ways, but peer support is customarily overlooked. Peer support can be very helpful in teaching a new investor how to navigate the local community and possibly even local politics. Granted, franchises should look the same all across America as uniformity is the cornerstone of the franchise system. Nonetheless, local flavor and adaptation is necessary for the survival of any business, and who better to provide occasional advice in that regard than sister franchisees in the same market.
Overall, franchising would improve the investment process for athletes simply because they would have a better understanding of exactly what they are invested in. It is common knowledge that the more complex the investment portfolio, the less likely an individual will effectively monitor it. As such, advisors tend to over allocate into high end, complex investments that athletes cannot understand. The absence of review provides advisors a clear incentive to “bet” their clients’ money on high risk high reward assets because they stand to receive great commissions if the bet succeeds, while experiencing no personal losses if the bet fails. This is what has come to be known in regulatory parlance as a moral hazard.
Moral hazard is greatly reduced when a consultant is managing a group of McDonalds as opposed to selecting his favorite batch of asset backed securities for an athlete’s portfolio. That is because 80% of America can walk into a McDonalds and have a pretty good idea if it is properly managed, which makes it a lot easier for the business owner to follow revenues, subtract fixed costs, etc., and accurately arrive at the bottom line without needing an M.B.A. from Wharton. Alternatively, maybe 8% of America has substantive knowledge of complex securities and derivatives which would allow them to monitor those assets in a similar fashion.
Franchising also may aid professional athletes as investors by helping them to tell people no. I am not saying that merely being a franchisee will change their well-known psychology of acquiescing to family and friends who bleed them dry. What I am saying is if an athlete purchased five franchises he can at least offer loved ones jobs and management opportunities. That way the athlete can keep people on his “payroll” while getting some value from these expenditures, thereby shifting these items out of the aforementioned empty investment pool. Being an employer could help to reveal to the athlete who is worth helping and who should be cut-off. If all he can offer friends and family is money and a night out on the town then that line gets blurred. However, if certain friends and family continually ask for money yet refuse to accept jobs to better themselves, that line becomes a lot clearer to see. It seems simple enough to me.
In sum, although professional athletes may be great gladiators in our modern day coliseums, they are no different than average Joe in the financial management arena. They, like most Americans, believe that if and when a lump sum of money arrives the heavens will open and telepathically download financial wisdom into their brain allowing them to manage their family’s finances for the rest of their lives from a single large pot of gold. In reality, they end up giving away too much money, trusting people who misappropriate their funds, and repeatedly find themselves knee deep in failed private investments. Obviously franchising isn’t a magic elixir for all of the problems that professional athletes face, but it would help them achieve sustained financial success because it is a safer, steadier investment that can grow with them both during and especially after the end of their sports careers.