Buying a franchise is an excellent path to success for a budding entrepreneur. However, there are many rules that a potential franchisee should know before they take the plunge. Here are 3 facts that every potential franchise owner should know:
1.Costs of Doing Business
Every franchisee hopeful must pay the franchisor a fee for the rights to use the franchisor’s brand. This fee varies by company, but ranges from tens of thousands to hundreds of thousands of dollars.
Once the franchise fee is paid and a location is approved by the franchisor, a franchisee should earmark funds to rent and build out a location to the specification of the franchisor. This process may cost as much or more than the original franchise fee depending on your location. All good business owners will do their due diligence in selecting a location for their franchise. Location is everything!
Royalty fees may also be part of a franchisee’s contract. On average, a franchise owner pays roughly 6.7% of your monthly gross revenue to the franchisor. This is paid to the franchisor whether or not you actually make any profit and should be a consideration when speaking to a franchisor about making a large investment into a franchise.
2. Franchisor Imposed Restrictions
As mentioned above, the franchisor usually has final say in the location of your franchise. However, there are a few other areas where most franchises will impose their own standards:
Design and Marketing Materials
Franchisors may require strict adherence to floor plan, design and signage when you agree to the franchisee contract. Sometimes, these include companywide design changes that may range from changing the uniforms your employees wear or a full store redesign. Talking to franchise owners in your area may give you an idea of how often these redesigns happen. When they do, they may increase your costs of doing business
Restrictions on Goods and Services
“Franchisors may be allowed to place restrictions on the type of goods and services you sell,” said East Coast Wings & Grill. For example, a pretzel stand may not be able to sell other food items or otherwise change the menu and the may also enforce sales from time to time that will add to your costs.
These are just a few examples of the rules franchisees must abide. Be sure to read over any agreement before you sign and possibly have a lawyer who specializes in business contracts to go over it with you- remember, a lawyer will cost much less than a failed business and provides peace of mind to move forward.
3. You Have to Sweat, Sweat, Sweat!
Some people assume that a well-known franchise name equals instant success. They must be expanding for a reason right?
Well, according to sba.gov, about half of all new business establishments close their doors before the five-year mark. The reality of the situation is that owning your own business is hard work, even for a franchisee in a well-known brand.
In 2011, the Bureau of Labor Statistics reported roughly 780,000 new business establishments were started. The U.S Census Bureau reported that 2% of these businesses are franchises. That means that by the end of this year, roughly 7,800 franchises will have shuttered their operations; a sobering truth in today’s market.
But don’t let the statistics keep you from your dreams of business ownership! You can minimize your risks by doing your due diligence- research the company you are licensing from, research your target audience and try to interview other franchise owners to get a feel for the market before committing your money to any venture. There’s a niche in every market that you can capitalize on and an ounce of work now before you commit is worth a pound in the payoff.
