Thinking about buying a franchise? Here are some important things to consider before taking the leap.
Franchises offer buyers the opportunity to own a successful business without having to create the blueprint from scratch. Assuming you’re in the right market and you’re a good manager, success will likely follow suit.
Sounds appealing, but there are a number of factors you must consider before you buy in. In the video below, Money Talks News finance expert Stacy Johnson discusses the nation’s top franchises, and why investing in a franchise may be the best way to fulfill your entrepreneurial dreams.
Take a look, then meet me on the other side for information about how to determine if the model best suits your needs.
What is a franchise?
Under this business model, the franchisor licenses its trademarks and business system to the entrepreneur in exchange for a one-time franchise fee, royalties and advertising fees. In essence, you will receive a blueprint and live assistance to help you every step of the way, from securing the location to hiring employees and acquiring customers.
Benefits of ownership
Before signing on the dotted line, you will have access to pertinent information and disclosures to foster your decision-making process. It will include key factors, such as historical overall performance and operational trends at existing establishments. And that is just one of the major perks of buying into a franchise.
Here are a few others:
Limited risk. Starting a business is a major gamble, but at least you’ll have an idea of what you’re getting into. Of course, your initial investment is at risk, but the chances of losing it all heavily rests on your inability to put the tools they have provided you to good use.
Brand awareness. As a franchisee, you are in essence buying the complete package, so customers are familiar with your entity and know what to expect when buying products or patronizing your services. Unlike other startup ventures, you won’t have to spend months, or maybe years, raising awareness of your offerings and bringing recognition to your brand.
Continuing education. The franchisor won’t just leave you hanging, or lost in a deep blue sea full of predators anxiously awaiting to devour you. Instead, they pass any valuable information on that will help boost your bottom line and theirs. They are getting a piece of the pie, so it makes no sense at all for them to withhold information, resulting in missed opportunities and potential profits. This valuable information is disseminated through conferences, virtual training and reference manuals.
If you hit a major bump in the road, there should be a toll-free number to call and speak with a representative for additional assistance.
Lower marketing expenditures. Since your brand is already established, you won’t have to spend a lot of extra funds trying to get noticed in the marketplace with fancy logos, advertising campaigns and trademarks. You know what that means — more money in the bank for you.
Contracts, contracts and more contracts. Not happy with a particular policy or procedure? Well, when you signed on the dotted line, there were terms and conditions that you committed to following. And depending on the parent company, there may not be any room for negotiation.
Too much structure. This goes hand in hand with contracts. If there isn’t much room in the company structure to let your creative juices flow, you’re simply out of luck. The chain wants your cheeseburger to taste just like those at all of the other stores it contracts with. If you don’t like that idea, it’s a clear indicator that the franchise model may not be for you.
Fluctuating earnings. Although most franchisors give you a blueprint with a track record that will practically guarantee success, that doesn’t protect you from rough patches. That’s why it’s best to do your homework. Will you be able to increase your prices when the cost of your supplies goes up or are you locked in? Are you responsible for expensive upgrades at the franchisor’s whim?
Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you’ll realistically be able to pay yourself.
Image. No matter how hard you work, your success can depend on how other franchisees run their sites or whether company headquarters uniformly enforces standards. If the chain gets a reputation for a lack of cleanliness or undercooked food, you’ll suffer too.
A closer look at startup costs
Unless you have many thousands of dollars lying around, this is the factor that could make or break your chances of investing in a franchise. In fact, franchisors require that you have a net worth of a specified amount and a certain amount of cash available.
There’s a reason for that. In addition to the franchise fee, other startup costs include:
- Wages. The parent company will give you an idea of how many employees you need to get things up and running.
- The building.
- Inventory. This is another expense not covered by the initial franchise fee.
Top 10 franchises
Still hyped about the opportunity to join the ranks of fellow business owners in your area as a franchisee? Here are the results of Entrepreneur magazine’s top 10 franchises for 2014, along with the range of the initial capital outlay required to get up and running, according to Entrepreneur.
- Anytime Fitness — $56,299 to $353,900. The franchise fee is $20,999 to $26,999.
- Hampton Hotels — $3.7 million to $13.5 million. The franchise fee is $65,000.
- Subway — $85,700 – $262,850. The franchise fee is $15,000.
- Supercuts — $108,750 to $203,600. The franchise fee is $29,500.
- Jimmy John’s Gourmet Sandwiches — $300,500 to $489,500. The franchise fee is $35,000.
- 7-Eleven — $50,000 to $1.63 million. The franchise fee ranges from $20,000 to $1 million.
- Servpro — $138,550 to $187,200. The franchise fee is $44,000.
- Denny’s — $1.1 million to $2.6 million. The franchise fee is $40,000.
- Pizza Hut — $297,000 to $2.1 million. The franchise fee is $25,000.
- Dunkin’ Donuts — $294,000 to $1.5 million. The franchise fee ranges from $40,000 to $90,000.
Before you move forward, please check with your respective state’s department of revenue for business registration requirements to ensure you comply with both state and federal law.
Need more information about franchises? Check out the following resources:
- Small Business Administration — “Franchising Strategy.”
- Federal Trade Commission — “Consumer Guide to Buying a Franchise.”
- SCORE — “How to Find Your Way to Self-Employment Through Franchising.”
- International Franchise Association — “Is Franchising for Me?” and “Introduction to Franchising.”
- Entrepreneur — “How to Research and Buy a Franchise.”