Deciding to Open a Franchise Business
How to Determine if a New Franchise is Worth the Cost
Oct 19, 2009
The concept of franchising is simple; for a price, entrepreneurs get use of an established company’s business model, instant consumer recognition, brand recognition and access to training and support. But is it worth the cost? In addition to thousands of dollars for the initial sign-on fee, most franchisees also pay royalties usually equaling three to six percent of monthly gross sales. The cost of franchising can add up. However, many are finding that buying a franchise concept, despite the initial cost, may be worth it.
The Franchise Market
There are around 1 million franchise businesses in the United States, and new concepts hit the market each year. Franchises are comprised by all manner of business models, from fast food restaurants to tax services and everything in between. There are around 75 industries with franchise offerings. The franchise market’s growth is a result of the built-in experience a franchise provides. It's a business where somebody has come up with the franchise business model and implemented it many times over. There was an opportunity to work out the bugs.
The International Franchise Association (IFA), which is a membership organization of franchisors, franchisees and suppliers founded in 1960, is a popular resource for entrepreneurs interested in buying a franchise concept. It's like the white pages of franchising.
The Cost of Franchising
One issue to consider when shopping for a franchise is how much one wants to shell out. Franchise fees range from around $6,000 to several million dollars (if purchasing a hotel franchise for example). In addition, it’s vital to factor in the other start-up costs and operation costs once the business is on its feet. One of the biggest mistakes a new franchise can make is not having enough working capital during start-up. Franchisees must consider their current assets, their credit rating, if they need financing and where they can get it, and if they have savings or additional income to live on during the growth of the franchise.
Traits for Opening Successful Franchises
The most successful franchisees are the ones who get their finances in order first. If they have a solid business plan and financial strategy and know how they plan to execute them, they are better prospects and turn out to be better owners.
A typical franchise agreement extends 20 years, so before making the commitment, one should consider the implications of what amounts to a partnership with the franchise brand. Also, entrepreneurs buying franchises should not expect instant success just because their business has a famous name. As with any new venture, it takes a lot of work.
Other aspects to consider are the rules and restrictions the franchisor will impose which can be limiting to creative business owners. Because each location is different, it can be hard for some franchisees not to feel that they know their location better than a franchise headquarters, potentially thousands of miles away.
Ultimately the decision is an individual one, but it's helpful to consider the options and to select the right franchise concept because what works in one market won't work as well everywhere. But keeping the options of the franchise market and the cost of franchising in mind will help anyone with the goal of opening a successful franchise.
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