The numbers tell the story. In 2018, there were more than 759,000 franchises in the United States alone, employing more than 9 million people.
That’s because buying a franchise presents the opportunity to enter an existing, tried-and-tested business model where the franchisee pays an initial fee to the franchisor, along with continued royalties. From large, fast-food chains to convenience stores, opportunities to own part of a widespread or popular brand abound.
But these opportunities can be nuanced—buying a franchise comes with benefits and drawbacks. While it may present a good opportunity for some, it might not be the best answer for every hopeful entrepreneur. It’s best to weigh the advantages and disadvantages of each unique option and individual situation.
Benefits of Franchising
Reduced risk — When you buy a franchise, you are buying an established concept that has been successful. Franchisees have an 80 percent chance of surviving the first year. By contrast, independent businesses have an 80 percent failure rate.
Established products and services — There’s already a demand for the franchise’s offerings, so the market is ripe for your products.
Site selection and guidance — You don’t have to worry about where you’re going to set up shop. The location—and advice about how to make it successful—are already available to you.
Marketing support — Nobody wants you to succeed more than your franchisor, so they typically provide help with starting your business and running it afterwards. In addition, you will often benefit from the parent company's national marketing campaigns.
Drawbacks of Franchising
High cost of entry — It can be very expensive to buy into well-known franchises, so either plan on deep pockets and/or the ability to arrange the necessary financing.
Reduced autonomy — You have to conform to the rules and guidelines of the franchisor, which takes away some of the independence that you might be looking for with your business. A franchisor may dictate things like location, pricing, hours and layout.
Substantial overhead/operating capital — Along with the original franchise fee and operating costs, royalties (a percentage of your business revenue) need to be paid to the franchisor on a monthly basis. There also are ongoing costs like mortgage payments and high employee costs. The franchisor also may charge you for things like advertising costs.
Their brand, not yours — Franchisors must protect their business name as brand recognition is at the heart of successful franchises. If there is ever a conflict as to what is best for the corporation versus what is best for an individual franchisee the brand will always win out. If a problem arises in your business and it becomes public you may be labeled as a “rogue franchisee” who wasn’t following corporate’s rules and your rights can be terminated. Franchisors can be great partners when all is going well but often they are “fair-weather friends” distancing themselves when needed to protect the brand.
Do you think there’s a franchise in your future? Buying a franchise is like buying any other kind of business in that you have to study and investigate the opportunities. Then, given your options, life circumstances, and available resources and time, you might decide a franchise is right for you—or choose another, more flexible business opportunity, such as Healthy YOU Vending.
10 Steps to Starting a Franchise
Do your research. The first step is to learn more about franchising in general, including operations, what to expect and how to choose from all the available options. Weigh the pros and cons before making your decision.
Choose a franchise that matches your interests, business goals and personal strengths. You’ll be more successful, and enjoy your work more, if you’re aligning your personal strengths with your professional goals.
Protect yourself and your personal assets by forming an LLC or corporation. While not always needed in other types of businesses, it is a must for franchises. Create a legal barrier between your business liabilities and your personal assets by incorporating your business. In addition, corporations and LLCs can qualify for tax breaks that are unavailable to sole proprietors.
Research the market where you’re considering a franchise. Is there a need for a fast-food restaurant, convenience store or travel agency in this locale? Your whole business is tied into one location where you will be signing a long-term lease.
Write a formal business plan. A solid document will help you get organized when you pitch to investors. Make each step or goal actionable. As your business develops you will need to weigh two competing factors – changing your plan to adjust to market changes and sticking to your plan so as not to spook investors (who you may need to borrow further from).
Acquire capital for franchise fees, start-up costs and working expenses until the business becomes profitable. You need sufficient starting capital to cover you through the first leg of your franchise journey. Some possible sources of funding include your franchisor, family and acquaintances, banks or finance companies, and even crowdfunding sites and sources.
Hire an attorney to help you navigate through the franchise agreements - which are typically 50-100 pages long. In those pages are numerous obligations you are agreeing to which is why it’s recommended that you hire legal counsel. Make sure you understand the exact terms of the contract, including all your rights and obligations. Note any franchisor promises made during meetings and be sure they’re included, along with rules on suppliers, pricing, etc.
Make sure you can spend the time needed to start your business. Many franchises are not a part-time endeavor and they typically require 60 hours or more each week during your first year. If you cannot meet these time commitments you should choose a franchise that closer matches the amount of time you can spend.
Final preparation. Hire a general contractor to build or improve an existing space from where you will run your business, hire and train employees, and finally, attend any optional or required training offered by the franchisor to ensure your success.
Open the doors! All the hard work is done, or just beginning—depending on how you look at it.
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