Franchising Demystified

Have you ever considered owning your own business? You’re in good company.

According to the Small Business Administration, more than 500,000 small businesses are started in the U.S. each year. But before most small business owners can concentrate on running their own businesses, they must often invent their businesses. They must decide on a business name and a brand identity. They must establish a line of products and/or services. They must establish prices and procedures that will be accepted by customers and profitable for them. They must establish billing and accounting systems and procedures. They must create marketing programs to attract new customers, and operational efficiencies that will keep them coming back. There are a lot of critical decisions to make, and sometimes making the wrong decisions – such as purchasing the wrong equipment, choosing the wrong location, using the wrong suppliers, making illegal hiring or firing procedures – can prove disasterous.

Focus on building – not inventing – your business.
What if a prospective business owner didn’t have to invent the business, but could just focus on implementing an established, proven and battle-tested business system from Day One. What if he or she could also gain the buying power, marketing power and brand recognition made possible by pooling resources with dozens, hundreds, or even thousands of other small business owners ALSO using the same operational system and brand identity?

That’s the idea behind franchising: to eliminate the need for business owners to have to reinvent the wheel before they can get their business rolling… to eliminate the inefficiency, even lunacy, of hundreds of thousands of new start-up businesses across the country all simultaneously making the same start-up mistakes in isolation.

The idea is that instead of you having to invent the sandwich (or tax service, or consulting service, or travel agency, or pet grooming service), you can gain the benefit of an established product line that’s been proven successful in the marketplace. You can learn – rather than invent – all of the operational techniques necessary to run the business (all of which are documented in a series of manuals and taught to you and your staff). You will have a tested marketing strategy, professional materials and established marketing resources and vendors. You will have a team of professionals who will train you, guide you, support you and be there for you. You will be able to purchase inventory and supplies not as a single unit, but as part of a large network. And you will have a network of others like you to exchange ideas, encouragement and support.

What do these advantages cost?
To gain these advantages, you will generally pay an upfront fee (called a “franchise fee”) that often ranges from $10,000 to $35,000, a percentage of your gross sales (called a royalty or ongoing service fee), and contribute to a systemwide marketing fund (often 1% -3% of gross sales). In addition, you must give up a certain amount of freedom to do as you please, because you agree to follow the requirements and policies put forth by the company offering the franchise program (called the franchisor).

You (the “franchisee” or “franchise owner”) make the investment in the location, the build-out, the equipment, fixtures, vehicles, etc. required to open and operate the business. There are franchise opportunities with initial investment requirements of less than $10,000, and others that range into the millions. According to the International Franchise Association, the average franchise investment, excluding real estate, is between $350,000 and $400,000.

There’s no guarantee of success, and if you fail, you lose your investment and may be on the line for commitments you made, just as if you started your own business.

That’s a very simplified overview, and there are lots of variations. But, in a nutshell, you gain a certain number of advantages, tools, trademarks and programs in exchange for an upfront fee, a percentage of your sales and the obligation to follow the system and agreement signed with the franchisor company.

There’s no such thing as a risk-free investment. Even in franchising.
“Buying” a franchise is not a magic ticket to success, and not all franchise opportunities are created equal. Many provide benefits that far outweigh the fees paid and the freedom sacrificed… Many do not. Likewise, many would-be entrepreneurs thrive in the structured, implementation-oriented environment of a franchise, while others feel stifled and repressed.

If you’re considering business ownership, it is definitely worth looking hard at the many promising franchise opportunities emerging on the scene. In the end, you’ve got to make the determination whether franchising is the right path to your business and lifestyle goals, and if so, which franchise opportunity and company are best.

In the weeks to come, I will be posting in-depth advice for finding and evaluating promising franchise companies. Feel free to subscribe to our feed, or download our free franchise guide (see button on top page). Also, read 10 Criteria for Choosing a Franchise at FranBest.

What do you think? Leave a comment or question.