For aspiring business owners who don’t have unique ideas to build their own startup from scratch, a franchise seems like the perfect opportunity. But they’re not as straightforward as they might appear.
Put simply, a franchise business is usually a nationwide or global chain that allows independent owners to use their corporate logo and identity to open and manage their own business. For example, you might pay McDonald’s a recurring fee to use their logo and brand assets when building and managing your own McDonald’s restaurant, or you might pay to open your own SuperCuts, hiring your own hair care professionals and pocketing the profits.
Whatever franchise you choose, there are some key insights you’ll need to familiarize yourself with long before you get started.
What to Know Before Starting a Franchise
Keep these things in mind before you get too far into the process:
A franchise isn’t a guarantee of profit.
Across the board, franchisees earn an annual profit of $66,000. However, opening a franchise certainly isn’t a guarantee of profit. Slapping a log on a business may give you some extra brand recognition, or help you put the fundamentals in place, but if you aren’t actively managing that business and striving for greater profitability, a franchise can fail as hard as any other business.
Franchise fees vary wildly.
Every corporation handles franchises a little bit differently. Some will allow you to pay a one-time licensing fee to open up your own branch of the business. Some will charge you a fixed monthly rate for using the brand assets. Some will require you to pay a fixed percentage of your revenue. The only way to determine this is to do your research beforehand.
Your location can make or break your business.
Most franchised businesses offer franchises because they’re lucrative opportunities, but those opportunities vary greatly based on location. If you open up a restaurant in the middle of nowhere, you might have trouble breaking even. If you put one on a busy street corner where no other restaurants exist, you could set new records for the chain.
You’ll need a significant sum of capital.
Though there are some less expensive opportunities, buying a franchise usually requires a large sum of capital. You’ll need hundreds of thousands to millions of dollars to open a franchise outright—though you may be able to get a loan or funding to cover some of these costs.
Most brands have tight restrictions.
Most brands are very cautious about other people utilizing their assets; inappropriate messaging could compromise the image of thousands of establishments around the country. Accordingly, you’ll probably need to study and become familiar with the right and wrong ways to work within the brand. Higher-level brand representatives may also conduct periodic checks, handing you a fee or punitive measure if you don’t fall in line with those standards.
Training may be available.
That said, most franchise opportunities also offer training opportunities to franchisees. For a fixed fee, or possibly for free, you may be able to spend a few days to a few weeks learning not only about the brand, but about the strategies most likely to lead you to a successful venture. You may also be able to reach out with questions or concerns in the future, giving you an outlet of support in case things go wrong.
Competition is always around the corner.
Finally, remember that competition in a franchise can be fierce. Not only will you be competing with other business owners within the same franchise, all it takes is one strong competitor in your location to threaten your profitability. Consider this carefully when breaking down your financial projections.
Is It Worth It?
Opening a franchise isn’t for everybody, but it certainly can be a path toward financial success. What’s most important is that you’re adequately prepared for the opportunities and challenges that await you, and that you understand the risks involved with this type of business.
Overall, franchises are best for people who have some business management experience and enough capital to sink into this level of investment. Ideally, they’ll also be passionate about the brand they choose, and will have enough time and interest to dedicate to running the business correctly. If that sounds like you, and you’ve always dreamed of becoming an entrepreneur, it may be time to start researching potential franchises.