The United States was home to more than 745,290 franchise establishments in 2017. Big names like McDonald’s, Dunkin', Taco Bell and Planet Fitness generate millions of dollars annually. Dunkin', for example, has stores in 32 countries and requires a low investment of only $228,621, according to Entrepreneur. Before starting this kind of business, make sure you understand the characteristics of a franchise as well as the pros and cons.
How Does Franchising Work?
Nowadays, anyone can start a business. Turning it into a successful venture is the hard part. After all, there's a reason why 90 percent of startups fail. Another option is to buy an existing business, but be prepared to pay the price.
Have you ever considered franchise ownership? With this business model, you get the right to use a company's logo, name, know-how and products in exchange for a fixed fee, a percentage of gross sales and recurring payments. The franchisor, or business owner, will provide you with everything you need to become successful, from training to marketing materials. The downside is that you won't have full control over the business.
About half of all U.S. retail sales come from franchises. In fact, one out of 12 American businesses is a franchise. This industry provides goods and services in more than 300 categories, from health and fitness to real estate. Depending on your budget, you can buy a franchise for as little as $25,000 or as much as $50 million. As a franchisee, you may be protected from competition and receive ongoing support from the franchisor.
The Advantages of a Franchise
One of the main advantages of a franchise is the low startup cost. Many times, buying a franchise is less expensive than starting a business from scratch. Dale Carnegie Training, for example, requires an initial investment of $52,200 to $226,500. Franchisees must also pay ad royalty fees and ongoing royalty fees of up to 12 percent. Some franchises require business experience, while others provide training.
The nature of franchising is different than that of other business models. Franchisees enjoy the freedom of business ownership while being part of a larger network with its own set of rules and regulations. The relationship between the franchisor and franchisee is governed by a contract that outlines the rights and obligations of each party. A fitness franchise, for instance, will grant you the right to use the franchisor's training systems and workout plans, but you cannot develop and promote your own training programs.
Make sure you are fully aware of the drawbacks and advantages of a franchise. This business model has a higher success rate than most startups and makes it easier to secure financing. Furthermore, franchises have an established image and strong media relations, which can reduce your advertising costs. Their goods and services have a loyal customer base. You won't need to test the market and define your buyer persona because you already know your target audience.
Are There Any Drawbacks?
The average cost of starting a franchise is around $250,000. Some franchisees, especially those operating in the real estate industry, require higher startup costs that many entrepreneurs cannot afford. Hilton Hotels & Resorts, for example, charges anywhere between $29 million and $112 million plus a $75,000 initial franchise fee. Additionally, franchisees must pay ongoing royalty and advertising fees, which is one of the primary characteristics of a franchise.
Another drawback is that you must share your profit with the franchisor. Starting your own business, on the other hand, allows you to keep all the revenue. With a franchise, there will be restrictions on the suppliers you can use, the goods you can sell and where you can operate. As an independent business owner, you have more freedom and flexibility.
When you're a franchisee, the success of your business doesn't depend entirely on you. If other franchisees make mistakes that affect the brand's reputation, your revenue will suffer too. Breaking a franchise agreement can be expensive and complicated, which further limits your freedom. Also, be aware that franchisees can fail too. Common mistakes such as hiring inexperienced staff, choosing the wrong location or underestimating the commitment required can hurt your business and your revenue.
- Statista: Number of Franchise Establishments in the United States From 2007 to 2018
- Entrepreneur: Dunkin'
- Fortune: Why Startups Fail, According to Their Founders
- BizVolusia: Franchise Statistics
- Entrepreneur: Dale Carnegie Training
- U.S. Small Business Administration: Buy an Existing Business or Franchise
- LiveCareer: Franchising Pros and Cons - Is Franchising Right for You?
- Franchise Help: Hilton Hotels and Resorts Franchise
- MacDonald Sager Manis: The Nature of Franchising