What do Subway restaurants, Dunkin' Donuts, UPS, Domino's Pizza, Jiffy Lube, McDonald's, Burger King and RE/MAX Real Estate all have in common? The first thing is that they are all highly successful businesses. The second is that they are all available as franchise operations. If you've ever considered buying into a franchise, read on for some insight into the benefits and pitfalls of being a franchisee.
What's a franchise?
Franchising is a method of doing business in which someone who has a successful business model shares it with other people in exchange for an annual fee and a percentage of the gross profits. The idea dates back to the middle ages when a king would grant rights to individuals to engage in activities such as running a market or brewing ale. The Singer sewing machine company, which granted distribution rights to franchisees in 1851, is often cited as the first modern franchise operation. (To read more on the subject, see Getting To Know Business Models.)
What You Get
Buying into a franchise provides instant expertise. All of the systems and processes that you need to run a business are ready and waiting. From a broadly recognized brand name to consistent advertising, consistent branding and consistent presentation (uniforms/store colors/signs/products) franchising is like a business in a box. Just open the box, take out the components and you are ready to go. Once you are up and running, the materials that you need are delivered to your door by reliable, time-tested suppliers.
What They Get
In exchange for their ideas, expertise and assistance, franchisers get paid. The payment includes a percentage of gross sales and a lump-sum yearly franchise fee. As of 2007, for a Dunkin' Donuts franchise, charges of approximately $50,000 for the yearly franchise fee (a range of $50,000 to $80,000 is average), 5.9% in royalties and 5% for advertising are not unusual. With average annual sales of $813,000, that's about $140,000 owed to the company. Add in the cost of materials at $187 000, and the franchisee is left with around $486,000 in profits. From those profits, the franchisee must pay rent, utilities, labor, taxes and other expenses. However, even in the most expensive markets, the franchisee is likely to be left with a healthy profit.
Items to Keep in Mind
Franchising is an expensive proposition. Like every new business, franchising comes front-loaded with startup costs. The ongoing costs are also considerable, particularly since the trade-off for reliable, consistent suppliers is higher costs. It's also important to remember that you need to follow the rules. When you purchase a proven business model, you are expected to use it. The franchiser doesn't want you to try and change it. (To learn more about the downsides to this business, see Is Buying A Franchise Wise?)
Like running any business, running a franchise is not easy. You have to work to succeed, and despite the merits of franchising, some businesses fail.
Before you shell out the cash to open your own store, make sure to do extensive research. Talk to at least half-a-dozen current franchisees that are running the same operation that you are considering.
Take a long, hard look at the numbers. Make sure that you thoroughly understand the start-up costs, the ongoing costs and the amount of money that you can expect to earn.
Find out how far away the next closest franchise location is and where the next new location can be built. You don't want to be in competition with another store over which you have no control. Likewise, find out about opportunities to expand if your location is a success.
Finally, you'll want to make sure that you know how to sell the business when you are ready to call it quits. Having a solid exit strategy is always important to the wise business person.
Should you franchise?
If you want to run your own business and think franchising may be the way to go, you are not alone. The International Franchise Association reports that there are more than 760,000 franchised establishments and that a study by PricewaterhouseCoopers "found that the franchising sector generates 18 million jobs in the United States alone and yields $1.53 trillion in economic output."
Of the 4,800 Dunkin' Donuts shops that dot the landscape, not a single one is owned by the corporation. Every location is run by a franchisee. The success of the franchise business model is undisputed. Many popular franchise operations have waiting lists with eager franchisees waiting for the opportunity to open a store of their own.
If you are not the type of person that's going to dream up the next big idea, but you want to run your own business, franchise opportunities may be exactly what you are seeking. Like any business endeavor, you will want to consider the situation from all angles to find the right business and to make sure that you are comfortable with the processes and limitations that come with operating a business that somebody else dreamed up.