If you're thinking about buying a franchise, you have a lot to consider; understanding exactly how franchises work is the first step in determining whether it's the right business for you. Startup costs, fees, location and contract terms are just a few of the many aspects of franchise ownership that you'll want to consider before signing on with a major corporation.
Franchises allow an investor or franchisee to operate and profit from a store owned by a larger business. The investor pays a franchise fee and in exchange is given a store. The franchisor often helps the investor by finding a location, offering training and marketing and advising the franchisee on management techniques. The franchisee typically pays a percentage of his monthly profits to the corporation.
Franchise ownership has a lot of benefits. As a franchise owner, you are your own boss but you receive support that you wouldn’t if you were opening an independent business. Franchise owners benefit from nationwide marketing campaigns, a well-known product and from working from a format developed by the corporation that has proven itself successful. You also receive well-researched advice on how to make your store successful.
Despite the benefits, there are many considerations to think about before buying a franchise. The biggest consideration is cost. Startup fees for franchises can be high, so before choosing where to invest you’ll want to research what you can afford. You will also be required to make pay royalty payments to the corporation and some companies make franchisees pay advertising fees. You may also have to conform to restrictions regarding the design and appearance of your store, the services or products you provide, operation hours, uniforms, pricing and accounting procedures.
Contracts usually last 15 to 20 years and renewals of the contract are not guaranteed. If your store fails to meet goals determined by the corporation, the contract may not be renewed. The contract terms may also change when you renew.
Some franchisors require businesses to operate within a specific territory. Sometimes this helps reduce competition from other stores, but it may make it difficult for you to open new stores or relocate to an area that could be more profitable.
The Federal Trade Commission recommends doing substantial research before choosing a franchise to invest in. Consider the amount of money you have to invest, how much money you need to make, what strengths you will bring to the business as a manager and whether your desires as a business owner can be met by owning a franchise. When selecting a franchise, the FTC advises: “When you think about a particular franchise, think about the demand for the products or services it offers, competitors that offer similar products or services, the franchisor’s background, and the level of support you will receive.”