Franchising Offers Low Risk and High Yields

The power of brand recognition and built-in demand can be huge. The golden arches or the DQ “Texas stop sign” are a welcomed sight to weary travelers. People seek out familiarity, and that’s good news for franchise owners. National advertising increases brand awareness and helps keep the name, product or service top of mind. And the consumers know when they stop for a bite, need to ship a package or want to work out, that a business bearing the brand name they know and love won’t disappoint.

The kinks are already worked out. A lot of planning and trial and error go into starting any new business from scratch. With a franchise, someone else has already made the mistakes, learned from them and developed systems that work. Whether it’s finding the best ingredients, the right supplier for packaging materials or the best price on shipping, franchise owners are typically provided with a detailed manual that explains who to buy from and how to effectively produce, market and deliver the product or service.

You don’t have to go it alone. Training manuals and educational assistance are only the beginning when it comes to the support most franchisers offer. Need help finding the best location for your new business? Got a question from a client that hasn’t come up before? Many franchisers have staff available to answer tough questions and provide assistance on everything from securing financing to customer satisfaction. Additionally, other franchisees can be an excellent source of information. Before you decide to purchase a franchise, be sure to interview several franchisees. Ask about the support they receive, their successes and challenges, and learn from those who are making it happen.

Financing can be easier to obtain than if you were to start a business from scratch. Buying a franchise can require a significant investment. Financing is often available through the franchiser’s finance company or through the franchiser itself. And because banks can more easily predict the risks associated with a franchise, they may view franchisees as a safer financial bet than independent startups.

Get a better deal on supplies. As part of a larger organization, franchisees often benefit from the lower prices that come with increased buying power. Franchisers work to secure the best price on supplies and services and have access to bulk-rate discounts that are unavailable to independent business owners.

Reduce your risk. If the franchise you’re interested in has a successful track record, happy franchisees and a respected name, the likelihood of continued success is high. Buying a franchise doesn’t guarantee a problem-free business, but because the established systems are designed to promote your chances for success, longevity and profit can be greater than if you were starting a business on your own.

Potential Downside Associated with Franchises

1. High initial investments can stop would-be business owners in their tracks. With franchises, in addition to traditional overhead costs such as location, supplies, equipment and advertising, a franchise fee is also required. To use the name and draw on the franchiser’s experience, expect to shell out between $10,000 and $500,000 or more.

2. Ongoing fees, such as royalties and advertising fees, are sometimes viewed as a downside to franchises. Franchise owners are required to pay royalties, on average, 5 to 8 percent on gross sales or 6 to 10 percent on net sales. In some cases, rather than a percentage the franchisee pays a fl at monthly rate or a rate per client. Royalties and advertising fees may seem like a drain, but they help pay for the services and education that help maintain a standardized quality, thus protecting the chain’s reputation. And ad campaigns, of course, keep the brand top of mind.

3. Encroachment competition can sting. When investigating a franchise, be sure to research policies about how many franchises can be purchased in the same area. If another franchisee is allowed to open a location a block away, the proximity may dampen your sales.

4. Being a rule-follower isn’t for everyone. The beauty of franchises is their standardized approach to business. But an entrepreneur who wants to do things their way may find the franchiser’s rules stifle creativity. If freedom and individuality are important to you, you might consider another business option. But, if you prefer a proven plan and a ready-made system for success, there could be a franchise in your future.


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