If you’re starting a new business, opening a franchise is a great way to go. Franchising is a smart business model that cuts through just about every industry, from restaurants to janitorial services.
A franchise is a strong business model, but there’s still a long haul involved if you want a successful business. Like any venture, success is not guaranteed.
Keep reading to find out all you need to know about opening a franchise.
What Is a Franchise?
When you start a traditional brick and mortar business, you have a few ways to expand and scale-up. You can open up new locations, but that can take time and a lot of capital.
If you want to expand quickly, that’s not the way to go.
The alternative is to sell business opportunities as a franchise. The person that owns the business (franchisor) licenses the brand, and systems to someone to operate (franchisee).
The franchisee gets a turnkey solution to start a business. The brand is already established, so it’s much easier to have a competitive edge in the marketplace.
The Costs of Opening a Franchise
One of the misconceptions about opening a franchise is that you pay a franchise fee and you have the business. A franchise fee is just the cost to license the brand and business systems.
There are a lot more costs involved to operate a franchise before and after you open your doors.
Startup Costs
You are responsible for all of the startup costs beyond the franchise fee. You have to pay for equipment, employees, business licenses, and real estate costs.
For example, if you are opening a gym franchise, you want to make sure that you have gym equipment so people can work out. That’s on you to purchase, and you’re likely going to have to buy equipment directly from the franchisor.
Marketing Costs
One of the big advantages of opening a franchise is that you can leverage the power a well-known brand carries.
The franchisor does provide a lot of marketing support, but you have to pay your fair share. That’s likely going to be a percentage of revenues.
Your franchise revenues may be $30,000 a month. You may have to pay 2% of your revenues for marketing support. That adds up to $7,200 a year.
That can be a lot of money for a business, so you need to make sure that the franchise follows through with a strong marketing campaign.
You may be able to do your own franchise marketing, depending on the agreement you have with your franchisor. Take a look at this closely because you still want to invest funds in your local market on top of what the franchisee is already doing.
Royalty Fees
How do you think a franchise makes money? They make money off of selling equipment and franchising fees. One of the unknown fees for novice franchisees is a royalty fee.
This is so you can continue to license the intellectual property (brand and systems) of the franchise. Like the marketing fees, a royalty fee is a percentage of revenue.
The percentage depends on the franchise, but they can range from 4% up to 20% or more.
Go In With Eyes Wide Open
You don’t want to be caught off guard when you open your franchise. You have to open your eyes to franchising before you research opportunities and make a commitment.
There are advantages and disadvantages to franchising, just like in any other business opportunity.
The advantage of opening a franchise is that you are buying a proven system that works. You have a big brand and support behind you.
Many franchises will offer business training and support to help their franchisees become successful. It’s like going to business school without paying for a degree.
Another advantage is that you can often get a loan for a successful business model that’s proven. It’s much easier to do that with a franchise than an unknown business you’re starting on your own.
There are a number of downsides to franchising. You don’t have much control over the business.
Franchises work because they’re consistent. Customers expect the same experience from a store in New Jersey and another store in North Dakota.
Corporate will dictate how each location looks and establishes itself in the marketplace. Not only that, but you run the risk of having a competing franchise open up its doors down the street.
That practice is known as cannibalization, and it’s common in franchising. You have to keep in mind that corporate will do what’s in the best interest of corporate, even if your investment and location are put at risk.
Opening Your Franchise
Once you understand what you’re really getting into in franchise, you can make much better decisions. You have to do your research to find the right match for your needs.
You may have dreams of investing in the business and being a hands-off executive. That’s fine as long as you pick the right franchise to support that. You also have to hire an outstanding manager to run the daily operations.
You want to interview other franchise owners and find out from them what it’s really like to work with the main office of the franchise. Some franchises will give you a little flexibility to adapt your franchise to the local market, while others won’t.
You also have to read disclosure documents and if the franchise is a publicly-traded company, be sure to read their 10-K statements.
Those financial statements reveal an awful lot about the business, such as the risks, cash flow, and opportunities in the market.
Opening a Franchise for Long-Term Success
If you want to open a business, opening a franchise can be a great thing to do. Franchises offer a proven business concept that works.
Where people get tripped up is that they don’t fully understand how a franchise and the associated fees work before they sign up.
The more you know about the franchising business model and the fees, the easier it will be to pick the right franchise for you.
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