by Randall S. Hansen, Ph.D.
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If you have any kind of entrepreneurial streak in you, the allure of owning a franchise can
be great. Just about any kind of product or service that interests you probably has one
of more franchising operations, from fast food (Burger King), to fitness centers (Curves)
to hotels (Holiday Inn), to repair shops (Meineke Car Care Center), to hair salons
(Supercuts), to housekeeping services (Merry Maids), to security services (ADT),
to recreation/sports (Play It Again Sports), to elder care (Comfort Keepers), to tanning
(Sun Tanning Salon). Fast food, though, remains the top franchising opportunity.
According to the International Franchise Association, the estimated number
of franchised locations in the U.S. is almost 400,000 in 75 industries, employing
almost 10 million workers. More than 2,500 companies offer franchising opportunities.
But should you start your own business or buy a franchise of an already successful
business?
Some Background into Franchising
What is a franchise? It's a legal and commercial relationship between the owner of
a trademark, service mark, brand name, or advertising symbol (the franchisor) and
an individual or organization (the franchisee) wishing to use that identification in a
business. The franchise governs the method of conducting business between the
two parties. Generally, a franchisee sells goods or services supplied by the franchisor
or that meet the franchisor's quality standards.
Top 10 Franchises
According to the annual review of the franchise industry by
Entrepreneur.com, here are the top 10 franchises for 2005:
- Subway (sandwiches, salad)
- Curves (women's fitness)
- Quiznos Sub (sandwiches, soups, salads)
- Jackson Hewitt Tax Services
- The UPS Store (shipping services)
- Sonic Drive In (fast food)
- Jani-King (commercial cleaning)
- 7-Eleven, Inc. (convenience store)
- Dunkin' Donuts (donuts)
- RE/MAX, Inc. (real estate)
Source: Franchise 500®
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Think of franchising -- or at least the costs of it -- as paying for the work
someone else has already done in developing a successful business model,
marketing strategy, and superior operations efficiencies.
The popularity of the franchise business model has to do with its proven track
record of success and ease in becoming a business owner; however, while
the success rate for franchise-owned businesses is significantly higher than
for independent businesses, no individual franchise is guaranteed to succeed.
That said, nine out of ten franchise owners reported profit in 2002.
Experts state that 40 cents of every retail or service dollar spent by consumers
is spent in a franchised business. In 2000, most analysts estimated that
franchising companies and their franchisees accounted for $1 trillion in
annual U.S. retail sales, with approximately one out of every 12 U.S. retail
business establishments is a franchised business. A new franchise business
opens every 8 minutes of every business day
Finding a Franchise Right for You
The key to finding a franchise opportunity that is right for you is research --
lots of research. You'll want to first decide how much of an investment you are
willing or able to make. Initial fees can range from $1,000 to more than $200,000,
and then there are the other typical start-up costs, from real estate to equipment.
The average initial franchise investment is $250,000, excluding real estate, though
there are many franchising opportunities available for smaller investments… and
the average royalty fees paid by franchisees to the franchisor range from 3 to 6
percent of monthly gross sales. The average length of a franchise contract is 10 years.
After examining costs, the next step is thinking long and hard about what type
of business interests you, what type best fits your lifestyle. There are any number
of franchising books
and franchising Websites
that can help you identify some specific opportunities.
Once you've identified a few legitimate franchise opportunities that you can afford, the
next research step is interviewing current franchisees to get the real scoop on
earnings, support, costs. Speak with each owner and ask them all the questions
you need answers for, such as if they were doing it all over again, would they do
the same thing? How much marketing, consulting, and training help does the
franchisor really provide? Are the earnings living up to expectations?
Of course, the other key piece of the research is examining the nature of
franchising -- the pros and cons of franchising -- to help you determine if
any franchising opportunity is right for you.
Here are some of the issues you'll want to consider before making the leap
into being a franchisee.
Pros of Franchise Businesses
- Established Brand and Customer Base. By far, the biggest advantage
of buying into an established franchise is the strength of the brand and
loyalty of its customers.
- Marketing Support. Franchises often have the support of a national
campaign, as well as prepared marketing materials for a local campaign.
- Reputable Suppliers. Franchisors often have established relationships
with suppliers for all the materials franchisees need.
- Business Support. There's a saying in franchising: "You're in business
for yourself, but not by yourself" because you have a network of support.
- Training. Some of the better (and more expensive) franchise operations
offer management and technical training.
- Financial Assistance. Some franchisors provide loans and other
assistance to help franchisees.
- Access to Proprietary Methods. There's no need to reinvent the wheel
as franchisees get access to all the trade secrets.
- Ongoing Research and Development, New Products. Franchisees can
stick to improving their operations and let the franchisor spend the time and
money developing new products.
- The Boss is You. As with owning any business that you own, you are
in control of your destiny.
- Reduced Risk. For all of these reasons, starting a franchise of an
established brand often has less risk than starting a business from nothing.
Cons of Franchise Businesses
- Initial Payout (Franchise Fee and Start-up Costs). Some of the bigger
franchise operations can involve a very large initial costs, often more than what
it would cost to start your own business.
- Royalty Payments. For as long as you are a franchisee, you will have to
pay some percentage of the monthly gross back to the franchisor, reducing
your profit potential.
- Marketing/Advertising Fees. To receive the wonderful marketing support
from the franchisor, franchisees must pay these fees, according to some contracts.
- Limited Creativity/Flexibility. Most franchise contracts have very explicit
standards, allowing little or no alterations or additions to the brand, stifling any
creativity on the part of the franchisee. You must use their system, follow their rules.
- Sole Sourcing. Some franchise contracts stipulate that franchisors must
buy supplies only from an approved list of suppliers, possibly at a higher cost.
- Locked into Operation by Long-Term Contract. If you don't do as much
research as you should have and find yourself with the wrong franchise, you
may be stuck for many years.
- Dependent on Franchisor Success. The reputation of your franchise is only
as good as that of the franchisor, so any difficulties that the franchisor
encounters will have a direct impact on you.
- False Expectations. Opening a franchise rather than starting your own
business offers no guarantees of success. You still need to be a sharp businessperson
to make it work.
- Risk. There's always risk in starting any new business.
Final Thoughts
Before finalizing your decision about buying into a franchise operation, include
your family in the deliberations, because being the owner takes a lot more time
and energy than you might think -- and your family will be affected the most by
your workload.
You'll also want to consult two other experts as you make final preparations for
buying a franchise. You'll want a franchise attorney to assist you with understanding
all the ins and outs of the franchise contract. And you'll also want the assistance
of a consultant to help you develop a business plan, both for yourself and for any
financing you may need.
Finally, if you are a true entrepreneur, then owning a franchise probably is
not for you. You'll want to start your own business so you can be free to
develop your own concepts, brands, systems, etc.
Questions about some of the terminology used in this article? Get more information (definitions and links) on key college, career, and job-search
terms by going to our Job-Seeker's Glossary of Job-Hunting Terms.
Dr. Randall S. Hansen is founder of Quintessential Careers,
one of the oldest and most comprehensive career development sites on the Web, as well CEO of
EmpoweringSites.com. He is also founder of
MyCollegeSuccessStory.com and
EnhanceMyVocabulary.com. He is publisher of
Quintessential Careers Press,
including the Quintessential Careers electronic newsletter,
QuintZine. Dr. Hansen is also a
published author, with several books, chapters in books, and hundreds of articles. He's often
quoted in the media and conducts empowering workshops around the country. Finally, Dr. Hansen is
also an educator, having taught at the college level for more than 15 years. Visit his
personal Website or
reach him by email at randall(at)quintcareers.com.
