Instead of starting their own business, entrepreneurs may become a franchisee. The franchisee buys the rights to the franchisor’s license and they can then operate under the franchise’s name and use their successful business model.
With a proven successful model, franchisees are already a step further than if they were to start their own business from scratch.
Each franchise opportunity is different. The prominent factors that determine if franchises are a good business opportunity are:
- Franchise Fees
- Brand Potential
- Geographical Availability
Now, let’s look at each factor individually.
What is the initial investment?
Setting up a franchise requires fees and upfront costs.
Upfront costs are needed by the franchisee as part of an investment. Depending on the company, this number can vary from hundreds to millions of dollars.
Ongoing fees like royalty fees (also referred to as franchise management or service fees) require the franchisee to regularly pay the franchisor, which helps to cover the support services the franchisor provides.
How seen is the brand?
Take McDonald’s for example. It is undeniable how seen they really are. With franchises all over the world, their success continues daily, but this impacts how much you must invest.
McDonald’s requires millions of dollars to open a franchise. Although investing in larger corporations like McDonald’s reaps many benefits, it may not be attainable for you.
If it is a smaller brand, the initial investment may be lower, but you need to think about the brand potential. How seen is the brand? Does it have room for scalability?
How profitable is the brand?
If they’re not worth much, it may not be the best investment.
To help determine a business’s profitability, you can examine the following:
- Unit Growth: How many franchises do they have? How many of these have opened recently?
- Success Rate: How successful are the new franchises? Are they struggling or are they making a profit?
- Financial Evidence: Does the franchisor have sufficient financial evidence? Does it prove their successes?
Investing in a franchise isn’t like any other business investment. They require you to be fully committed, take part in vigorous training and work for up to 80 hours per week. This of course depends on the franchise, but if you aren’t committed, your franchise won’t grow.
If you lack the time or business experience, you could become a silent partner if you have the capital to invest. You can team up with someone to oversee the franchise and you could reap most of the profits.
Franchises are more likely to profit if there aren’t many of them in a specific location. You should find out from your franchisor whether the geographical location that you have in mind is suitable. If not, you may have to reconsider your options.
Top 10 Franchises to Buy
- Dunkin’ Donuts
- The UPS Store
- Sonic Drive-In
- Great Clips
- Taco Bell
- Kumon Math and Reading Centers
- Sport Clips
The Positives of Franchising
Franchising means that you don’t have to do it alone. By operating under an already established brand, you can offer products and services that people already know and love whilst having access to their resources.
Here are some positives of franchising:
- Training: Franchisees will have access to training programs and ongoing opportunities that will help the success of their franchise.
- Support: Franchisees will receive support and professional advice from franchisors and a team of qualified staff to assist them when needed.
- Advertising and Marketing: Franchisees will have access to marketing research and strategies that they consistently use throughout all their franchises. This will also help to reduce costs by having readily available resources.
- Equipment: You can rent or buy equipment that you may need. Some franchises offer payment plans to their franchisees which makes costs more manageable.
- Hiring and HR: Franchisors should have hiring guidelines in place which detail what they expect from employees. This should help you to find suitable employees for your franchise.
The Negatives of Franchising
Whilst there are fewer negatives for franchising, they’re big ones! Becoming part of a franchise means that you’re part of a specific culture, and if that’s not what you want, then it could be a massive turn-off for you.
- Limited Freedom: Whilst you have the rights to their license, you still must operate under their requirements. They don’t wish for you to change their model but to adhere to it.
- Fees and Expenses: It’s safe to say that becoming part of a franchise can be a little pricey. From upfront costs to regular fees, you may not be able to keep up with all the costs that are needed to secure or maintain the franchise. Whilst money is no object for some people, others may have to take out loans to support them.
Whether franchises are a good business opportunity relies heavily upon you and your situation. Arguably, it depends on your financial situation and whether you can afford the initial investment costs and the costs thereafter.
If you carefully consider all these factors and think that it’s the right decision for you, then go for it!