Is a franchise business right for you?
If you are thinking about starting a business one of your options is owning a franchise.
Here are some popular franchise businesses:
- Anytime Fitness – 2,500 clubs with more than 1.9 million members.
- Hampton Hotels – More than 1,900 locations worldwide.
- Subway – Over 40,000 locations.
- Supercuts – More than 2,300 locations.
- 7-Eleven – Over 51,000 stores globally.
And, the list could go on and on. There are more franchises you can imagine in every possible service and industry. It is a model that works.
There is no doubt that owning a franchise is working for many entrepreneurs. Whatever industry you are interested in there is a good chance that there are franchise opportunities there. There are franchises in the food, healthcare, automobile, hardware, business services, and everything in between. According to the International Franchise Association (IFA) there are more than 780,000 franchise establishments that employ close to 9 million people.
What is a franchise? A franchise is an agreement between two parties which gives a person (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor).
Common franchise opportunities
Business format franchises are the most common. This type of franchise offers a complete business method including product / service, trademark, systems, policies, and procedures. It is a complete turnkey business. Very little left to the imagination.
Here are some of the most common franchises by industry:
- Fast Food
- Building and Construction
- Business Services
- Retail Food
Advantages of buying a new franchise
One of the greatest advantages of owning a franchise business is that there are systems created for you. When you start a brand new business you are responsible for creating the systems that help you run, grow, and market your business. Unfortunately, most entrepreneurs never build a mature business because they fail to create systems. When you buy a franchise you pay for the system, a system that has been proven to work.
Here are some of the greatest advantages of owning a franchise:
- Lower risk – You are buying into a proven system. Others before you proved that it works. You simply have to follow their lead and you have a good chance of success.
- Systems – Instead of worrying about creating systems you can plug into existing ones.
- Products – A franchise business has proven products / services for you to sell. You don’t have to invent anything.
- Brand recognition – When you buy a franchise you are also paying for an established brand. You instantly get brand recognition that would take you years to establish if you had to start from scratch.
- Support – As a franchisee you get training and support.
Disadvantages of buying a new franchise
In many ways when you buy a franchise you are buying a job. It’s true that you are the boss, but there are many rules. If you want to be independent, owning a franchise might not be the best option for you. When you buy a franchise you agree to run the business according to rigid franchise rules. Of course, there are many advantages to this, but they are rules nevertheless. The same reasons that make the franchise model attractive can also make the experience suffocating for some. Before you commit to a franchise understand all the rules, procedures, and systems you must follow as a franchisee.
Buying a franchise has significant upfront costs. The systems, processes, and brand recognition you get comes at a price. You will also have to live with smaller profit margins. In addition, you are part of larger system. If something happens to tarnish the image of the franchise it could hurt all franchisees. It is a risk you have to be ready to take.
Advantages of buying an existing franchise
- You are buying an up and running business. You don’t have to worry about finding a location and other details you would with a new franchise.
- There will be reduced risk. You are looking at a business with a history. You can evaluate how the business performed in the past and draw conclusions.
- There are employees in place. It is one less thing for you to worry about.
- It might be easier to obtain financing.
Disadvantages of buying an existing franchise
- The business might have a negative reputation.
- The location might be less than desirable or there might be lease problems.
- There might be problem employees.
- You might have to pay a higher price.
- You might inherit lawsuits and other legal problems.
How much does a franchise business cost?
The upfront costs to own a franchise business can greatly vary. An inexpensive franchise might cost you $25,000 while some can cost millions. The range is huge. At the low end you could buy into a home-based business spending less than $20,000. Restaurant, hotel, and automobile franchises are among the most expensive ones.
The cost of owning some popular franchises:
- Subway – $100,000 – $285,000
- Wendy’s – $250,000 – $600,000
- Days Inn – $199,000 – $7,000,000
- Doubletree by Hilton – $35,000,000 – $65,000,000
- H & R Block – $31,000 – $138,000
- Auto repair – $200,000 – $300,000
There are several costs associated with buying a franchise business:
- Franchise fee – You pay this fee to the franchise company. The franchise fee could range from as low as $10,000 to millions. It covers the cost of training, location selection, and support. It is crucial that you understand what exactly you are getting in return for the franchise fee.
- Legal fees – You shouldn’t buy a franchise without consulting a franchise attorney. You need the attorney to help you understand the franchise agreement and any other related legal matters. Expect to pay upwards of $5000.
- Construction costs – The build-out cost could be one of your biggest expenses. If you buy a home based franchise, you can completely avoid this.
- Inventory – Every franchise is different, so there is a huge range here. You might spend tens or hundreds of thousands on inventory.
- Supplies – Supplies could be utensils, office supplies, or a wide variety of supplies.
- Capital – Cash is essential in any business, including franchises. The franchiser will give you an estimate about the amount of working capital needed.
How much money does a franchise business make?
To stay in business you have to make a profit. It might be difficult for you to get a straight answer from the franchiser about how much money you can expect to make. To a certain degree this is understandable. If they promise that you will make a certain amount and you don’t they would be legally liable.
But really, how much money can you expect to earn? According to a survey conducted by the Franchise Business Review, the average franchise across the spectrum earns a profit of $66,000 annually. The same survey found that 51.5% of food franchises earn profits of less than $50,000 annually.
In order to maximize your profits you have to pay attention to the following:
- Real estate – Negotiate a great lease. Working with a real estate attorney on your side could help you drive a hard bargain.
- Labor costs – Your staffing level should be in sync with your traffic. For example, in the restaurant business labor is about 35-40 percent of your expenses.
- Cost of goods sold – Having a larger than necessary inventory will quickly eat into your profits.