Building a brand, marketing to consumers, and managing operation costs to profit, can be overwhelming for most new business owners. In fact, over 20% of new businesses fail within their first year of operations. Accordingly, many aspiring business owners consider buying a franchise, like a franchise home health care business, fast-food restaurant, fitness club, bar, or a similar chain of businesses with an established brand name and built-in consumer base.
However, nothing in life is ever that easy. As a franchisee, you are beholden to the rules of the franchisor.
Initial Investment Costs
The average cost to open a franchise is about $50,000. Depending on the size, industry influence, and regional and/or national presence of the franchisor, that cost can be as much as $5 million. Operating and expense costs can far exceed your initial investment costs on a monthly, seasonal and annual basis. It could take months or years for you to make back your investment, never mind profiting.
Keep in mind that you will have to invest a lot of time as well. A franchise won’t run itself. You and your employees will need training. You could find yourself working 14 to 16-hour days to get your franchise off the ground and operating.
The Franchisor Always Profits
You will have to buy all of your supplies, ingredients, equipment, and all franchise affiliated material needs from the franchisor. If you buy a McDonald’s franchise, for example, you must buy all food and equipment supplies from McDonald’s. You just can’t shop around to find the best supplier for your needs.
Franchisors make a lot of their profits by making sure their franchisees pay them for their supplies and operational needs. This is how franchise chains stay financially and operationally connected. However, this is not the least of franchisor business methods to optimize costs.
Regular Recurring Fees
The franchisor will charge you a myriad of one-time and recurring fees on a monthly and annual basis for the privilege of running the franchise. These fees are deducted directly from your sales and profits. There might be a fee for opening the franchise in the amount of 25% to 40%. You will definitely have monthly fees for royalties associated with using the brand name, marketing fees, territory rights fees, insurance fees, technology fees, and so on.
Each fee could be in excess of 4%. This is not an exhaustive list of possible franchisor fees by any means. You can find yourself paying additional fees for any reason the franchisor deems necessary.
Advertise Your Franchise
OK. So, you now know that just like a casino, the franchisor always wins. What can you do? Study your overhead and expenses intricately for ways to cut waste or redundancies. Know your local consumer and advertise. SEO optimize your business online so that it ranks high in searches. Hold a grand opening and advertise to businesses, organization, schools, and local events with large turnouts.
Make your business presence known locally. You should be committing as much effort as possible to local advertising for the first year of operations and reassessing thereafter. Also, you will probably be advertising locally out of your own pocket. Any marketing fees you pay the franchisor probably goes towards regional and/or national marketing costs.
Walk around your neighborhood or the neighborhood you plan to open the franchise in. Who is your consumer? Why would they buy from you and how will you keep selling to them? Buying into a franchise and benefiting from a brand name is not enough to instantly profit.
Don’t Rush Into Failure
Nothing in life is easy, especially opening a business. Talk to current and past franchise owners. Get advice and guidance. Just like opening a brand-new business, opening a franchise involves a lot of research and consideration. Otherwise, you are just setting yourself up for breakeven status at best. Or, a, “closing soon,” sale at worst.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.