Small Business Personal Finance: Is Being a Franchise Owner Right For You?

Starting a new business is scary. Whether you’re entering a competitive market or trying to build a category that doesn’t even exist yet it can be extremely difficult to execute your idea and turn it into a successful company. Furthermore there are many Americans who may not have an idea for a new business but still have a desire to be their own boss and run the show. In these cases franchise ownership might be something to consider.

What is Franchising?

Simply stated, buying a franchise means that you own a small business that is actually part of a larger business. Franchising allows existing companies to expand their presence, while providing entrepreneurs the opportunity to work for themselves and turn a profit. As a result the franchise model has remained popular and, as of 2011, there were 785,000 franchise locations in the United States alone.

Types of Franchises

When most people think of franchises, fast food locations and pizza delivery chains typically come to mind. While those categories do make up a sizeable portion of franchise opportunities they are from the only businesses that use the model. In fact any business that can be reasonably duplicated is a candidate for franchising, meaning that entrepreneurs looking to buy will have a world of options and industries to choose from.

Fees

In most cases there will be a number of fees associated with starting and running a franchise. First you will have to pay an upfront buy-in fee which can range anywhere from $10,000 to $100,000 depending on the company. Keep in mind that these fees do not include things like real estate, equipment, or inventory — it only gives you the right to use the company’s name and other trademarks/copyrights. These contracts can also expire and may require you to renew your agreement (which will result in an additional fee).

Once your business is ready to open there will be an ongoing royalty fee assessed to your business. This mean that you will be required to pay a certain percentage of the money you make in sales to the corporation you’re franchising from. In 2010 the National Federation of Independent Business reported that the average royalty rate was 6.7%. On top of the royalty fee different companies may also require franchisees to kick in money towards advertising campaigns, leasing, or other corporate costs. All of these factors and fees should be considered before you decide to buy in.

Researching Franchise Opportunities

There’s really no set way that franchisees discover the businesses they’d like to build. Some buyer might have a desire to take a particular business they’ve visited or heard of that doesn’t operate in their area and open a location there themselves. Others may just see an opportunity with a certain company that’s on the rise and decide to jump aboard. The best thing to do is to figure out what kind of industry you want to be in and then narrow your search from there.

As you discover companies that offer franchising you’ll want to make sure it’s a true match by vetting them as much as they’ll be vetting you. This includes looking to see how successful other franchisees have been with that company, how you get along with your would-be partners at the corporate level, and what they’re willing to do to support you when you open. Sadly in some cases the franchisor is just a small business looking for some extra revenue that may not actually be properly equipped to support a franchise model. With that in mind be sure to do thorough research prior to signing on the dotted line.

The Upsides to Franchising

When considering buying a franchise many potential entrepreneurs will compare the pros and cons to those of starting a business from scratch. One major advantage of franchising is the inherent brand awareness that comes from buying into an existing company. Thanks to national advertisements and other efforts you’ll have a customer base that’s familiar with your product from the minute you open your doors.

Another plus is that franchisees aren’t alone in their endeavors and are supported by a corporate team. This means that the items or services you sell have been market-tested and should be “ready for prime time,” so to speak. They also will have worked out a set of best-practices that you can help you as you get started. Although there’s definitely a high level of risk involved in opening any business, having this power behind you can often help take away some of the pressure. Additionally having a strong franchisor as a partner can help you grow as an entrepreneur. Beside your franchisor there are additional resources available, such as the American Association of Franchisees & Dealers that can provide valuable resources and business advice.

Overall franchising might be right for those who may not be as experienced or confident in managing some of the larger picture aspects of running a business such as advertising or product development. While you will still have control and input over the day to day operations of your business, such as hiring a team, you will also have people behind you to help you succeed. If that sounds good to you then you might want to consider owning a franchise as both an investment and a career.

The Downsides to Franchising

While franchising might be right for some, admittedly it’s not for everyone. All of the benefits that come with being part of something larger can be seen as drawbacks for entrepreneurs who want more freedom to implement their own ideas and truly answer to no one. That’s where the franchise model hits a snag.

Depending on the company, the rules of owning a franchise can be very strict. This could mean a mandate on the items you sell, the prices you charge, a dress code for you and your employees, and anything else a company deems to be an integral part of their brand. Some businesses may offer a little more wiggle room but rarely are you fully independent.

Perhaps the biggest roadblock to opening the business of your dream is just confirming that you’re allowed to build your franchise where you want. Different companies will have different rules regarding territories and how close two of their locations can be to one another. Even if there isn’t another franchise in your area you may discover that a particular business isn’t interested in expanding into your region.

Because of this it’s important to keep an open mind when looking for opportunities and don’t get your hopes too high about any one business idea. This is something that many entrepreneurs simply cannot fathom and, in that case, franchising may be a bust for them.

Are Franchises Worth It?

There are several things to think about when contemplating the purchase of a franchise, including what the initial fee is, what the the royalty rate is, and what your projected sales will be. However, at the end of the day, a passion for the business you’re buying into is paramount. While it’s possible to simply purchase a franchise and turn over the keys to a general manager to run it, nothing can compare to a driven owner who takes a franchise and makes it their own. With that in mind you have to ask yourself if being a franchisee is truly right for you.