What do Subway, Dunkin' Donuts, UPS, Domino's Pizza, Jiffy Lube, McDonald's, Burger King, and RE/MAX all have in common? One, they are all highly successful businesses. Two, they all franchise their operations. If you have ever considered becoming a franchisee, read on for some insight into the benefits and pitfalls.
- A franchise is a business whereby the owner licenses its operations—along with its products, branding and knowledge—in exchange for a franchise fee.
- In exchange for use of their resources, franchisers receive a percentage of gross sales and a lump-sum yearly franchise fee.
- The franchise industry is a substantial part of the U.S. economy, employing roughly 7.5 million Americans as of 2021.
What Is a Franchise?
Franchising is a business model in which a successful business allows individuals to use the business' name and other resources in exchange for an annual fee and percentage of gross profit. The concept dates to the Middle Ages when a king would grant rights for activities such as running a market or brewing ale.
What You Get as a Franchisee
Buying into a franchise provides instant expertise. All of the systems and processes that you need to run a business are already established. From a broadly recognized brand name to consistent advertising, branding, and presentation (uniforms, store colors, signage, and products) franchising is a business in a box. Open the box, take out the components, and you are ready to go. The materials you need are delivered to your door by reliable, time-tested suppliers.
What They Get as a Franchiser
Franchisers get paid in exchange for their ideas, expertise, and assistance. The payment includes a percentage of gross sales and a lump-sum yearly franchise fee. For example, Dunkin' Donuts charges approximately $40,000 to $90,000 for the initial franchise fee, 5.9% in royalties, and 5% for advertising. The initial investment ranges between $109,700 to $1,637,700.
A store that does $900,000 in annual sales would owe nearly $100,000 to the company. Adding in materials cost of about $200,000 would leave the franchisee with about $600,000. From this, the franchisee must pay rent, utilities, labor, taxes, and other expenses. However, even in the most expensive markets, the franchisee of a successful brand is likely to be left with a healthy profit.
What to Keep in Mind
Franchising is an expensive proposition. Like every new business, franchising comes front-loaded with startup costs. Ongoing costs are also considerable, particularly since the trade-off for reliable suppliers is higher costs. It is 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 does not want you to try and change it.
Operating a franchise is not easy. You have to work to succeed and, despite the merits of franchising, some businesses fail.
Before you invest in your own store, make sure to do extensive research. Talk to at least a half dozen current franchisees. Take a long, hard look at the numbers. Make sure you thoroughly understand the start-up costs, ongoing costs, and the amount of money 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. Also, find out about opportunities to expand if your location is a success. Finally, develop an exit plan in case you decide to call it quits.
Should You Franchise?
The franchise economy was hit especially hard by the COVID-19 pandemic. According to the 2021 report from the International Franchise Association, roughly 20,000 franchise locations and 900,000 jobs were lost in 2020. That being said, if you are considering opening a franchise, you are not alone—franchising contributed $670 billion of economic output to the US economy and still represented 3% of the total nominal Gross Domestic Product (GDP).
The report is optimistic, however, about the rebound of franchising as the economy as a whole recovers from the damage caused by the pandemic. In fact, it cites the fact that in past recoveries, franchising has expanded faster than overall GDP. Furthermore, the rise of vacancies in retail real estate may make this an enticing time for potential franchisers.
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, find the right business for you, do your research, and make sure that you are comfortable with the processes and limitations that come with operating a business that somebody else created.