Foray Into Franchising

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Foray Into Franchising: Be in Business For Yourself, But Not By Yourself

By the end of 2014, about 770,000 franchise businesses are expected to be operating in the United States. And that number is only going to get higher, as a new franchise is opened approximately every 8 minutes. What’s franchising all about, and is it for you? Let’s take a look at what it means to be a franchisee, as well as the costs involved, other pros and cons and the best industries to get started in.

What Is a Franchise?

A franchise lets a person or group of people – the franchisee – market a service or product using the trademark or trade name of an already established business, or the franchisor. (3)

Franchisee’s duties (3)

Uses trade name or trademark

Pays fees (initial, advertising, royalties)

Expands business with support of franchisor

Franchisor’s duties (3)

Owns trade name or trademark

Receives fees

Offers support (training, marketing, sometimes finance)

There are two main types of franchising: product distribution and business format.

Product distribution franchises are simple supplier-dealer relationships where the franchisor supplies the product, and the franchisee sells it. (3)

Examples of product distribution franchises: (3)

  • Soft drink distributors
  • Car dealers
  • Gas stations

Business format franchises are the most common type of franchise, and allow a franchisee to use the franchisor’s entire method of doing business, from product supply and marketing strategy to site selection and training. (3-4)

Examples of business format franchises: (4)

  • Fast food restaurants
  • Hotels
  • Convenience stores

Business format franchises can be single-unit or multi-unit. A single-unit franchise agreement allows the franchisee to open and operate one store, while a multi-unit franchise agreement lets the franchisee have more than one store. (3)

55%

Percentage of all franchise units in the U.S. owned by multi-unit franchise operators (1)

4.5%

Estimated percentage of the entire U.S. gross domestic product represented by franchises in 2014 (1)

That may not sound like much, but it adds up to about $493 billion. (1)

You’ve Gotta Pay to Play (Or Do Business)

If a franchise is a club, a franchise fee pays for your right to join the club, and a royalty fee is your continuing cost of membership.

A franchise fee is generally a fairly large flat fee paid upon signing an agreement to join with the franchisor’s system. This is typically a one-time cost and can vary greatly depending on the type of industry or even the franchisor itself, ranging from $3,000 to more than $100,000. (5-6)

$20,000 to $25,000

Typical franchise fee cost (6)

A royalty fee is usually a certain percentage of a franchisee’s sales paid to the franchisor on a regular basis, whether it is weekly, monthly or annually. (5)

5% to 6%

Typical franchise royalty fee, in percentage of gross sales (6)

Most expensive franchises to open (total initial investment, including franchise fees and startup costs) (7)

1. Choice Hotels International (Clarion, Comfort Inn, Econolodge, Quality Inn, others), $14.6 million

2. Amazing Spaces (storage space), $8.25 million

3. AMPM (convenience store), $7.6 million

4. Golden Corral (restaurant), $6.76 million

5. Buffalo Wild Wings (restaurant), $3.2 million

6. Culver’s (restaurant), $2.8 million

7. KFC (fast food), $2.5 million

8. Denny’s (restaurant), $2.4 million

9. Carl’s Jr. (fast food), $1.8 million

10. Hardee’s (fast food), $1.6 million

Least expensive franchises to open (franchise fees) (7)

1. Jan-Pro (cleaning service), $1,000

2. Jazzercise (fitness), $3,000

3. Travel Leaders (travel agency), $3,600

4. Fiesta Auto Insurance (car insurance), $10,000

5. Super Glass Windshield Repair (auto repair service), $10,000

6. Cruise Planners/American Express (travel agency), $10,000

7. Candy Bouquet International (edible arrangement delivery service), $12,000

8. CompuChild (technology education), $20,000

9. Proforma (printing services), $20,000

10. Disaster Kleenup International (disaster restoration), $33,000

So Is a Franchise Right For You?

Like most other things in life, there are pros and cons of doing business as a franchisee, and both should be weighed before signing on the dotted line.

Pros (3, 8)

Proven business model for generating profits

Built-in network of support, both pre-opening and ongoing

Established brand name and market awareness

Lower costs in inventory and equipment

Ease of recruiting staff

Cons (8-9)

Less freedom of operation

Initial costs (franchise fees) and ongoing costs (royalty payments)

Difficulty of finding information about profitability from franchisors

Possibility for other franchisees to encroach on your market

Restrictions on future business based on noncompetition clauses

The Federal Trade Commission’s Bureau of Consumer Protection recommends asking the following

tough questions before deciding to open a franchise. (10)

Your investment: How much money do you have available to invest? How much can you afford to lose?

Your abilities: Does the franchise require special technical training or education? What skill set can you bring to the business?

Your goals: Do you intend to run the business yourself or hire a manager? How many hours are you able and willing to work a week?

Your potential franchise: Is there a demand for the franchise’s services or products in your area? What’s the level of competition on a local, regional and national level?

Most Profitable Franchise Opportunities

Senior care, child services and education are sectors on the rise this year, though quick service restaurants form the largest proportion of business format franchises and are still increasing. (11)

Fast food restaurants, business services and personal services combined make up nearly half of all franchise establishments. (3)

Almost 1 in 5 franchise establishments is a fast food restaurant. (3)

Most rapidly expanding franchise sectors in 2014 by growth percentage (12): Jobs added (estimated) (12)

Business services, 3.8%: 35,000

Commercial and residential services, 3.1%: 11,000

Quick service restaurants, 2.4%: 76,000

Real estate, 2.2%: 6,800

Table/full service restaurants, 2.1%: 22,000

Based on financial strength and stability, growth rate and the size of the franchise system,

Entrepreneur.com ranked these 10 companies the top franchise opportunities for 2014. (5)

Franchise: Approximate startup costs

1. Anytime Fitness: $78,000 to $371,000

2. Hampton Hotels: $3.69 million to $13.53 million

3. Subway: $116,000 to $263,000

4. Supercuts: $113,000 to $233,000

5. Jimmy John’s: $330,000 to $519,000

6. 7-Eleven: $37,000 to $1.63 million

7. Servpro: $138,000 to $187,000

8. Denny’s: $1.32 million to $2.61 million

9. Pizza Hut: $297,000 to $2.1 million

10. Dunkin’ Donuts: $216,000 to $1.52 million

Franchising

Sources:
1. http://buxtonco.com
2. http://www.franchising.com
3. http://www.franchise.org
4. http://www.franchise-law.com
5. http://www.entrepreneur.com
6. http://franchises.about.com
7. http://www.therichest.com
8. http://sbinformation.about.com
9. http://www.nolo.com
10. http://www.business.ftc.gov
11. http://www.franchisebusinessreview.com
12. http://franchiseeconomy.com

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