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 have ever considered buying into a franchise, read on for some insight into the benefits and pitfalls of being a franchisee.
What Is 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 concept 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 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, consistent branding and consistent presentation (uniforms/store colors/signs/products) franchising is a business in a box. Open the box, take out the components, and you are ready to go. The materials that you need are delivered to your door by reliable, time-tested suppliers.
What They Get as a Franchiser
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 2018, for a Dunkin' Donuts franchise, charges of approximately $50,000 to $90,000 for the initial franchise fee, 5.9% in royalties and 5% for advertising are not unusual. With average annual sales of $900,000, that's about $200,000 owed to the company. Add in the cost of materials at approximately $200,000, and the franchisee is left with around $500,000 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 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. The ongoing costs are also considerable, particularly since the trade-off for reliable, consistent 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 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. 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. According to Export.gov, the U.S. franchising sector employs 21 million people, generates $2.3 trillion of economic activity and a new franchise business opens every eight minutes of every business day."
Of the 8,500 Dunkin' Donuts shops that dot the U.S. 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.