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.
What Is a Franchise?
Franchising is a business model where a successful business shares it with others 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. The Singer sewing machine company granted distribution rights to franchisees in 1851 and is the first modern franchise operation.
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. (To learn more about the downsides to this business, see Is Buying A Franchise Wise?)
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?
If you want to run your own business and think franchising may be the way to go, you are not alone. In the U.S., roughly 8.67 million people were expected to be employed by franchised businesses in 2020. Total establishments were expected to reach more than 780,000 businesses contributing $495 billion to the economy.
Of the 13,000 Dunkin' Donuts shops that dot the global 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, 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.