Are you interested in running your personal business and being your personal boss, but don’t know how to get started? You’re not alone — starting a company from scratch needs a solid business plan and plenty of capital. Despite careful planning, there’s no guarantee that your business is a success.
But what if there is a method to improve your chances for success having a tried-and-true business model?
Fortunately, that’s where franchises are available in. A franchise helps simplify the process of launching and operating your personal business. You’ll get the freedom of owning your personal business without having to build it in the ground up. However, as with any other business, there are some challenges you might encounter. In this post, we’re going to dive in to the realm of franchises. We’ll review what a franchise is, how it all works, and assist you to determine if franchising is the right fit for you personally.
What Is A Franchise?
Even if you don’t think guess what happens a franchise is, you’re almost certainly familiar with franchises in some capacity. You’ve probably seen many franchises in your area or town. Fast food restaurants, fitness centers, coffee shops, auto repair centers, stores, and other kinds of businesses may be franchises.
A franchise is really a business structure that enables a third-party entrepreneur (also referred to as the franchisee) to legally operate a business using the trade name, standards, and procedures from the business proprietor — the franchisor.
The franchisee is considered a completely independent operator, and the franchisor is not involved in the day-to-day operations of the business. However, the franchisor may provide ongoing support in return for fees paid through the franchisee. We’ll get into more details on the specifics in the next section.
To put it simply, an entrepreneur may use the name, branding, products, services, and procedures of an established business. This allows the entrepreneur to own a business without starting from scratch while also expanding the franchise.
How Franchises Work
Now that you've a general idea of what a franchise is, let’s explore the specifics of how these business entities work.
Licensing
A franchise is only a business entity that's licensed by the franchisor to some third-party — the franchisee. The franchisee may then legally make use of the trade name, processes, procedures, products, and services of the business. The franchisee gets to take advantage of a turnkey business design which has minimal startup costs.
What’s in it for that franchisor? Along with startup costs, there are a variety of ongoing fees the franchisee pays through the amount of the licensing agreement. The length of the licensing agreement varies by franchise, but in general, many initial licensing agreements are positioned for a period of five years with the option to renew the agreement. However, some agreements might be as short as 3 years, while some might be so long as 20.
As the franchisor builds more relationships with franchisees, the business expands. While the franchisor isn’t proportional in the operations from the business, it will provide training and support — something we’ll cover a little later.
Fees
One of the most popular advantages of investing in a franchise is the fact that startup cost is typically less than building a business in the ground up. You then have a better idea of what to expect when it comes to costs. For instance, you might map out the expense of a new business built from scratch, but it’s not uncommon for business people to find their actual expenses tend to be greater than estimated. With a franchise, you've got a clearer picture of your startup costs and ongoing fees and expenses. Some to expect include:
- Franchise Transfer Fee
- Training Fee
- Royalty Fees
- Auditing Fees
- Renewal Fees
While purchasing a franchise can typically be less expensive than starting a company on your own, there are significant fees associated with starting and operating your franchise. As a rule of thumb, count on paying one-third of your pre-tax earnings toward these one-time and ongoing costs.
Fortunately, there are many funding opportunities that will help cover these costs, which we’ll explore a little later in this post.
Training & Support
When you purchase a franchise, another advantage may be the training and support that you receive in the franchisor. This is built into the royalty fees which are paid with an ongoing basis. Your franchisor may provide technical support, customer support, marketing materials, and training. This training and support are based upon the franchise’s proven systems and methods, taking out the guesswork and also the added expenses for you personally.
While the franchisor comes with standards in place for operations, the franchisee does have some flexibility in some areas of operating the company. This includes employment standards, disciplinary actions taken by management, whom you hire, and also the rate of pay employees receive.
What It requires To Buy A Franchise
While investing in a franchise removes some of the guesswork of owning and operating your personal business, planning, budgeting, and knowing what to expect are critical to your ability to succeed. Before you make the next phase toward buying a franchise, think about the following points.
Pick Your Sector
Don’t think that meals are your only option when it comes to opening a franchise. While junk food, quick-service, and full-service restaurants are extremely options, there are plenty of other opportunities for you personally, including:
- Gyms
- Salons & spas
- Hotels
- Gas stations & convenience stores
- Automotive services
- Clothing stores
- Pet stores
When pinpointing what sector is right for you, consider first your very own preferences. Can there be something which interests you, or perhaps a sector where you have experience? It's also wise to take into consideration market and industry trends to boost your chances for operating an effective franchise.
Seek Out Other Franchisees
Still undecided by what franchise is best for you? Look for other franchisees and find out more about their experiences — the great, the bad, and the ugly.
There exist several methods to find other franchisees. During the pre-sale process, you’ll get the Franchise Disclosure Document, which provides information about the franchise, franchise locations, along with other franchisees. Online discussion boards can provide details about franchising. Finally, you can connect with franchisees by attending industry conferences, expos, along with other events.
Set Your Budget
What you’re prepared to spend to own a franchise may help you limit your selection. Do your research to learn more about the associated costs with investing in a franchise. Compare your options, and understand what you are able to comfortably afford.
Like any other kind of economic, a franchise may not be profitable for approximately twelve months. In some instances, it may take even longer before you decide to visit a profit. Calculate what you can afford, and in mind that you'll want extra use of capital to keep your business running until it becomes profitable.
One last thing to note is the fact that purchasing an existing franchise is usually a smaller amount expensive than buying a new one. However, you need to determine if the cash you save is the best for the long haul. For instance, a franchise that is struggling might take much longer before turning an income.
Find Financing
Another positive aspect of purchasing a franchise is the funding opportunities available to new franchisees. There are many long- and short-term funding possibilities including:
- Franchisor financing
- Small Business Administration loans
- Installment loans
- Rollovers as Business Startups (ROBS)
- Lines of credit
Unsure which option is right for you? Check out our post concerning the best franchise loans.
Determine Your Location
You’ve determined your budget, you’ve selected a franchise, and you’ve explored financing options. Now, it’s time to consider where your franchise will be located. There are a variety of considerations to bear in mind when choosing your location, including:
- Convenience to customers
- Proximity to competitors
- Price to buy or rent commercial space
Many franchisors will help you identify suitable locations for the business that also follow your franchisor agreement.
Select Your Franchise
If you’ve managed to get this far along the way, you should know what franchise fits your needs. You should do your quest prior to you making your choice, as well as due diligence with the pre-sale process. Including identifying your specific Selling Proposition and reviewing the Franchise Disclosure Document. Learn more about this process by checking out our article, The Step-By-Step Help guide to Purchasing a Franchise.
Prepare For Opening
Before you open your doors to the public, there are a variety of steps you need to take. Including selecting the right business software, including project management software software and restaurant POS software.
Training is also critical before opening your franchise for business. Many franchisors provide a number of resources, including extensive in-person training. Connecting with other franchisees, attending trade events, and doing online research are additional ways to improve your knowledge and expertise.
Open Your Franchise
Once you’ve covered the prior steps, you should be ready to open your doors to customers. Consider using a “soft opening” to see how everything goes and to overcome any potential challenges that could arise when the franchise is working. Once you’ve overcome these hurdles, you are able to host a great opening for your customers. Be sure to improve your traffic by providing free samples, special rates, coupons, or any other incentives that can help get the business off to a powerful start.
Is Having a Franchise Best for you?
At this time, you should have a concept of whether a franchise is definitely an opportunity that’s attractive to you. However, if you’re still on the fence, there are some additional considerations:
- Reduced Risk: There’s a lower chance of failure with a franchise since you’re utilizing tried-and-true systems/processes and a familiar brand. This isn’t to say that you’re guaranteed success having a franchise. You'll, however, have access to resources and tools to help you using your entrepreneurial journey, including marketing campaigns, training, and other assistance.
- Potentially Low Startup Costs: While startup price varies, many franchises have low initial investment costs. Franchises including Jersey Mike’s, Great Clips, and The UPS Store all require an initial investment os less than $250,000.
- More Funding Opportunities: Getting a business loan can be challenging if you construct your business from scratch. However, franchising opens up more opportunities for financing, including franchisor financing and other loans specifically for franchisees.
- Be Your personal Boss: If you want to become an entrepreneur but you don’t know where to get started, investing in a franchise may be a great choice for you. When you should at least possess some industry experience for that franchise you choose, this isn’t required. You won’t have to think of a concept, find suppliers, and try everything on your own, however, you still get to be your own boss.
However, being a franchisee isn’t the best choice for everyone. Keep these considerations in your mind when making your choice:
- Ongoing Royalties & Other Fees: Ongoing fees and royalties paid for your franchisor reduce your profits.
- Limited Creativity: If you'll need a business that’s truly your personal, a franchise isn’t the right option. Like a franchisee, you’ll have branding limitations that may prevent you from putting your own personal stamp on your business.
- Tarnished Reputation Affecting Profitability: The actions of 1 franchise could spell difficulties for your company. A case of food poisoning or food tampering, bad behavior by employees or management, or perhaps a news-worthy negative event could damage the brand’s reputation — as well as your own franchise.
- Shared Financial Information: Your financial details are distributed to the franchisor. If you don’t want that much transparency inside your business, consider taking another route.
- Risk Of Non-Renewal: Once your franchise agreement expires, the franchisor has got the option to not renew the agreement.
If the drawbacks of the franchise outweigh the advantages, consider starting a own small business from the ground-up or getting a business that isn’t a franchise.
Final Thoughts
Becoming a franchisee takes a large amount of the guesswork from owning your own business. You have to remember, though, that even though you’re not doing the work alone, you've still got to invest time and to make sure your franchise is a success. While a franchise provides the blueprint for aspiring entrepreneurs, it’s your decision to put in hard work necessary to build a successful, profitable business.
