If you’ve ever been interested in owning your own business, you may have felt intimidated at the prospect of designing an entire company from scratch. Being an entrepreneur is always hard, but it’s even harder if you’re hard-pressed to come up with an original business idea.
This is where franchises come into play. Buying a franchise allows you to own and operate one or more locations that follow the same commercial strategy as a bigger brand. For example, you can buy a McDonald’s franchise and run your own McDonald’s location, using their branding, their products, and their promotions in exchange for a fee.
This model is attractive because it allows you to draw on the power of an existing brand. And in many cases, you’ll get ongoing support from the franchisor as you attempt to develop your business. However, there are some limitations and complicated variables you should understand before committing to this approach.
8 Hurdles Before Buying a Franchise
These are some of your most important considerations before buying a franchise:
- There are many different types of franchise available. When you think about franchises, you might think about popular fast food restaurants, but there are a variety of different franchises available, some of which offer incredibly unique concepts. For example, with Pedal Pub, you can open a franchise that allows people to pedal around the city while drinking. And with a rage room, you could encourage people to break everyday objects like TVs and desks as a way to vent their anger. There’s almost no limit to the types of franchises you could open.
- Just because a brand is successful doesn’t mean you will be. Many newcomers to the world of franchises assume that if a brand has found widespread commercial success, it means opening a franchise with that brand will guarantee success in their own life. This isn’t necessarily the case; bad locations, bad strategies, and bad high-level decisions can wreck even the most promising national brands.
- Owning a franchise isn’t truly passive income. Sometimes, you’ll hear franchise ownership referenced as a form of passive income; in other words, you can sit back while your franchises generate revenue for you. But this isn’t really the case. You’ll still be responsible for hiring the right team members, making high-level decisions, and directing the business to ensure its overall success. If you don’t, the business could fail.
- Initial capital demands are often intense. Franchise fees and startup costs vary, but you can expect intense capital demands even for the most innocuous franchises. Starting a McDonald’s, for example, requires at least $955,000 in personal resources; the franchise fee is $45,000 and you’ll be required to pay a fee of 4 percent of your gross sales. Subway is a bit more forgiving, with the total costs to open a Subway franchise in the U.S. being between $116,600 and $263,150; the franchise fee is $15,000, plus 8 percent of gross sales.
- You may not have much flexibility or autonomy. You’ll function as an entrepreneur, leader, and business owner in some respects, but you may not have much flexibility or autonomy to make your own decisions. You may be limited in terms of how you control the business and what you’re able to offer, based on the stipulations of the brand.
- You need skills and experience to be successful. Again, you’ll be playing the role of a manager and a leader, so it’s unlikely that you’ll be successful unless you have some business management experience. If you’ve never owned a business or managed a team before, it’s a bad idea to start with a major franchise.
- You’re going to face significant competition. Competition is one of the biggest challenges for franchise owners to face. There will likely be many businesses like yours in the surrounding area, competing for attention from the same customers. How are you going to overcome them?
- The fine print can get you. When it comes to prominent national brands, most franchising agreements are notoriously complex. Your chosen company will likely have fine print in the contract that you should fully understand. For example, the franchisor may have rights to acquire your assets, and you might have limited ownership transfer rights otherwise. Make sure you work with a lawyer to understand the details before you finalize everything.
Is a Franchise Right for You?
Owning a franchise is the right entrepreneurial strategy for millions of investors, but it isn’t the right move for everyone. Many people become wealthy, and are able to easily retire on their built franchises, but others lose everything they have. Whatever you decide, make sure you do your research before moving forward.