Is Owning A Franchise Right For You?

By John Henning at OpenAFranchise.com

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What is a Franchise?

Franchising refers to the methods of practicing and using a specific business philosophy or system. The Franchisor, or Home Office, grants the franchise operator, the franchisee, the right to distribute its products, services, techniques, and trademarks for a percentage of sales, commonly called a royalty fee.

Various services are provided by the franchisor, such as: advertising, training, startup assistance and other ongoing support. A Franchise License is awarded by the franchisor to the franchisee. This written agreement forms the foundation for the relationship between the 2 parties and clearly outlines their responsibilities to each other. The Franchise License usually lasts between 5 & 25 years.

What is the best Franchise?

As a Franchise Consultant I get asked this question on a daily basis. I work with clients to help them find the right franchise and through those conversations they almost always as me: “What is the Best Franchise?”. There is no single answer for this question as the answer truly depends on the criteria you set as a perspective franchise owner. Meaning, maybe you want a retail location with 5 employees that makes $50k/yr, or maybe you want a home based business that has zero employees and makes $150k/yr. Either way, the word “best” becomes relative to what is important to you.

I realized quite some time ago that I could never “sell” a franchise to anyone. The only way someone will buy a franchise is if it makes sense for them & their family. Performing the proper due diligence is key to finding the best franchise for you.

How much does a Franchise Cost?

The total up front cost for a Franchise will vary between $30k & $100k. This is cash you must have prior to any financing options. You should also have a credit score of at least 700.

Most of the up front cost for a Franchise is the Franchise License Fee. This fee will vary between $20k & $50k. The Franchise License Fee covers your training, startup assistance and usually your protected territory.

The total cost of a Franchise will usually vary between $30k & $500k with the average total investment being around $250k. Financing is available for the balance of the Franchise cost depending on your credit score and the Franchise Company’s rate of success. A good rule of thumb is to have at least 30% of the total investment in cash.

For example, for a Franchise with a total investment of $250k, you would need approximately $60k in cash prior to any financing. This cash can come from savings, home equity, 401k, Retirement, Partners etc…

Some common factors that influence the startup costs are;

- Age of the franchise
- Number of franchises
- Responsibilities of each party
- Name brand recognition
- The service
- The product
- Length of term
- Finance Terms
- Real Estate Costs
- Many other factors

Why buy a Franchise?

Most people purchase a Franchise for one of two reasons.

#1. Reduce their risk. Quicker startup times, faster break even points & ongoing help after startup. All of these things help reduce the risk of starting a business.

#2. They don’t want to create a system, they want to use someone else’s program, not reinvent the wheel. The Franchise’s System is the main component of what you are buying when you buy a Franchise.

How much can I make with a Franchise?

Another one of the many questions I get asked on a regular basis is: “How Much Can I Make?”. This is an important question regardless of the type of Franchise you are exploring. The simple answer is: I can’t tell you.

Franchising is regulated by the FTC. The FTC does not allow a Franchise Company or Franchise Consultant to make an earnings claim unless those earnings are published in their Franchise Disclosure Documents or FDD. Most companies don’t post those numbers for legal liability reasons.

However, this is still a very important question that you need to know the answer to prior to buying a Franchise. The real answer is: No one can tell you how much YOU are going to make, because the biggest determining factor in that equation is YOU. However, you are able to get a feel for what the potential of a particular franchise might be by talking to existing franchise owners that already own that same franchise in another area. This is part of the due diligence process that we help our clients through.

What should I look for in a Franchise?

When researching any Franchise, you should look for some key factors. This list is by no means an exhaustive list. There are many more things you could look for too, depending on what is important to you.

- How long have they been in business?
- How many franchises do they have?
- What are my responsibilities as a franchise owner?
- What are the franchisor’s responsibilities?
- Where is the industry now? Where was it 5 yrs ago? Where will it be in 5 yrs?
- How many franchises have failed? And why?
- Do they make an earnings claim in their FDD?
- How many home office employees are there?
- Is the franchise organization expanding, stagnant or shrinking?
- Do I get a protected territory or name brand to use?
- How often do you hold training & where is it held?
- What are the average gross revenues per unit nationwide?
- Did they start as a Franchise or as a business and expand through franchising?

These are just a few of the questions to talk about when researching a Franchise. There is a free eBook on franchising that is published by the FTC: A Consumer Guide to Buying A Franchise, you can download it for free here: EbookOnFranchising.com

Summary/Closing

As you start your entrepreneurial search for a franchise, make sure to perform the proper due diligence, talk to existing franchise owners, visit the home office, talk to a lawyer, and work with an experienced franchise consultant. A good franchise consultant can help you find the right franchise by making sure you get the information you need on each franchise.

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John Henning is a Franchise Consultant based in Pottstown, Pa. John’s company: OpenAFranchise.com helps people find the right franchise by helping them through the discovery & research process. With over 5000 Franchises & business opportunities out there, John & his team help guide clients to the right information on each company.