Franchise Ownership

3 Financial considerations before you take the plunge

So, you are considering entering the world of entrepreneurship. Entrepreneurship can be a wonderful way to make a living, without feeling tied to the whims and desires of another person or company, but there are risks associated with going into business for yourself. Many people believe that the risks of self-employment can be mitigated by buying a franchise, as it appears to be a middle ground between going out on your own and working for a company. While franchising can be a great option for some people, it is not something to jump into without doing extensive research.

How Much Does It Cost in the Long Run?

The cost of a franchise depends on a variety of different factors. The brand you are interested in, the location of the franchise, the size of the store and the type of industry can all affect the cost of the franchise. Hotels, for example, are the most expensive type of franchise, as the land, building, and upkeep are particularly high. Sit-down restaurants are similarly expensive for the same reasons. Mobile and virtual franchises generally have the lowest entry cost because of the lack of property.

Franchise fees can run between $20,000 up to $200,000, depending on the brand and the market. These costs do not include monthly franchising fees, rent fees, and other company fees associated with franchising. Franchise owners can expect to pay a portion of their gross sales back to the company as a franchising fee and as rent. For example, those who own a McDonald’s franchise will need to pay a percentage of their gross sales to the company as a franchising fee, and a portion of their gross sales for rent. The percentage varies by market and the monthly sales of the location.

What are the Franchise’s Requirements?

Most franchises will have net worth and liquid asset requirements for potential franchisees. This is to protect the franchise from poor management and potential payment problems down the road. The more recognizable the brand, the higher the requirements are likely to be. For example, McDonald’s requires franchisees to have liquid capital of at least $500,000. Franchisees must also pay at least 40% of the startup costs with non-borrowed money. Chick-Fil-A, Burger King, and KFC have similar requirements.

Not all franchises are as expensive, though. Subway, for example, has less strict requirements and lower startup costs. Lesser known franchises, especially those that are regional, will have less strict requirements, but do not offer the franchisee the safety of brand recognition. It is important for every potential franchisee to weigh the pros and cons of every franchise they are interested in before picking one that fits their financial situation, their passion, and their background.

Are the Franchisees Happy?

Not every company that offers franchising opportunities is worth your time. Just because a brand is willing to franchise, doesn’t mean they do it well. Experts suggest looking at the track record of the business and learning as much as you can about the success of other business owners before you take the plunge. Whether or not others have succeeded in the space is an important consideration, especially those who are working within the same area you are interested in. Look around to see how often franchises close for the company, and why former franchisees have gotten out of the business. You’ll also want to learn as much as you can about the support offered to franchisees after the paperwork is signed and the building is underway. A company that offers a great deal of support is more likely to ensure you are successful.

Buying a franchise isn't an easy decision, and it isn't one that should be taken lightly. If you consider these three things before taking the plunge, you'll be in a much better position to make a sound business decision.