Choosing a Franchise

Business Communication

November 20, 2012

Choosing a Franchise

Every 8 minutes of each business day, a new franchise is open, and 1 out of 12 businesses is a franchise. In total, franchises generate over $800 billion dollars annually. When you think of a franchise, you probably think of a McDonald's, Subway, or some type of restaurant. When in fact, franchises can be anything from a restaurant to a provided service. If you want to be your own boss, with a proven successful company that backs you up, then becoming a franchisee might be a good fit. There are many advantages, and options to choose from when investing in a franchise.

If you are thinking of opening a franchise, then a key reason is likely the independence of having your own business. "Owning a franchise allows you to go into business for yourself, but not by yourself." (Matt Haller, director of communication for the International Franchise Association). One advantage of investing in a franchise is the turnkey system. In a turnkey system, everything is set-up, including a solid business plan, management skills, a proven successful system, and franchise support.

A business plan is the key component to operating a successful business. If you were to open up a new business on your own, you would have to go through the hassle of creating a business plan, and hoping that it works. In a franchise, this business plan has already been proven to work. Most studies show that up to 80% of small businesses fail during the first three years of operation. Although there is still some risk of failure in a franchise, the likelihood is lowered to 20%. Besides the lack of a good business plan, another significant factor that increases the risk of failure is lack of management skills.

As a franchisee, you have a great opportunity to acquire the management skills needed to be successful. Many people open up a new business thinking that having initiative and motivation is enough. When in fact, management skills are a key component of having a successful business. As a franchisee, most franchisors give you the training necessary to have these key management skills. These franchises know what it is to have good management skills, and they want you to succeed. If a problem arises, you have their ongoing support.

The fact that the franchisee has the ongoing support from the franchisor is a great relief. Some examples of the support you might get would be marketing; such as local advertisement, national promotions, as well as staff training. There might be a fee that would have to be paid for these services, but in general, you would be minimizing these costs compared to running your own business. Like previously mentioned, franchises have been proven successful, and thus might have more experience in the marketing field. As a result, having a well-known company makes it is easier for franchisees to recruit staff. That being said, there are some disadvantages of investing in a franchise.

Some disadvantages of investing in a franchise are the lack of complete control and freedom. As a franchise you would be required to run your business in accordance to the rules and regulations set by the franchisor. In addition to not having complete freedom, there is also the cost that comes with investing in a franchise. Although the cost to invest in a franchise is sometimes less than having your own business, it is nevertheless costly.

According to franchising.com, while costs range from less than $10,000 to upwards of $5 million, the majority of franchises run from about $50,000 or $75,000 to about $200,000 to get started. Another disadvantage of investing in a franchise is the royalty payments. Royalty payments are the fees that franchisees have to pay annually in return for the support and advertisement. There are many financial and legal implications when it comes to investing in a franchise.

Some financial implications, mentioned are the start-up costs. Examples of these costs would include: franchise fees, equipment, leasehold improvements, training and support, real estate or vehicle, working capital, professional fees, and advertisement/marketing. In order to even be considered a candidate by the franchisor, you must typically have certain financial requirements including a minimum net worth, and cash liquidity.

Two main legal implications that you will have to incur as a franchisee are the disclosure document, and the franchise agreement. The purpose of the disclosure agreement also known as the FDD is to provide franchise candidates with information about the franchisor, their system, and the franchise agreements they will need to sign in order to make an informed decision. Some of the components