Owning and operating your own business – that’s the American dream, right? Don’t we all want to be our own bosses and make the big bucks? And maybe we can even have our own staff of employees doing the ‘heavy lifting’ while we take care of the management and paperwork. For many, this scenario would far outweigh the routine of clocking in at 9 AM and heading home at 5 PM. But if you’re not completely sure how to set up a business and you have more questions than answers, you may want to consider owning a franchise.
Starting your own business without much knowledge of how to do so usually comes with its fair share of stress, worry, and extra workload. When someone wants to start their own business, it can be an intimidating task leaving you with doubt and questions. Where do you start? How much money is needed? Is there a guarantee you’ll make a profit? People will often start a new business without much knowledge of owning and running a business. Because franchises come with such a turnkey business model, it is much less risky than trying to start your own business.
What Is a Franchise?
A franchise is a license that allows a franchisor to license a complete business package including its own intellectual property, business model, methods, and brand to a franchisee so the franchisee can sell products or services using the franchisor’s business name. In return, the franchisor receives monthly or annual licensing fees, a startup fee, and often a percentage of the profits. The ongoing fees are referred to as royalties or commissions.
The beauty of a franchise is that you are buying the rights to use someone else’s business model with complete training to open and operate the business. The business model should have a proven track record and a recognized brand, and the franchisor has already figured out what does and doesn’t work for the business. The franchisee must conduct business in accordance with guidelines as part of the deal. This might include what uniform to wear, what recipes to use, hours of operation, location, prices, equipment, policies, and vendors, all the way down to the smallest detail of how to run the business. The franchisee will also receive advice and support to ensure the business is successful.
What Are the Benefits of Owning a Franchise?
The benefits are that a business owner isn’t jumping into a new business where they would have to learn by making mistakes and taking risks. A franchise offers a proven business model with substantially less risk if operated in accordance with the recommended guidelines established by the franchisor. A major benefit is that the franchisor, who is familiar with every detail of the business, will provide their knowledge and experience of running that business. Not only is there thorough training, there is also ongoing support. And when a franchisee hands over the initial lump sum fee, they are getting a complete schematic of how to correctly run the business. There are far fewer decisions about how to make the business successful when every detail is laid out.
How Much Do Franchises Cost?
The costs of starting the franchise vary, but most require a franchise fee. There are low-cost franchise fees and more expensive franchise fees, but the average range in today’s market is between $20,000 and $50,000. However, the franchisee must pay for purchasing or renting the property of the business (if applicable), the building itself, outfitting the building with furniture, equipment, lighting, air conditioning, restrooms, signage, and inventory. Sometimes the building will already be available, and the franchisee only has to take care of the outfitting. If it is a digital industry where no brick-and-mortar location is necessary, those fees would not be applicable.
Other costs include might include advertising, depending on the franchise. Some franchisors take care of all the advertising, and some require franchisees to cover a portion of the advertising expense. If there are employees, the franchisee is responsible for their salaries. The franchisee is also responsible for accounting and legal fees, all necessary insurance, and royalties – usually a percentage of the profits. The royalties typically are in the range of 4% – 12% of the business revenue.
Do Your Homework Before Purchasing a Franchise
If you have heard incredible stories of successful franchises and are seriously considering purchasing one, practice due diligence and research the franchise. Pay attention to how many franchisees have failed or sold soon after opening. Also, contact franchise owners and ask their opinion and advice. When you do, be ready with questions about actual costs, hours worked, employee turnover, insurance rates, slow seasons, and revenue expectations. The franchisees have no reason to lie and will give an honest depiction of what to expect.
Financing your New Business
Starting your own franchise can be an extremely lucrative and wise business decision, but do you have the necessary funds? Affinity Beyond Capital (ABC) can help. Please contact one of our lending professionals at 833-234-6489 today.