There are a lot of entrepreneurs who want to open a franchise, and because of that, we decided to make a list of facts that every aspiring franchisee must be aware of. Franchising as a business concept is entirely different than an independent business, and because of that, it has its own rules.
Owning a franchise can be a perfect business choice if the investor knows how to choose the right franchising concept. So, for all those entrepreneurs who want to open a franchise, this list of facts can enlighten what they can expect.
The Must-Known Facts About Owning Franchise
The franchise can have a high starting cost
Entrepreneurs who want to open a franchise must know that starting an independent business is much more affordable than starting or buying a franchised business!
Usually, the entrepreneur can start an independent business for less than $10,000; to buy a franchise, the investor will need to have investment funds in the range of $50,000 to a few million dollars.
The franchisor’s support is the most valuable aspect of franchising, so it can be an ideal choice if you have enough investment funds to afford it. By paying more, the franchisee gets a proven business concept and franchisor support throughout the whole duration of the franchise agreement.
However, if you are starting with a limited budget, your only option is to create an independent business from scratch. Who knows, if you have a good and unique business concept, maybe you will be a franchisor in the future, which is much more lucrative than being a franchisee.
Entrepreneurs must know how to choose the right franchisor
If the franchisor is not on the required business level, your effort as a franchisee is worthless. At present, there are more than 4,000 franchising concepts on the market, which means that with the proper guidance, it is possible to choose the right franchise.
First of all, it is crucial to choose a niche of business in which you, as a franchisee, have passion and will to improve your skills to become better every day.
When choosing a franchisor, you must research the market and the profit margin you can expect to make. Many entrepreneurs want to start a franchise in oversaturated markets; the fast-food industry is the biggest example.
Although in the fast-food industry, profit margins of the franchised restaurants are usually between 7% to 13%, people think that they are the most lucrative franchises to own.
So don’t be part of the herd. Buy a franchise that can deliver to you better profit margins than the Fast-Food Industry can. Cleaning and pressure washing franchises are one example of good franchising opportunities; they have low operating costs and excellent profit.
Recently we have analyzed the Renew Crew franchising opportunity, so this can be a good start for the entrepreneurs who want to open a profitable franchise.
Entrepreneurs who want to open franchises must be aware that they can’t expect to make a high profit in the oversaturated markets. So look behind the corner and choose a franchisor in the industry that has higher demand than supply.
Owning a franchise isn’t a passive source of income
Many entrepreneurs think that after the franchise agreement is closed, the profit will start to drop from the sky. You must be aware that owning a franchised business will demand the same or even more work ethics than an independent business.
It is best if the franchise owner is also an onsite manager. Yes, it is possible to find a good management team, but it can take a long time before you can find a person who will take care of your business with the same attitude as you.
No one cares for your business profitability like you, and many franchises fail because of poor management. So every potential franchisee must be aware that this is not a passive source of income and that owners’ everyday presence on site will be necessary.
Sure, some of the entrepreneurs own a bunch of franchises, and they visit them a couple of times per year. But usually, these are business people like Shaquille O’Neill.
Shaq owns a lot of the franchises, but he does not depend on that will his franchise make 6% or 16% of the profit margins, and this is the most significant difference between you and him.
Be present at the location of your business and don’t think of it as a passive source of income. Those entrepreneurs that invest all their savings in starting a franchise must be capable of extracting every dollar of profit if they want to make it work in the long run.
Franchised businesses can fail
Usually, on the media, we can see only successful franchising stories. Entrepreneurs who want to open franchises must be familiar with the fact that franchised businesses can fail, and a significant percentage of them will fail.
There are not many trustworthy sources that deal with the failure rate of franchised businesses. But we know that according to the U.S. Bureau of Labor Statistics, approximately 19% of small businesses fail in the first year.
As a franchisee, you don’t worry that your business will fail in the first year, but if you have picked the wrong franchisor, you can expect that you may experience business failure at some time.
Most franchised businesses fail because they operate in an oversaturated market. So if you want to reduce chances of business failure to the minimum, you must find the franchisor in the niche where demand is higher than supply.
As we mentioned above, the fast-food industry is one of the examples of an oversaturated market. So entrepreneurs who want to open franchise must find franchising concepts that are usually under the radar and don’t invest a huge amount of money in the marketing campaigns to attract new franchisees.
One of the examples of franchising concepts that can be very lucrative is those operating in the Smoothies & Juicing Industry. These businesses demand a relatively low-cost investment and can deliver excellent profit margins to their owners.
We can mention Tropical Smoothie, Jamba Juice, and Smoothie King as some of the better ones. These franchises operate in the non oversaturated market, and entrepreneurs who want to open profitable franchises must always search outside of the box.
The franchise owner must pay to franchisor fees
Every month/week franchisee will need to pay to franchisor specific fees that are usually calculated according to gross sales that the franchise unit makes. So entrepreneurs who want to open franchises must be aware that they will share their profit with the franchising company.
This is standard practice in the franchising industry; this is the main difference when discussing franchised vs. independent business. For paying these fees, the franchisee gets certain benefits that can significantly help in everyday business operations.
There are a few types of fees that franchisees are obligated to pay:
Initial Fee
The Initial Fee is a franchisor charge to the franchisee for the rights to use brand Trademarks. By paying for it, entrepreneurs get permission to use logos, taglines, promotional items, and other things that make some company’s visual identity.
Usually, Initial Fee can cost from $10,000 to $60,000; the exact charge can vary depending on the brand’s popularity and the industry in which they operate.
Some franchising companies are members of the so-called ”VetFran Program”. It means that they offer Initial Fee discounts to the Veterans of the U.S Army Forces who want to open a franchise.
This discount is usually 20% to 50% off the Initial Fee; some franchisors don’t charge this fee for the former military personnel. One of them is the ice cream brand Baskin-Robbins, which can be an ideal franchising opportunity for Veterans.
But all other entrepreneurs who want to open franchise must be aware that they will need to pay some money to the franchising company to get the right to use their intellectual property.
Royalty Fee
In return for franchisor support, franchisees must pay the so-called Royalty Fee. It is an ongoing obligation that owners must pay during the whole duration of the Franchise Agreement.
The franchising companies charge their royalties according to the gross sales that the franchise makes. Usually, the Royalty Fee is charged 4% to 10% of the unit gross sales.
It means if the franchised business has made $100,000 of gross sales, the $4,000 to $10,000 will be forwarded to the franchisor’s bank account. So entrepreneurs who want to open franchise must know that this fee will be an ongoing operational cost.
Usually, franchising companies calculate the percentage of the Royalty Fee in a quantity that will not burden overall business profitability. But sometimes, franchisor royalties can eat a big chunk of the profit margin.
So all entrepreneurs who wish to invest in this type of business must hire a trustworthy franchise consultant who will know how to find information in the Franchise Disclosure Document.
Marketing Fees
There are different types of marketing fees in the franchising industry. These fees are also, as a Royalty Fee calculated according to the gross sales, and franchisees are obligated to pay them every month.
Two main types of marketing fees:
- Ad Fund Fee
- Local Advertising Fee
Ad Fund Fee can be explained as the responsibility of the franchisee to contribute to the marketing campaigns that the franchisor launch on the national level. Usually, this fee is 2% to 4% of the gross sales that franchise units make per month/week.
Some of the franchisors, not all, demand from their franchisees to spend a certain amount of the money on the Local Marketing Fee; these are marketing campaigns that target potential customers in the area where the business’s location is.
Usually, the Local Marketing Fee is 1% to 2% of the gross sales. This fee can’t be considered an unnecessary operating cost because these marketing campaigns will result in more customers, that is, in more owner profit at the end of the month.
The franchising industry is a highly developed one
Usually, when we mention franchising, the people start thinking about Mcdonald’s, Subway, Burger King, etc. But franchising today offers much more opportunities for entrepreneurs than ever. At present, there are more than 4,000 franchising companies in the business.
It means that there are a lot of franchising opportunities for aspiring business owners. So if you don’t have the necessary investment fund to start, for example, McDonald’s, don’t despair.
There are different kinds of franchises available; some are cheap ones. You don’t be a millionaire to start your first franchise; there are also a lot of affordable online franchises that deal with social marketing, making websites, etc.
Entrepreneurs who want to start a franchise must be aware that there are at least a dozen franchising concepts in every niche of business. Some of them are new, some of them have been in business for more decades, but they are all part of the franchising industry.
So if you want to be part of this industry, today is the right time to make that possible.
Summary
Our goal was to explain how this business works to all those entrepreneurs who want to open a franchise. By owning a franchise, you become a part of the industry that employs millions of people.
The last few years were especially difficult for all businesses; the franchising industry was no exception. But after the rain falls, always comes the sun. We all predict that the U.S economy will start to grow again, so now is an ideal time to think about what franchise to choose.