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Chances are you’ve shopped at or visited a franchise at some point. Maybe you even go to one regularly, when you head to the gym or pick up your favorite coffee. If it feels like franchises are everywhere, well, they kind of are: In 2019, there were an estimated 773,600 franchises in the US, employing nearly 8.4 million people, according to data from the International Franchise Association. Franchises pop up in many industries including restaurants, hotels, gyms, gas stations and more.
Given their popularity, jumping into a franchise as a business venture could be exciting. Franchising can be a gateway into the world of entrepreneurship for many people, letting you (in many cases) dip your toes into running a business. And you’ll want to know that there are a couple of different ways to get involved.
For one, you could start a franchise on your own. That would mean launching a business from scratch and then using the franchise model to expand it. So you might open your own coffee shop, and then other entrepreneurs could buy the rights from you to open their own locations.
Or you could invest in a franchise – which is what we’ll cover in this article. The difference may be slight, but when you invest in or buy a franchise, you’re getting involved with a business that already exists. Compared with starting a franchise, this option might feel more doable; after all, you won’t have to come up with a product, a business name or logo. Think of it more like test driving entrepreneurship rather than diving right in. That’s not to say it’s easier, though, or risk-free!
Ahead, we’ll walk you through the basics of franchising and go over some of the things you should know before you invest in one.
If you’ve ever walked into a restaurant in Chicago and recognize the uniforms, signs, furniture and menu items from an eatery in Atlanta, you might be seeing the franchise model in action.
At the most fundamental level, a franchise is a business model where an owner (the franchisor) lets other entrepreneurs (the franchisees) purchase the rights to use their name, product, services and particular way of doing business. To get the rights, the franchisee will have to pay an upfront fee, which can run from $10,000 to more than $100,000. In some cases, you might have to cover annual licensing fees as well. Some franchisees are also required to kick in money for advertising, pay royalty fees or use specific vendors.
Hopefully you have a better understanding of how franchising works. So if someone asks you “what is a franchise?” you’ll now know what’s behind this business model, aside from the similar uniforms and signage.
But if you’re serious about investing in a franchise, there are a few more important things to consider.
You don’t want to rush into a business – particularly with a lot of money at stake – without knowing what you’re getting into. We know, it sounds obvious!
To start, it’s important to have at least a basic understanding of the type of franchise you’re looking to invest in. For example, running a hotel may be very different from operating a gym.
Some companies require franchisees to have a certain level of business experience or a business plan to make sure that they have an idea of what lies ahead. Others will even require franchisees to go through training programs that can last months, or even years.
That’s why it’s a good idea to do your due diligence, which can include talking to other people associated with franchises about what it was like to get started, attending expos or trade shows in the industry that interests you, or even getting in touch with a professional, like a franchise consultant.
In addition to the franchising fees we mentioned earlier, potential franchisees may have to pay for other things. (Keep in mind: Costs will vary depending on the specific franchise you’re interested in.)
Some franchisors will require franchisees to have a certain amount of money in the bank to cover their expenses and reach a certain net worth to ensure they can afford the costs of starting a franchise. Some franchisees will have to pay tens of thousands of dollars in fees just to get a franchise started, while others will need seven-figures in their back pocket.
On top of this, you may need to own or rent physical assets (like land) to get up and running. You may also have to pay for supplies and inventory, which may run up to $150,000.
In short: Expenses can add up quickly! It’s a good idea to run the numbers before you get too deep into the process. And if you’d like a second pair of eyes, a financial advisor can help you decide if or when you’ll be ready to take on the investment.
Being an investor in a franchise isn’t a cookie-cutter role. How much time you’ll have to put into the business – and what you’ll have to do daily, monthly or annually – can vary. That’s one reason why it may be important to clearly define your role in the franchise and get a sense of all of the responsibilities, before you even get started.
There are a few different ways to invest in a franchise. You could invest as the sole owner of a certain location, or essentially, be a solo franchisee. Or you can invest with co-owners or partners. If you’re strapped for resources at the beginning, having partners – and the ability to pool your resources with others – could be beneficial.
Of course, there are trade-offs. If you’re the sole owner, you could potentially see a bigger return on your investment if the business is successful. But you might also assume more risk going at it alone. On the other hand, if you have one or more partners, you’d have to split up the profits but also take on less risk.
In terms of other commitments, here are a few to consider: Will you be able to go on-site every day and manage the operation? Or will you need to hire employees to help you oversee the business? Have you thought about how you will manage your franchise’s managers or who will do the bookkeeping? Obviously, your needs will depend on the type of business and industry in which you’ve set up shop, as well as the skills of your partner(s). But regardless, it’s a good idea to think through the commitment, and spell out the roles you and your partners or co-investors will have.
Even though you may be running an independent business as a franchisee, you’ll still be bound by your franchise agreement. In other words, the franchisor may have rules that determine what you can or cannot do.
Some things a franchisor could control? They may be able to say where you can set up shop or where you’re allowed to advertise. To you, this could feel unfair – you’re the business owner after all, right? But the franchisor has other factors they need to keep in mind. For instance, by limiting your location, the franchisor may be giving consideration to another nearby franchise. Basically, they want to make sure that you’re not encroaching on the terriotories of other franchisees.
There also may be a bit of supervision to contend with. Many franchisors require that franchisees submit to a degree of corporate oversight to make sure they’re sticking to their agreement.
You may hit pay dirt, so to speak, by opening up the right franchise in the right location. (That’s the outcome we’d all probably be rooting for, right?) And while that does sound nice, it’s also necessary to consider the very real flipside: Starting a business is risky, and you could lose money if things don’t work out as planned. We know, it’s not what budding (or established) entrepreneurs want to hear, but it’s worth talking about.
The reality: For most small businesses (including some franchises), it may be a couple of years before they become profitable. So it’s a good idea to figure out what you’re getting into financially and what to expect in terms of profits. Now, it could be tough to know. Franchisees may not have access to sales numbers, and franchisors aren’t required to give you any information about your potential profits or sales. Obviously, that can make it hard to chart your potential returns. Here’s where it might be helpful to get in touch with a franchise consultant or with current franchisees in the industry you’re looking to get into. They may be able to give you some ballpark figures of what you could expect.
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