Recently I have been heavily involved in the evaluation and possible opening of a franchise business. As a part of this process I have done a ton of analysis, have been interviewing people like crazy and have learned a lot! I’m going to try and go through my process a bit and try to hash out what has happened, and what my thoughts are on how to go about this process. I’m approaching this more from the aspect of a process, rather than my particular process.

Lets start with the concept… Products are great, ideas a amazing but when it comes down to a successful business its all about the systems. Whether your looking to start a mom and pop shop in a little town or create a multi-national technology company; its all about the systems. The systems define whether you have a job, or a business So from the start, the concept must be a system that can make your dreams a reality. In my particular instance, I’m looking for a great product, supported by excellent systems that will enable me to begin the process of creating amazing wealth. It will be a long process, but you have to start somewhere!

For me, I want to reduce some of the initial risk of opening a business by using a franchise system. My reasons for this are pretty straight forward.

• Brand recognition
• Tested and proven systems
• A “support” network from your franchisor
• Reduced risk

I’m not looking to be a creative genius that takes over the world in two years; but I am looking to build a great company that can generate passive cash-flow and create the foundation for the future. Using all of that information, I have narrowed my initial field of vision to the franchising world, and to real-estate.

After doing quite a bit of research on different franchise opportunities and finding some friends that are interested we have landed on one particular opportunity that looks promising.

Now that we have an opportunity in our sights – its time to figure out if it really is a good fit and if we should pull the trigger.

Here is the process we have been using so far… First off, after all of the external factors have been analyzed and decided upon, it all comes down to the numbers. If you can’t make money on the deal, you better be willing to loose money for the entire time you have the business open… in other words, don’t do it! For this particular opportunity, we have spent quite a bit of time focusing in on the numbers, possible ROI and how long we really think it will take to break even.

To make sure that we understand the whole thing we have spent time calling other owners, interviewing people and trying to make sure that we have all of our “ducks in a row”… So how do you get to that point… It’s a tough and long road. In our particular case we have been doing as much research as possible, learning about the industry and all of the key items that need to be taken care of to be successful.

It’s important to make sure you have enough information to be comfortable, but at the same time you don’t want to drag you feet too long! It’s a fine line, and one that requires a bit of a gut check!

Lately I’ve been spending a lot of time evaluating potential investments, both in the stock market and new businesses. As a part of this process, I’ve been struck with the importance of knowing when to get in, and when to get out. In my opinion it is critical to have a clear entry and exit strategy for any investment you choose to undertake, no matter how large or small.

For example, lets take an option trade… Heck, lets take my latest position on the Russell 2000. So the position is an Iron Condor and will expire in the month of March. The inside strike prices are 670 and 780, so it makes some sense that I would want to be out if the underlying gets to 670 or 780

For those that are not familiar with an Iron Condor, basically it is a complex option position consisting of 4 different options. For this particular Iron Condor the following options are used March 660 RUT Put, March 670 RUT Put, March 780 RUT Put and March 790 RUT Put. To setup Iron Condor I typically buy/sell two vertical spreads. In this case, the 660/670 Put spread was sold first, then the 780/790 Call spread. In the end you are long two options and short two options. When selling the condor, you are short the inside strikes and long the outside strikes.

If the position is held till expiration, you are only risking the difference in each vertical spreads strike price. In the RUT example, my risk is $10 (the difference between 660-670 or 780-790). The risk is not $20, because you can’t be wrong on both sides! If you have a good broker, you will only have margin held for your max risk ($1,000 per contract). Remember, options work in multiples of 100: 1 Contract = the right to buy or sell 100 shares

So if you want to be out no matter what when the position hits 670 or 780, then it stands to reason that you would want to get out at some defined time/price before you reach the get out now prices. To be honest, I don’t have a clear system defined for this yet. For me its more a feel thing on the position, suffice to say, if the position is moving quickly towards my get out now prices I get out! For this Russell position here is my criteria:

• If the Russell trades at or above 770 on or before March 10th, I’ll get out.

• If the Russell trades at or above 775 on or before Expiration, I’ll get out.

• Depending on the market during the week of Expiration, I’ll evaluate closing the call spread. Due to the small credit taken in to open the position, it may not be viable to close the spread. This particular position will likely not be closed unless it is in danger; I plan to just let this expire worthless

• If the Russell trades at or below 680 – I’m out. If the Russell can fall over 50 points in two weeks – I’ll run!

So now there is a defined exit strategy, but what was my entry criteria? In this particular trade, I was looking for a position that had a nice short term ROI while maintaining minimum risk. Given that there isn’t a lot of premium available in the markets lately, anything in the 5-10% for 3 weeks was good enough for me. If my money is going to be on the line much longer, the ROI will need to move much closer to the 10% range. For this Russell position, I defined minimum risk as at least a 90% change of success.

So there you have it, entry and exit criteria for a trade. Now the key is to simply follow the rules and let your emotions go by the wayside!

Later this week I’ll write about my thoughts on larger, longer term investments. Currently I’m evaluating the potential formation of a franchise business, so I’ll dive into what my thoughts are on this as well.