Not every business owner or entrepreneur has the strength to nurture a business from the ground up. Entrepreneurs who wish to avoid the hassles of starting from scratch need to learn about franchise startup costs and weigh their options. The following parts of this article cover franchising and what you need to know before opening one.
What is Franchising?
A franchise is an established company that offers its business rights, models, and products to another business or company under its name. It is essentially a chain of businesses under an umbrella name but owned by different persons.
As an entrepreneur, buying a franchise helps you skip some business establishment and development steps. You also get access to an established business model, training and support, and other resources necessary for your growth.
Owning a franchise comes at a cost. Different franchises have different costs, depending on their success over the years. Some franchises demand an initial franchising fee of between $5,000 and $50,000, while others demand as much as $200,000.
Asides from the initial franchising fee demanded, franchises also demand other financial commitments. The common ones include;
- Initial franchise fee
- Corporate fees
- Royalty and advertisement fees
- Permits and Taxes
- Financing application fee
- Initial liquid investment capital
- Accounting fees
- Attorney fees, etc.
Please note that not all franchises demand all of the fees listed above. Some franchises may also demand other fees or financial commitments outside the ones listed above.
Buying a franchise comes with some rules and regulations. Unlike owning your business, where you make 100% of the rules, a franchise comes with its rules.
Each franchisee must read the rules and regulations and sign a contract binding them to those rules.
In addition to the rules guiding franchisees, federal rules guide the relationship between the franchiser and the franchisee. The FTC oversees the relationship between franchisers and franchisees. It also sets the overall rules and enforces franchise laws to protect all parties involved.
According to the FTC, prospective franchisees are required to go over the Franchise Disclosure Document (FDD) at the initial stage of the application process. This document tells the franchisee everything they need to know about the franchise and business opportunity. The FDD further outlines the franchise’s fees, investments, litigation, and bankruptcy history.
With the disclosure in the FDD, the prospective entrepreneur can gauge whether they are happy to continue with the process or not.
What to Look For in a Franchise
You cannot afford to be blind or deaf when investing in a franchise. You need to understand everything about the business and carefully read through the FDD. However, this may not be enough to make a decision. Below are some additional factors to consider when choosing a franchise.
Level of Business Autonomy
As an entrepreneur, the chances of wanting to implement new business strategies to make your venture successful exist. However, not all franchises are open and welcoming to new business models or strategies.
You should investigate the level of autonomy you have in the business before putting your money into the franchise. Franchises with strict rules that do not allow flexibility or outside strategies may not be the best option for you, especially if you want to infuse your creativity into your business.
Business Model Sustainability
As an entrepreneur, sustainability is an important consideration when starting a business. Buying into a franchise costs a lot, and you should investigate how sustainable the business is. A business model that isn’t sustainable or unproven may cost you your business in the nearest future.
Take careful steps to analyze how the franchise runs its business, look for obvious holes, and determine whether those problems are worth the risk or not.
You can measure a franchise’s strength by the number of years they have been around, how far they have succeeded over the years, and their competition. A franchise that has weathered the storm and has remained profitable over its competition may be worth the stress of getting in. However, a franchise that is struggling or losing money may not be the best way to invest your money.
Support, Training, and Company Culture
Franchises are expected to train you extensively on the business side of your business while also intimating you with the quality standards they have become famous for. They are also expected to provide support in other areas to improve the chances of business success. A lack of this support and training puts you at a disadvantage as you could as well have chosen to start a business on your own.
Also, consider the company culture, how information is disseminated, and how the franchise treats franchisees. All of these can help you decide whether the franchise is worth your money or not.