At first the idea of purchasing a franchise business seems ideal: You will sell products that already enjoy brand recognition, so you should get a head start on the sales side. However, there are plenty of factors that might indicate a franchise situation is not best for your temperament and skills. Check out this guide before deciding to take the plunge with a franchise.
How It Works
When you purchase a franchise, you are essentially paying a fee to use the company name and established format. The business may offer training assistance or other perks. Outlet costs range from several thousand dollars to hundreds of thousands of dollars, depending how well established the brand is and how much assistance the franchisee can expect to get from headquarters.
Although this system overall seems fair, most franchisees will be expected to follow company rules and regulations regardless of any other factors, such as problems with the franchise location or failure to receive corporate support. Not every entrepreneur is comfortable leaving so many of the business decisions up to someone else.
In fact, in addition to the base franchise fee, there are usually other costs involved in purchasing an outlet. Here is a roundup of the main financial outlays involved:
- Initial fee: This includes the franchise fee but also, depending on the circumstances, may include the cost of buying, building or renovating a physical location, equipment costs, initial inventory, and operating licenses and insurance.
- Royalty payments: Franchisees are obligated to pay headquarters a portion of all the money the outlet makes, regardless how well sales are going at the store. Even when a company fails to make good on its pledge to support the franchisee, the royalty payments still will be due.
- Advertising funds: Outlet owners usually pay into an advertising fund that the company uses to promote the business in all areas, not just the location where the franchise operates.
As mentioned above, the franchisor holds the reins when it comes to decisions that affect the business. There may be very little opportunity for the franchise owner to exercise his or her own business judgement. The company must approve the outlet location, for example, and may not support the site you’ve chosen. Franchisees also may have to foot the bill for seasonal décor changes, signage for new products and other aspects of the location’s appearance so that customers will see the same things no matter which outlet they visit.
Headquarters often dictates what kinds of goods or services each franchise offers, such as menu items at a fast food restaurant or car repair services at an automotive shop. Franchisors decide which hours the outlet will be open, how much each item will cost and what the workers inside must wear. They may even dictate the service area, which may restrict the ability to move or add another location nearby.
Each franchisor-franchisee relationship is governed by a franchise agreement, which eventually will expire. At that time, the franchisor decides whether it will be extended. Or, the outlet owner might be found to have breached the contract, at which point the agreement is void. In this case the franchisee usually loses his or her financial investment.
On the other hand, if the agreement is renewed, it might come with changes such as additional royalty payments, new design requirements or a probationary period. The sales territory could change at any time, or the franchisor could impose other restrictions.
For some investors, franchises offer the perfect amount of corporate support and local autonomy that they are seeking. Many others, however, find the relationship to be too restrictive. These details about how franchises work should help you decide whether this type of business opportunity is for you.
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