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If you’re passionate about a specific product or service, you may be surprised to find that a franchise for it probably already exists. So, should you go into business for yourself or purchase a franchise?
Owning a franchise significantly reduces your risk. Franchises have brand recognition and advertising strength that provide staying power during tough times.
Plus, franchisors profit when their new ventures do well, so it’s in their interest to provide the tools and assistance you need. Other franchisees also are a valuable resource for advising you through struggles. (On that note, it’s a good idea to interview a few franchisees before you invest to get a better idea of what to expect).
While many high-spirited entrepreneurial types would take the risk of going it alone to be their own masters, investing in a franchise doesn’t mean you won’t have any control. As a franchisee, you still have to manage, market and promote your business, which provides plenty of opportunity for implementing your own ideas.
The Bottom Line
Initial franchise fees range from several thousand to several hundred thousand dollars, according to the Federal Trade Commission. In addition, there may be significant costs to equip the new operation and buy inventory. Then you must pay ongoing royalty fees (usually a percentage of the monthly gross earnings) to use the name and brand for the duration of your agreement.
On the upside, some costs are shared. As part of a larger group, you can buy business goods at a lower cost. Also, your advertising fees pay for regional and national ad campaigns and marketing you wouldn’t be able to afford on your own, keeping your business top of mind for consumers seeking brands they know and trust.
It may be easier to start a franchise than your own business from scratch, but standard operations and systems alone will not guarantee you success. It’s your ability to consistently oversee and implement those standards that will help you make a profit.
Also, not all franchises are created equal. A weak franchise program is not worth your time or money. Do your research, starting by requesting a copy of the Franchise Disclosure Document (FDD), which all franchises are required by law to provide to prospective buyers.
Is It Right for You?
Recommended skill set: Organization, consistency, confidence, drive to grow and market business, loyalty to and belief in the system in which you are participating.
Risks: Initial franchise fees may be nonrefundable. Ongoing fees cut into your revenue and many franchises charge required royalties regardless of whether the business is succeeding or not. Also, popular chains can saturate the market and negatively impact your sales.
Pros & Cons at a Glance
|1. Standardized operations/systems/training||1. Less control|
|2. Less risk of failure||2. Non-negotiable contracts|
|3. Brand awareness||3. Ongoing franchise/royalty fees|
|4. Shared advertising||4. Additional required fees (signs, ads, etc.)|
|5. Easier to secure financing||5. High initial investment|