Should you invest in franchising opportunities?
Many of us have the desire to work for ourselves and start a business, and at some point will consider buying into a franchise as an opportunity to get wealthy but also own a piece for our self. Franchising is an idea that comes up at some point or another and may seem like the easy way out but let’s take a moment and break down what you can or can’t do owning a franchise.
Owning a franchise has many advantages but also has many drawbacks that are usually not considered till after the fact, these drawbacks may make you think twice before investing your money or at least should get you asking the tough questions before buying.
How to buy into a franchise?
Most business that offer franchise opportunities have a specific plan for those interested in buying into the business and usually have a program to help make the new acquisition a success for the owner. The programs often are a form of on- boarding to help blend you and the culture of the organization together and include a training program once you do acquire your own store. The process usually require you to pay a deposit of 20% to be put on the waiting list, at which point the program would start and continue until your store was ready to be built. The rest of your money is usually due before the store’s construction starts.
How much does it take to buy in?
This varies significantly from store to store and company to company and can vary significantly. A typical 7-11 franchise purchase is about $200,000, Quizno Subs can be purchased for $50,000, and McDonalds will cost you about $5 million. This significant difference can make it hard to price franchising costs in general. Just keep in mind that you will need additional capital in case of additional costs.
Can I finance a franchise purchase?
In most cases you can but will still need a significant down payment, most banks offer franchise financing but only for well established franchises. There is also SBA help if needed to help lower the risk for the bank and help you buy the franchise you want. It is much easier to obtain franchising financing for an existing store than a brand new building. The banks simply look at the past performance and can relate the profit to how much they will lend. It is also easier to obtain franchising financing through the franchise themselves who often offer financing programs at slightly higher rates.
Do I really own the store?
Yes you do, you own the store and its entire inventory but you never own the name or part of it. You simply own the tangible aspect of the business. You have the right to run the store, hire the employees, and run like it’s your own, but there are many limitations to the marketing aspects of the franchise that you cannot change or neglect to display. The consistencies across the signage and marketing need to remain the same and despite the slight variations that you are allowed to have, you cannot simply change the business model.
How much do I have to pay the franchiser?
There indeed lies the first downfall of the ownership. Most franchises will charge you monthly or quarterly for your profits, they will charge you anywhere from 5% to 25%. This cost will cover your signage and other forms of advertising they might do for the company as a whole such as TV, newspaper and radio. All those costs are passed on to the franchise owners.
Do I have to use the same specials they offer?
Not all of them, most specials are company wide and will require you to take a loss at times on your budget in honor to be consistent with the delivery of the promotion. Some promotions could have you losing thousands by offering a .99 cent special. Some promotions are market based only and are geared to help boost sales, those are not mandatory and you may be excluded, but might be beneficial to you anyways.
Bottom line is, from our perspective, franchises can be a profitable investments but do not seem to be a money making powerhouse but simply a means to a replacing a $60-80,ooo income, while being free of the politics behind corporate America.