So you’re thinking about starting a business? And you have probably heard about franchising before, but what is it? Let’s start at the beginning.
The basics of Franchising
Franchising is essentially paying someone to use their business strategies. The owner of the business is known as the franchisor and the third party is know as the franchisee. Generally, the owner licenses the right to operate their business under the franchise’s name to the franchisee for a certain amount of time. To get these rights, the franchisee pays a fee to the franchisor.
After buying the franchise, they go through training from the franchisor, which can take anywhere from 4 weeks to 9 months. More complex franchises may require longer training sessions.
About the Fee
The franchising fee can be paid in several different ways and vary depending on the franchisor. The fee can be an upfront payment to the franchisor, an ongoing fee in a percentage of the profit or revenue, or a combination of the two.
For example, if you want to open your own McDonald’s, a new franchise comes with the below franchise fees.
– There is an initial $45,000 fee paid to McDonald’s.
– The new Owner/Operators must pay forty percent (40%) cash of the total costs of a new restaurant, and may finance the remainder from traditional sources. Typically, these costs range from $1,314,500 to $2,306,500.
– A monthly fee based on the restaurant’s gross sales (currently a service fee of 4.0% of monthly sales).
– A monthly base rent or rent amount based upon a percentage of monthly sales is established
The above is a popular (although expensive) example of a franchise, but there are thousands of franchises available within every price range and industry that will appeal to potential business owners.
Advantages of Buying a Franchise
– Starting your own business is a time-consuming and risky proposition, so buying a franchise may be much easier.
– Buying a franchise is generally cheaper than starting a business from scratch
– The franchisor generally provides assistance with identifying suitable business locations, as well as training and support.
– The term is flexible. It could last one year or have no fixed term and last forever.
– The franchise that you buy benefits from advertising by other franchisees, as well as central marketing support from the franchisor.
– Depending on the terms of the agreement with the franchisor, franchisees may be protected from competition.
Disadvantages of Buying a Franchise
– By purchasing a franchise, you are entering a formal agreement with your franchisor. These franchise agreements leave little room for creativity.
– There are usually restrictions on the products you sell, the suppliers you use, and where you operate.
– If another franchisee has a bad performance, it could impact your franchise’s reputation.
– You may have to share your profit with the franchisor.
– You have a contract that is valid for a certain amount of time. Franchisors are not required to renew this agreement at the end of the term.
Buying a Franchise vs Starting Your Own Business
Deciding between buying a franchise or starting a small business can be a difficult call, and there are pros and cons to both. If you want full creative control over your business, a small business is better. Franchises are already owned and by buying one you are making a formal agreement to operate exactly how the franchisor wants you to. With a small business, you can make your own decisions.
However, there is a higher rate of success for franchises as opposed to start-up businesses. On the other hand, a major franchise takes longer to start than a small and uncomplicated business. You also would not be the sole profiteer in a franchise whereas in your own business, you would get the whole profit. In the end, it depends on what you are looking for in your business and using those standards to choose one or the other.
Things to Consider Beforehand
Before investing in a franchise, keep some things in mind. It is the franchisor’s business, so they might impose restrictions as to how they want their business to be operated. It is your responsibility to abide by these restrictions. When buying a franchise, you have to uphold your agreement. This could include some burdensome terms so make sure to review it very carefully and consult legal advice, if necessary. Make sure that you completely understand the franchisor’s policies before investing.
Another thing to be wary about is that the franchisee generally makes ongoing payments. Make sure that you will be able to make these payments, as this is the biggest issue with small businesses. You might also have to make an upfront payment with no guarantee of success. Keep in mind that this is not refundable so make sure you assess the likely prospects of the franchise and do your due diligence in selecting the right franchise.
In the end, Franchising can be an excellent option if you go into it with the right expectations around operating control, business fit with your lifestyle, cash flow positions and profit considerations.