The franchise model is one of the most recognizable in the United States and can be found lining every city strip and commercial epicentre.
Purchasing a franchise allots numerous benefits, including access to sell the products of a successful brand while it technically being licensed as your own business. With automation disrupting many established industries and new startups falling by the waysides, franchises open up opportunities for entrepreneurs to own and operate their own business at a reduced risk.
Of course, every business comes with risk and there are some things you should know before you purchase a franchise.
Typically, an established franchise will provide you with an outlook of the costs of operating a franchise the first year. It will generally take some franchise owners a while to start making a profit. This will ultimately depend on the initial debt of purchasing the license, hiring employees, and purchasing the location.
Be sure to analyze the franchise UFOC for a good estimate of your costs. Be aware of any hidden costs and obvious operational costs with running a business. These will include:
- Raw materials cost (rent , equipment, and utility management)
- Labor costs (wages, insurance, 401(k), training etc.)
- Liabilities and insurance- as required by the UFOC
There will also be legal fees for acquiring the franchisor’s license and you’ll need to comply with regulatory dictum, which can be costly.
Opening a franchise may seem like a cheap investment because you get help from a corporate structure, but you’re essentially taking on all of the costs for operating it. You need to evaluate your risk assessment and what you can afford before purchasing a franchise.
Alignment with Personal Goals
What could be more profitable than opening a McDonalds up in a crowded city? Unfortunately, some don’t survive due to poor management decisions and ownership. Just like any business, only invest in an area you’re proficient in and passionate about.
Many franchise owner take on a direct role in their business’s operations so make sure you know how to do the work. For small franchises you’ll probably have to complete the financing, hiring, managing, and a ton of other roles you didn’t expect.
More importantly, owning a franchise is a big commitment and leaves you very little room to expand upon your initial investment. Some franchises don’t allow you to open new businesses. Are you more suited to own a single business or to work on the corporate level for a bigger company?
Everyone loves fast food and shoe stores, but how much does your town really need another one? Just like any other business, you need to do your market research into the demographics and demand for a franchise store in your area. Finally, is that the area where you want to settle down as you’ll be stuck managing a single location until you sell the franchise.
It’s important to be aware of the rules and regulations of the franchise’s corporate structure. Fast food franchises have no control over the products they want to sell and some are required to follow the nationwide promotions from corporate.
There are rules about how a brand should be represented to maintain consistency across products and locations. Breaking those rules could represent a breach of contract and become costly.
What does the Franchisor Provide?
Fortunately, many franchisors give franchisees help in establishing their business in a local area. This could extend beyond the mere use of products into employee and management training, free advertising, and customer support. Some even go so far as to offer financial assistance, though you shouldn’t count on it.
Owning a franchise is a rewarding process and a major life decision. It’s important to evaluate your personal goals before reaching a decision, as well as the direction of the company you’ll be ‘leasing’ from. Not every franchise is destined for success and you’re the only one who can steer it toward success.