For many first-time entrepreneurs, owning a franchise is a safe way to make their first foray into the world of entrepreneurship.
Becoming a franchisee offers several benefits. Some of which include an established brand, a proven system and a great deal of corporate support. However, this does not mean every franchise is a safe bet. It is still imperative to do plenty of research before you sign a franchise agreement.
Fees and Hidden Fees
Some franchises are more expensive than others. Thus, it is important to look at both the up-front costs and the long-term costs of owning a franchise.
In some cases, you must buy a certain amount of equipment from a vendor. You may also not be able to choose the vendor. This is because the franchise itself may have an agreement in place. Additionally, there is sometimes an upfront fee to buy in to a franchise. This fee is generally in addition to startup costs like real estate, equipment and labor.
It is important to know how much the franchise fee is before you proceed too far into the deal. Finally, many franchises require you to pay either a flat fee or a percentage of your profits to the franchise every month. This figure will, again, depend on the franchiser itself. However, you will start paying this from the day you open your doors. You will often send a part of your income back to the corporate office even if you do not profit.
Consider branding when you are thinking about whether to buy into a franchise. You might choose a franchise because it already has a strong brand. It is nice have a franchise do all of advertising and marketing for you. However, you want to be sure that the franchise is protective of its brand.
The problem with branding and being a franchisee is that if another franchisee makes a mess of things, it can affect your business. This is a key difference between owning a franchise and owning your own business. Even if your outfit has nothing to do with a PR scandal, you can be impacted by the fallout, since you are a part of the overall brand identity.
Systems and Support
A franchiser will already have a set of systems in place for you to use. Having these tried and true methods for doing business can be a blessing for first-time entrepreneurs. However, these systems are not always a good thing, especially if they are not backed with corporate support.
It is important to do plenty of research into the franchisee experience before you dive into the contract. Every franchise treats its franchisees differently.
Some require extensive investments in interior design, staffing, supplemental marketing, etc. Your experiences and level of support when dealing with the corporate office can make a big difference.
Just because a successful franchise says that a system is standard for franchisees does not mean that the system works. In fact, it could be an inefficient system that costs you money. Yet, you might be legally bound to use that system or else you would breach your contract.
Ability to Acquire Territory
Your ability to acquire territory exclusively can be an important factor when applying to purchase a franchise. Some franchisers will allow another franchisees to build practically on top of you. For the franchise, this is not a problem because it is still making money. However, the competition can cause serious hardships for your business, especially if you are newly established.
Return on Investment
As always, you should consider the return on your investment. For example, the cost of opening a McDonald’s restaurant is between $1 to 2.5 million. It also requires you to have a lot of liquid capital. This is a high cost for a franchise. However, the average performing store generates revenue sales that reach $2.5 million annually.
So, while you are shelling out up front, McDonald’s has a stable brand that brings in plenty of cash, even for average performers. Newer, and less established franchises will cost significantly less.
Opening a franchise is only safe when you have all the information you need to make a smart investment decision. Remember that you always need to read the fine print, especially when opening a franchise!
This article has been edited and condensed.