Today’s Opportunities In Franchising

• Franchising is when a company sells the rights to its existing business model and products.
• Opening a franchise is a business venture with relatively low risk and high support, but you must be aware of the regulations and factors that make a franchise successful.
• While costs vary widely, in general, you can expect to spend $50,000 to $200,000 in franchising startup costs.
• This article is for entrepreneurs and business owners interested in buying and operating a franchise.
  

When entrepreneurs dream about their future, franchising is rarely part of the fantasy. While it may not be your first choice, buying a business franchise comes with many benefits. When you open a franchise, you get a chance to run your own business while buying an established brand and business model.

“A franchise is a business with training wheels,” said Tom Scarda, founder of The Franchise Academy, a podcast dedicated to franchising. “For a majority of franchisees, franchising has proven to be a viable way to become a business owner.”

Franchises offer a unique mix of low risk and high reward. “For the most part, [franchising] offers the lowest risks and the highest level of support,” Scarda said. “Because a franchiser doesn’t succeed until the franchisees do, you’ll find a team of dedicated professionals willing and able to help you every step of the way, from site selection to employee hiring to grand opening.”

We’ll explore the basics of franchising, factors to consider when choosing a franchise, startup costs and more.

What is franchising?

A company that sells the rights to its existing business model and products to another businessperson or company is creating a franchise. However, the exact definition varies because of the numerous statutes passed by the Federal Trade Commission (FTC) and individual states.

The bottom line is when you buy a franchise, you’re purchasing an established business and a ready-made product or service. Franchises usually come with a recognizable brand name, a proven business model and a repeatable marketing strategy.

Franchise costs

The costs of buying a franchise can vary greatly depending on the type of business you’re considering. But in general, you can expect to spend between $50,000 and $200,000 in startup costs.

Here are some of the startup costs involved in buying a franchise:

• Initial franchise fee
• Corporate fees
• Financing application fee
• Attorneys’ fees (for having a lawyer review the contract)
• Accounting fees
• Insurance
• Permits and taxes

You’ll also have to consider the ongoing costs of running the franchise. This includes marketing and advertising, running payroll, inventory, and equipment.

Franchise regulations

Federal regulations exist to protect the rights of both the franchisee and the franchiser. The FTC helps oversee and enforce franchise laws to ensure that entrepreneurs receive full disclosure on the state of the business they’re joining and that the franchiser’s brand is protected.

Early in the franchise purchasing process, franchisers must provide a franchise disclosure document (FDD) to the potential franchisee. Sometimes called an offering circular, the FDD outlines the franchiser company’s fees, investments, and bankruptcy and litigation history.

There are also registration and relationship laws that govern the franchise’s registration, salespeople and advertising. More laws cover terminating a franchise, notice and cure periods, grounds for nonrenewal, and equal treatment. These laws and regulations vary by state.

What to look for when choosing a franchise

When it comes to choosing a franchise, thousands of options are available. So if you don’t know the type of franchise you’re looking for, this can be a daunting task. Let’s look at a few factors you should consider when choosing a franchise.

Startup costs

Franchising provides many benefits to aspiring entrepreneurs, but it also comes with significant startup costs. You’ll have to pay an initial franchising fee before you can begin setting up your business and selling products under the franchise’s brand name.

Before launching the business, you’ll be expected to propose a store location, business model, business opportunities and royalties. Once franchise contract terms are agreed upon, you can begin setting up the storefront. All those activities require an additional investment of money and time.

Your level of business autonomy

While franchising’s appeal is getting an established name and branding, running a franchise may limit your business autonomy. You may not have the autonomy to move and grow your business in different directions to take advantage of local business factors. You should think carefully about how much control you want to have over the business before investing.

A sustainable business model

It’s important to find a business with a sustainable business model and a track record of success. Make sure to research where the company stands before joining as a franchisee.

Rob Holt, founder of Two Maids & A Mop, said his franchise underwent growing pains when initially transitioning from a traditional corporation to a franchise.

“In 2013, we only opened one franchise,” he said. “In 2014, we opened one as well. We didn’t really start growing until 2015, but during those first two years of franchising, even though we only had two, we really tried to perfect what we were doing.”

How established the business is

It’s essential to understand the parent company’s current state, including its business valuation. The first franchisees for Two Maids & A Mop were willing to remain patient as the company experienced growing pains, while today’s Two Maids & A Mop franchisees are joining a more established business.

Neither option is right or wrong, but it’s important to know which situation you’re getting yourself into before spending the time and money to open a franchise.

Competition

You should also consider how competitive the franchise’s market is. Competition isn’t necessarily a bad thing, because it means there’s a demand for that product or service. But a lot of competition means you’re going to have to work even harder to differentiate your business and help it stand out.

Company culture

It’s important to consider the prospective franchise’s company culture. The parent company’s management will have a major impact on how you run your business – and your income. In many ways, they’ll be your business partners for the duration of your franchise ownership.

Pay attention to your interactions with company management and the level of support they provide. Do they answer any questions you have and provide resources to help you get up and running?

You should be very wary of buying into a franchise if you don’t like the company management. Look for a company you believe in and can get behind, or move on to a different franchise opportunity.

Your level of interest

Finally, you should consider your level of personal interest in the business model. Look for a business model you find interesting and a product line that excites you.

It’s all right if it’s a new industry or a product you’re unfamiliar with, as long as you’re interested in learning more about the company. Don’t just buy into a business model because you think it will make a lot of money. The energy and effort you put into the business will determine its success or failure.

Benefits of franchising

One of the biggest benefits of franchising is drawing off the experience and expertise of the entire organization. By joining an established brand, you bypass many of the hardships in building a company from the ground up.

“Franchising takes the guesswork out of starting a business,” said Jonathan Barnett, founder and CEO of Oxi Fresh Carpet Cleaning. “They have established systems designed to give new franchisees a massive head start over competitors.”

Being part of a respected brand is invaluable, Barnett said. “It’s hard to overstate the advantage of starting a business and having people know and trust your brand from day one.”

These are some other reasons to consider franchising:

• Perks of the particular brand (e.g., training and discounts)
• Business model with a track record of success
• Easier access to money and small business loans
• Low risk for banking institutions