Have you ever dreamed of owning a Mc Donalds, IHOP, UPS Store, Domino’s Pizza or Jiffy Lube? If so, franchising might be for you. There are some distinct advantages to starting your business by franchising but there are also some pretty significant drawbacks. Let’s step behind the curtain and learn more.
What Is Franchising
Franchising is simply a fast way to get into business for yourself. Rather starting your business from scratch, you use someone else’s formula. Think of it as the Betty Crocker Instant Cake Mix for business. Instead of just adding milk and eggs of course, the main ingredient is money. And sometimes you have to pour in quite a bit.
How does it work?
Once you find the right opportunity you write a check (sometimes a large one as I said) to the corporate headquarters. They train you, set you up, sell you exactly the right equipment, allow you to use their name and buy their ingredients and/or systems and hold yourself out to consumers as part of their company. That means you don’t have to spend years figuring all this out and then, if you are lucky enough to survive, building a reputation. Poof. The right franchise provides all of this at the blink of an eye.
How much does it cost?
As a franchisee, you’ll pay for training, services, equipment, supplies and an initial franchising fee. On top of that, you’ll fork over annual royalties on sales. Of course, if there is anything left, you get to keep it. Getting set up can cost between $10,000 on the very low end to several million dollars.
Neal’s Notes: If you are buying a franchise because you want passive business income – think twice. Owning a business is hard work and anyone who tells you otherwise is either inexperienced or a con man or woman.
Some of the Pros and Cons
As I said, one of the main reasons people are drawn to this business model is because they want to be self-employed but don’t want to start from scratch. And franchisees have some peace of mind knowing they invested in a business that has a proven and profitable track record. That’s worth a lot.
But of course there is no guarantee. Franchisees fail too – just like other businesses. There may be less risk of this, but it still exists.
And the reality is you aren’t fully self-employed when you own a franchise. That’s because you don’t have complete autonomy. You can’t do whatever you like. Remember, you are the company as far as the public is concerned.
As a result, the company wants to protect it’s brand so it imposes restrictions on what you can and can’t do. For example, if you buy a UPS Store, they probably won’t let you paint it anyway you see fit. If you buy an IHOP, you will have to sell pancakes even if you can’t stand them. And you’ll have to make them the IHOP way.
Also, keep in mind that being self-employed is a lot of work- franchise or not. Don’t expect to plunk down a wade of cash and then watch the profits flow your way without breaking a sweat. You are paying top dollar for the right to use the franchise name and business model. You’ll have to work hard to ensure you implement their systems if you want the business to be a success.
MORE ON RISK
It’s absolutely true that franchises help business owners side-step a great deal of risk. That’s because the company has already created a proven track to run on as I said. They’ve seen it all. Most have a stake in your success (but not all). Usually, the company (and other franchisees) are there to help you make it work. They don’t just point you towards the cash register and tell you “mush”. They want you to succeed because it hurts the entire company when a franchisee fails. It’s nice to know experts are watching over your shoulder and invested in your success.
But you are still in business and that means you still have risk. If the overall economy shifts or if your product or service doesn’t work in your community, you may end up closing up and paying the price. The same goes for mismanagement. You have to keep your eye on the ball at all times. And if you buy the wrong franchise from the wrong franchisor, you are really going to end up in a world of pain.
Keep in mind that when you buy a franchise, you pay a big wade of dough for “goodwill” (the brand name on your store). That means a franchise is often much more expensive that starting your own business without the nationally-recognized name on the shingle. And that means you may have more to lose my friend. Watch out.
The Big Bottom Line On Becoming A Franchisee and How To Find the Right One
I’ve met several people who bought franchises. One of the wealthiest men I know is a franchise owner. But for every success story there are 50 failures. When you buy into a franchise, the company may not provide you all the information you need to make a good decision. Make sure to go over the Franchise Disclosure Documents (FDD) with a fine-tooth comb. Pay your accountant and attorney to look over the information too.
Many franchisees take out loans to pay for the business from the franchisor. Look at the default rates on those loans. That’s a good indication of how successful franchisees are. If many franchisees are failing, you may be looking at a disaster waiting to happen. Of course, continue your review by looking at sales, revenue, cost and net profit numbers. And it might be worth your time to compare the franchise opportunity to buying an existing non-franchise business from someone else.
My general experience is that it’s safer to go with well-respected, nationally recognized companies although this can be more expensive of course.
Make sure the business fits your skill level, work experience and income requirement needs. If the most successful franchisee on the books pulls down $40,000 a year and you need to make $100,000, why even bother? And keep in mind that you’re going to have to say goodbye to the benefits your current employer provides. It’s going to cost money to replace those goodies.
Whatever you earn, you’re going to have work harder and put more time in to make that money. Will the business fit your lifestyle? These are all important questions to ask.
Have you ever thought about going this route? Are you a current franchise owner? What has been your experience?