“Should I buy a franchise or start my business from scratch?” It’s a question we get from time to time. And while there is not a one size fits all answer, there are specific considerations to include in your decision.
But first, what is a franchise?
According to Investopedia, “A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business’s (franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.”
Franchises are Common
In the US, franchises are a common way of doing business. Most of us are familiar with McDonald’s, H & R Block, Pizza Hut, Subway, Wendy’s, Marriott International, KFC, Burger King, Circle K… all franchises.
It’s interesting to note that the majority of franchises exist in the fast-food market. The industry lends itself to repeatable, easy to document processes, virtually anyone can follow. And, there seems to be an insatiable demand for fast food.
Now, let’s take a look at how much it costs to buy into one of these franchises. Here are the numbers from thebalancesmb.com for two of the franchises.
A minimum of $955,00 in initial nonborrowed, personal resources, a franchise fee of $45,000, and a service fee of 4% of gross sales
The investment to open this franchise ranges between $116,600 and $263,150. Once opened, the franchisee pays a royalty fee (8% of gross sales) and a franchise fee of $15,000.
Do the numbers make your head spin?
While these fees are at the high end of the scale, even the more affordable franchises can carry hefty price tags once you add up all fees.
Costs and Fees
While startup costs and ongoing fees differ from one franchise to the next, there are standard costs typical to them all.
- Initial Franchise Fee: a one-time payment made to the franchisor for the privilege of joining the franchise. Usually, a set fee used to offset the franchisor’s expenses to bring the franchisee onboard: training, marketing, and other start-up costs.
- Royalty Fees: an ongoing franchise fee paid for the continued use of trademarks and processes; fees may be collected as a flat fee or assessed as a set percentage of gross or net sales.
- Renewal Fees: some franchises may charge a renewal fee.
- Marketing or Advertising Fees: some franchises may include marketing and advertising activities for the franchisee.
While the above costs are the most commonly found franchise expenses, it is not a complete list. All initial costs, ongoing fees, and franchise details will be outlined in the Franchisor’s Disclosure Document.
The expense of buying into a franchise is not the only consideration. Here are a few more things to evaluate before making your final decision.
- What is the duration of the franchise agreement? What happens after the initial franchise period ends? How long are subsequent renewal periods?
- What happens if you decide to sell your franchise? Are there additional fees to pay? Will you be charged a transfer fee?
- Are there any limitations to what you can sell or the type of service you can provide? Are there limitations on how you may expand the business?
- How much involvement, input, or oversight may a franchisor exercise? Does the franchisor have restrictions on how you manage your business?
- Does the franchise operate within a protected territory? How are boundaries defined? Are they defined within a set radius or by other standards?
- How many franchises identical to the one you want to purchase are currently in or will be allowed in your market? Will your business be the only one within a certain radius? If there is exclusivity, how long will it last?
- What is the business experience of the franchisor? How established and proven is the franchise? Have there been closures of franchises?
- How current are the financial statements you’ve received? Make sure you evaluate the franchisor based on current financial information, not information that’s a few years old.
- All details of the franchise are specified in the Franchise Disclosure Document. Make sure to exercise due diligence. Get professional help to review the document. Be sure to get answers and clarification on any questions you have. Do it before you sign on the dotted line, or it may haunt you for years to come.
While most franchises take a big “chunk of change” to start, the benefits gained may be worth it. After all, franchises offer many benefits to franchisees, amongst them:
- A ready-made, turn-key business, with most of the business startup work done for you
- A business with all necessary processes and systems in place
- Training at startup and ongoing
- Better access to funding. In some instances, it may be easier to obtain financing for a proven franchise than for a start-up.
- Less perceived risk; buying into a well-known franchise with a proven track record may be less risky than building a business from the ground up.
But of course, it’s not all rosy. Buying into a franchise has some drawbacks, notably:
- Potentially large upfront and ongoing expenses, in addition to the costs of running your business
- Entering a long-term contractual agreement
- Relying on a third party for expertise and guidance
- Dealing with restrictions and limitation on what is and is not allowed
- Potential limits based on location, where you or may or may not start a franchise
Today, most franchise opportunities are available within the fast-food, hospitality, and a variety of service industries.
Within the medical space, you’ll find the most common franchise opportunities include:
- Senior Care
- Senior Advising
- Home Health Services
- Medical Billing
- Medica Practice Management
- Mobility Consulting
- Medical Staffing
- Medical Weight Loss
- Eye Care
- Vitamin Therapy
- Labs and Testing
- Medical Financial Management
While buying into a franchise may provide you with many benefits, as for myself, I see three significant drawbacks, including:
- High upfront costs
- Ongoing costs and sharing of profits
- Reduced flexibility in how you run and grow your business
But of course, to each their own…
While buying into a franchise may be a bad idea for some, for others it may be a match made in heaven. You are the only one who can make that decision, once you’ve completed all due diligence.
Join the conversation and let us know what you think… Have you ever bought or considered buying into a franchise? If so, what has been your experience… ?
By Johanna Hofmann, MBA, MAc., EAMP; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”