Excellent business opportunities don’t come just from starting brand new companies—they often come from franchising existing companies. Is this the right path for you?
In this article, business owner and franchising consultant Cheryl Lickfeld talks with Pursuit about the advantages and challenges of franchising. Cheryl’s the owner of Optimal CFO, a company that offers outsourced accounting and financial education. She’s also a franchise consultant to FranNet—a free consulting service—and a member of Pursuit’s Consulting Corps. Read on for Cheryl’s insights on the world of franchising.
1. What are similarities and differences between owning a franchise and opening a from-scratch business?
Starting with the differences is probably easiest. Unlike a business that you start from scratch, a reputable franchisor has spent years perfecting products, operations, training, brand-recognition and more, so you get a fully packaged business from the start. Along with this, though, you have to operate within the parameters set by the franchisor. That means adhering to production guidelines, facility design, branding, uniform requirements and more. With an independent business, every decision is yours.
A key similarity—and this is important because it’s often overlooked—is that you still have to work at building your business. You have to attract and keep customers. You have to keep your brand’s position strong and build customer loyalty. You must work to be better than your competitors. Too many people buy franchises thinking that customers come with them, but if you don’t uphold the brand promise, you’ll lose to competitors, just like any other business.
2. Do the costs vary—and are they one-time costs or ongoing?
The most popular brands, like fast-food giants McDonald’s and Burger King are millions of dollars to franchise. However, there’s a huge range of opportunities for businesses like cleaning services, home repair and inspection services, consulting, and fitness studios, and at least half of them are available for $250,000 or less, plus some ongoing costs.
To clarify the costs, there are three primary buckets for franchises. First, there’s an initial franchise fee, which is a one-time cost that’s paid when you buy into a franchise. It covers the franchise license, as well as the investment that franchisors make in training you and getting your business set up. For many franchises, this fee is typically about $30,000-$50,000.
The second cost, which is mostly one-time, is the actual cost to get a business set up. For example, if you buy into a fitness franchise, these costs include the space and equipment. These costs vary a lot by the type of franchise—a restaurant franchise, for example, will typically have higher set-up costs than an accounting franchise.
The third cost is the ongoing royalty fee, which is typically in the 6-8% range. This pays for ongoing support from the franchisor. It’s important to remember that you’ll need working capital, too—many potential franchisees forget to allow for sufficient funds. And franchisees are on their own for funding, but banks and other lenders can help.
3. How do you know which franchise is right for you?
It’s really important that potential franchisees do an honest assessment about goals and needs. For example, do you want employees? A home office or a mobile business? One location or multiple? Do you want a business that is hands-on, or do you want to manage from a distance and hire a team for day-to-day operations? What are your transferable business skills—do you love (or hate) sales, do you enjoy managing people, are numbers and accounting your thing? What are your financial goals?
Be honest with yourself because the wrong model will be costly and not do well.
4. Are there common mistakes that new franchise owners make?
The primary one goes back to not aligning your best interests and skills with the business that you take on—that’s a major mistake. Another caution: you’re buying a business model, but unless you’re buying an established business, it’s not going to be profitable from day one. Remember, it’s a business and you have to work at it consistently—this is where a lot of franchises fail. And good franchisors develop and perfect their business models, then duplicate them. If a franchisor hasn’t been in business long enough to do that, it’s a red flag.
5. What are some good resources for more information?
Research is essential. Franchisors are vague about how much you can make because there are so many variables. However, as an industry, franchising is very regulated, and franchisors must file franchise disclosure documents (FDDs) with the Federal Trade Commission. These documents give a lot of great information.
If you’re interested in a business, talk to other franchisees in markets that are similar to yours. Ask about support and how long it took to break even. Also, there’s a lot of information on the internet and organizations like Pursuit and FranNet can help a lot. I love the book, Street Smart Franchising, it’s a great resource and available at many libraries and online booksellers.
If you’d like more information, contact us today.