5 Things to Know Before Franchising – and the Top 5 Franchises to Buy

Advertising Disclosure: When you buy something by clicking links on our site, we may earn a small commission, but it never affects the products or services we recommend.

Image Not Available

Many people dream of starting their own business, and with 9 percent national unemployment, there are plenty of people dreaming of just getting a job at one of them.

Owning a business isn’t easy. But it’s not impossible, either – even in this economy. If you have the money, now’s actually a great time to get started: Interest rates are low, plenty of real estate is available, and many smart and talented people have been laid off.

One way to get a head start is to buy a franchise, which can take a lot of the ground work off your shoulders. That’s what Mike Zebib did.

Zebib currently owns 11 Domino’s Pizza restaurants. But he started out as a Domino’s delivery boy in college. He wasn’t even good at it.

“It was taking me almost an hour to make a delivery,” Zebib says. “So the manager took me in his office and told me that I have no future with Domino’s Pizza and this is not for me.”

Zebib asked if there was anything else he could do – if he could work inside and make pizzas instead. The manager gave him that chance, and it changed his life. “From there, I loved the business,” Zebib says.

Stacy caught up with him and asked what it takes to build a business, and why franchising is a good bet. See what he says in the video below, then read on to learn more about what’s popular in franchising now – and what potential franchisees need to know to be successful.

Not just pie in the sky, but you’ll need some dough

According to the International Franchise Association’s 2011 Franchise Economic Outlook, there are currently more than 765,000 franchise establishments in the United States, and that’s expected to go up another 2.5 percent this year. They’ll create nearly another 200,000 jobs for the economy.

That’s a lot of business, and proves it’s not impossible. But it’s not easy, either. While many smaller franchises can charge initial fees of $20,000 to $50,000, a proven-success franchise with a strong support network isn’t cheap. You’re looking at $100,000 to a cool quarter million or more to get in the game. And regardless of the initial fee, you’ll need additional working capital to pay the bills and keep things running until you become profitable.

Forbes recently put out a top 20 list of best franchies “based on the estimated initial investment, total number of locations, store survival rates and hours of training offered.” Here are the top five, along with the average cost to get started:

  1. Domino’s Pizza. Average initial investment: $254,000.
  2. 7-Eleven. Average initial investment: $390,000.
  3. Kumon Learning Centers. Average initial investment: $91,000.
  4. McDonald’s. Average initial investment: $1.47 million.
  5. Papa Murphy’s Pizza. Average initial investment: $288,000.

Just last week, the iFranchise Group (a consulting firm in Chicago that studies the industry) identified several trends for franchises in 2011. Food, as the list above suggests, is still one of the best places to be.

“Upscale burgers and frozen yogurt have been going strong for a little while now, and probably have another three years of continued aggressive growth before we start seeing market saturation,” says iFranchise CEO Mark Siebert.

Ethnic restaurant concepts and healthier foods are becoming more popular, too. In addition to food, other areas expected to excel include “green” and wellness-oriented franchises.

What you need to know

In addition to where to find startup money, there are other factors to consider to evaluate franchises, including…

  1. The company’s history. As Mike Zebib said in the video, you have to “know what you’re getting into.” Many successful franchisees like Zebib survive because they come from within the company and work their way up the ladder. If you don’t know how the company operates from the bottom up, do some serious research before investing. Talk to current owners and employees. You should get a detailed disclosure document from the franchisor with background information, contact info for nearby franchisees, startup cost estimates, and an audited financial statement. If there’s anything you don’t understand, consult a CPA, lawyer or other franchise professional.
  2. Ongoing expenses. Zebib says, “A lot of franchisees go into the business and see the money coming in and start spending it. And they don’t save for the bad days – trust me, they do come.” It may take a year or more to become profitable, and until then you’ll be pouring in a lot more money than you’re pulling out. You may have to purchase equipment and supplies exclusively from the franchiser. You have no control over the fluctuating costs of commodities, or when the next competing “big thing” will come along and threaten your customer base. And there’s one more major monetary consideration…
  3. Royalties. The advantages of being part of a familiar brand like Dominos – having “built-in customers,” advertising, training programs, and other support – comes at a cost. Franchisors charge fees that can vary widely, and can be based on sales – adding insult to injury if you’re running in the red – or on profit. Domino’s charges an average royalty rate of 5.5 percent of gross sales, while the average rate for 7-Eleven is 49 percent of gross profit. Franchises are sort of like businesses on training wheels, and you have to pay the trainer even after you become a masterful entrepreneur.
  4. Personalities. As Zebib said in the video, “You have to make sure you can deal with people, that you can take orders and give orders.” While you technically work for yourself, you still have to follow all your franchisor’s rules — which may include all kinds of frustrating things, like fixed prices that aren’t competitive or profitable in your area, as Burger King franchisees found out last year. Some things are negotiable, and some aren’t — but either way, you’ll need to know how to deal with the home office. You also can’t run most businesses by yourself, so you’ll need to rely on other people and make sure they’re maintaining company standards.
  5. Commitments. Mike Zebib says, “There were days I worked until 3 or 5 in the morning. I missed a lot of holidays, a lot of birthdays for my kids – but it’s very rewarding.” Being your own boss doesn’t necessarily mean setting your own hours – a lot of the time, it can mean working harder and longer than anyone else. Employees can do 9-5, grab a paycheck, and forget about the company for the weekend. But if something goes wrong, it’s ultimately on you to fix it, whatever it takes – that’s a big commitment that affects not just you, but your family and friends, too.

Those are just a few of the pros and cons of running a franchise. If you’re looking for more advice to get you started, try these links:

Get smarter with your money!

Want the best money-news and tips to help you make more and spend less? Then sign up for the free Money Talks Newsletter to receive daily updates of personal finance news and advice, delivered straight to your inbox. Sign up for our free newsletter today.