Franchise

Buying a franchise is one way to own your own business without having to start from the ground up and without having to assume all of the risk yourself. You choose an industry, whether it is a restaurant, retail store, service establishment or a hotel and then you look for a business within that industry that interests you and is successful. You become the franchisee by paying the franchisor, who is the owner of the company, an upfront fee to use the company name and sell the goods and/or services that company offers.

There’s a lot more to it than that of course and it is that “more to it” part that this article will explore. What kinds of franchises are there? What do they cost? What are the advantages and disadvantages? Will this really be my own business or will I be giving up total control by buying into a franchise? These are just some of the questions anyone considering buying a franchise should ask.

The initial up-front investment when buying a franchise differs widely. You can buy some franchises for as little as $20,000 while others go for hundreds of thousands of dollars and that is just the initial investment! You still have to buy or rent the building, pay the employees and purchase inventory. You’ll also be required to pay the franchisor royalties on a continuous basis based on the revenue your franchise generates. There may also be advertising fees that you are obligated to pay the franchisor and depending on the industry, you may have to purchase equipment. Finally, you will find that establishing a franchise will require a tremendous investment in both time and patience.

Whether you’re set on buying a franchise or just beginning the investigative process, you’ll be glad to know there are many different kinds of franchises thereby increasing your chances of purchasing one in an industry that suits you. Probably the most popular type of franchise everyone is familiar with is the restaurant franchise, both fast-food and upscale. For most people it doesn’t take any specialized knowledge to run a restaurant; however, there’s plenty to learn about the restaurant business.

Hotels are another common franchise and the retail industry is brimming with franchises. For a more scaled down operation there are franchises that pack and mail packages. Then there are plenty of franchises that do require specialized knowledge whether that is going to be coming from you, the franchisee or from the employees you hire. For example, the automotive industry has franchises in certain service areas. Tax preparation is another popular franchise operation.

Now that’s another area to consider. Not so much tax preparation but seasonal businesses. You’ll want to consider whether or not to take a chance on a business whose revenue jumps and dives according to the seasons. For example, if you were to purchase an ice cream business, think of the geographical area in which you live. Although based in part on the seasons, this business is also going to be more or less successful based on geography.

Once you decide to buy a franchise, while it’s important to choose an industry that interests you, it’s also important to consider your surroundings and what types of franchises will do best in your area. You must also consider how many of a particular type of franchise are already operating in your area and whether or not the market is saturated. Ultimately, you will find that there is little limitation in terms of the different kinds of franchises to choose from and you will also find little difficulty finding a franchise that interests you.

There’s not an “average” price for franchises. It stands to reason that the older, well established franchises that are making a handsome profit are going to charge more upfront fees than a relatively new one-man operation will. Knowing this, the price for the franchises you research will fall into the range of a few thousand to a few hundred thousand dollars. This will probably be your largest expense but by no means the only one. The initial franchise fee basically just gives you the right to use the franchisor’s business name and to operate as that business does. Most franchisors include training and other assistance in that initial fee as well.

You will most likely have to pay royalties to the franchisor based on the gross revenue your business generates. This can be scary and this is where you really want to make sure that you have done your homework as far as the income potential is concerned. Unless you’re constructing a new building, chances are another franchisee once owned that same business. Have you talked with him or her? Why did this person leave the business and what kind of profits did they see while they were in business?

When you pay royalties off of gross receipts, you pay them whether or not you are making any money. You could be losing your shirt and still have to pay the franchisor the royalties. Then again, you could be rolling in dough and be happy to pay the royalties. That’s why it is so important though to research before you buy a franchise. There are a lot of things you need to know before you sign on the dotted line. It would be extremely helpful if you speak with owners of established franchises. Ask for recommendations, ask how well the business is doing and if the franchise is a worthwhile investment.

You’ll also want to find out how much if any you’ll have to contribute toward advertising costs. Many franchises have an advertising fund that all the franchisees contribute to regularly.

You’ll also need to research how much the physical place of business is going to cost to rent or buy. Will you have employees? How much will payroll cost?

Finding out the cost of any particular franchise is a large part of the research you’ll want to conduct before you make a commitment. It is not something however, that you can find out everything about over lunch. It is a process, one which you’ll be happy you took the time to complete once everything is in order.

There are many advantages to owning a franchise over starting your business from the ground and having to build it up by yourself. For one thing, when you buy a franchise, one of the things you are buying is a proven business plan. Someone else already made a lot of mistakes before they got it just right and now you don’t have to make those same mistakes. In essence, a lot of the hard work involved in getting the franchise established has already been well researched and covered.

We can travel to another city or country that we’ve never been to before and recognize a business we patronize back home and even though we may be thousands of miles from home, we are instantly confident that we will find the same great product or service in that business as we have at home. By buying a franchise, you’ll enjoy that same level of confidence that your customers have in your product or service without having to win them over to either you or your goods or services.

You’re paying for that name recognition as part of the initial franchise fee but it is something you will enjoy from the moment you open the doors on your new business. Your customers won’t care that they don’t know you or that you’re new in the neighborhood. When they see your sign, they’ll know your product or service and that’s all that matters. The idea that your franchise gets recognition from the original establishment and other establishments proves to save a significant amount of cash in terms of advertising.

Training and a support system from your franchisor is important to your success. Regardless of how much training you have before the doors open, once you’re open for business you will have questions and issues you couldn’t have known about before you opened. A successful franchisor will be interested in your success and be willing to offer you ongoing support because successful franchisees are what makes successful franchisors.

There are disadvantages to almost any endeavor and most people are aware of that and accept it. Sometimes however, what may be a disadvantage to one person may not be seen as a disadvantage to another person at all. For instance, depending on your personality, the fact that buying a franchise doesn’t put you in complete control of your new business venture will either drive you crazy or be a relief. For most people, it’s somewhere in the middle.

Before you even begin your research on a franchise you need to first do a little heartfelt research on yourself. Are you the kind of person that won’t mind not having complete control over how things are done in your business? What if you buy a restaurant franchise and your Aunt Jane makes the best apple pie you’ve ever tasted and you want to sell it in your restaurant? If the franchisor doesn’t allow that, is it going to bother you? Or maybe you’re the kind of person that likes everything all laid out neat and tidy and you are looking forward to pouring over the previous franchisee’s books. You’re willing to do everything the franchisor requires of you without trying to change anything.

You want to give this a great deal of thought because you could lose your entire investment by not fulfilling your franchise contract which will stipulate you are to run things the way the franchisor directs you to. You may not be able to choose your own vendors or your own menu or clothes or nuts and bolts or services depending on the type of franchise you choose to invest in. You will need to come to the realization that you will still be required to answer to someone when you start a franchise; if you are getting into a business so you only have yourself to answer to, then you need to reconsider.

The advantages and disadvantages of buying a franchise should be clear up front before you make a move. Make sure you understand control issues and who has control over what before you make a commitment.

Make sure your family is with you in this venture because even if it is a business with a proven track record, it is still a new business to you and its success depends in part on how much hard work you put into it. You still need to learn the business from the ground up and you still need to grow the business. Take your family situation into consideration before you take on such a venture to make sure you are all on the same page.

Is the franchisor interviewing you too or is he willing to accept anyone who has the capital? If the franchisor doesn’t ask any questions about you, be suspicious. After all, franchisees can make or break his business unless he makes most of his money selling and re-selling franchises.

He should make inquiries as to how you are financing this venture. If you have to borrow to the hilt just to pay the franchise fee, you may not be the best candidate for this franchise opportunity; that’s because you’ll need working capital and because the franchise fee is only one part of the investment. True, it’s the largest part but you’ll still need to secure a building if the franchise you buy is set up in a building whether it’s a store or an office.

You’ll have payroll and overhead to manage in addition to advertising and equipment to buy. If all the franchisor is interested in is getting the franchise fee, keep walking because this is a clear sign he won’t be interested in your business after you’ve paid the initial fee.

Once you’ve done your research and are seriously considering buying a particular franchise, there is certain information you are entitled to before any money changes hands. The Federal Trade Commission mandates that the franchisor give you a copy of the Uniform Franchise Operating Circular (UFOC) which should tell you different things about this particular business.

You should receive this document a full ten days before you pay any money or sign any kind of a contract. This is not legalese. Read this thoroughly as it highlights certain aspects of the franchisor’s business. It will tell you about the franchisor’s legal history, such as whether or not there have been lawsuits or legal judgments brought against him. It will also tell you if the company has been involved in a bankruptcy. Not only do you need enough working capital to run the franchise but if the franchisor is broke you could lose your entire investment if the franchise isn’t supported.

The UFOC will also tell you about the costs involved in buying and running such a franchise. It should cover the franchise fee, any other fees, rent or purchase of a building, inventory, advertising costs and equipment, etc. You’ll also want to make your own list of potential costs associated with buying and running this franchise and ask and have it answered in writing what your costs will be. You won’t be happy later if you thought all the equipment was covered in the franchise fee and later you find out you have to pay the franchisor $1,000 a month for it.

When you think you’ve asked all the questions you possibly can, talk to some other franchisees, preferably ones with this same company. Ask them if the franchisor has delivered on his promises and if they’re happy with their businesses. Ask what the pitfalls are and for any advice they can give you.

Although the potential risk is lower than that of starting your business from scratch there are risks involved to owning a franchise. For one thing, don’t assume this match made in heaven will last forever. Franchise contracts are for a specific period of time; some are for 15 or 20 years, some may be offered only for 5 years. The franchisor has no obligation to renew your contract however most will if you are making them money.

What if you want to retire though? Suppose you have turned this business around and made it into a profitable asset where before it was a liability? Will your entire investment of money and hard work go down the drain? Are you allowed to sell your franchise or to pass it along to your child? Make sure you ask and have answered in writing what your rights are concerning the contract end.

Suppose your best friend is a supplier of a major item your business requires and that you can get this item much cheaper than the franchisor can supply it to you. Will you be allowed to purchase items from vendors of your choice or will you have to allow the franchisor to decide which vendors to use?

What about the location? What role does the franchisor play in deciding or approving the location for your business? What if a competitor moves in across the street and you begin to lose a substantial part of your business? Will you be able to relocate if you choose to or can the franchisor force you to stay in the original location?What if a new highway is taken down or constructed and it seriously affects your business? Will you be able to relocate?

Ask other franchisees in this same business who have bought franchises from the same franchisor what restrictions they’ve experienced. Try to find a franchisee willing to tell all, both the positive and the negative about his experiences with this particular business and with this particular franchisor.

Buying a franchise can make your business dreams come true or it can be your worst nightmare. The whole key to your success is doing your homework first. It won’t matter how hard you work if you make a mistake by making the wrong purchase. As tedious as it is, go through the process and do all the research and ask all the questions. When you do this, you’ll have a great chance of buying a franchise that you will be happy with and that will provide the kind of income you need.