Should You Invest in a Traditional Franchise?
Enter the world of franchising--a pick of many entrepreneurs anxious to start their own business but who desire the safety net of a proven brand. Franchises include replicated physical “brick-and-mortar” operations like fast food restaurants, gyms, gas stations, and convenience stores.
Basically, this is how it works. A franchisor is a supplier or parent company who allows an operator (franchisee) to use the supplier's trademark and distribute the supplier's goods in exchange for a hefty investment and ongoing royalty fees.
In a 2016 Franchise Direct survey of 389 prospective franchisees, out of 28 possible selections a whopping 36 percent said they were interested in home-based franchises. When asked the primary reason they were interested in franchising, 39 percent respondents selected “I want to be my own boss, but don’t want to come up with my own business idea.”
Most entrepreneurs don’t have boatloads of extra money lying around. When asked how much they were planning to spend on starting a franchise, 59 percent said they wanted to spend below $100,000.
Investing in a franchise
In researching franchise opportunities by investment requirement, one of the least expensive I came across was one with an initial franchise fee set at $49,500. When other investment costs were tallied, the total investment came to $62,500. Added to that amount was a royalty fee of 8 percent of revenue that had to be figured into the mix.
You may be surprised to learn that a franchise is just a temporary business investment without any long-term benefits. Yes—with a franchise, you merely get to rent or lease an opportunity or license, not purchase a business for ownership purposes. A franchise is classified as a “wasting asset” which means it declines in value (depreciates) as time passes. Examples of wasting assets include fixed assets such as property or security that eventually have little or no residual value.
- You have the security of starting a business with an already-proven and time-tested brand and product or service.
- Hefty startup costs and ongoing payment of fees to the franchisor. They can include (but are not limited to): (a) a royalty for the trademark, (b) reimbursement for training and advisory services and (c) payment for a percentage of the franchise unit's sales. If you sell the business you will usually have to pay a fee to the franchisor (per the franchise agreement)
- A franchise usually lasts for a finite (fixed time) period. This time frame is often segmented into shorter periods, each of which usually requires renewal fees. Term agreements average from 10-30 years, with premature cancellations of most contracts typically yielding serious consequences for franchisees.
- At termination of the franchise period, the franchisor doesn’t have to renew the franchise. In this case, the business (and its valuable customer base) revert to the franchisor.
- Territory is restricted in which you can operate and/or promote your business.
- Building a franchise business is time intensive
- You must manage (including hiring and firing of) employees.
A similar business model without the high investment cost
You want to make great money. You want to build something of your own, yet be part of a team. You also seek the financial advantages of doing business with a respected company without mortgaging your future to do it. Look no further because there is an answer. Stay tuned for the next blog to find out about this amazing program!