Ready to open a franchise? The first big step is deciding which one. There are franchises for all budgets but finding the right one for you is about more than just cost.
Consider the franchise types
Different types of franchises require different levels of investment and allow for varying degrees of creativity. Some are solitary, hands-on endeavors. Some are more about setting up a team and supporting it. Still others are a place to deposit money and wait for it to pay you back.
Investment franchise
As the name implies, investment franchises are designed to maximize returns or produce capital gains. They generally have a high buy-in and can be the least hands-on. Franchisees may install a management team of their own or turn day-to-day operations back to the franchisor. Hotels and large restaurants are examples of investment franchises.
Conversion franchise
This type of franchise will be of interest to those looking to enhance an already operating, independent business. Popular in real estate—Century 21, for example—conversion franchisees obtain the visibility and reputation of a known trademark and the parent company gains access to existing enterprises in targeted geographic areas. Costs vary, depending on the franchisor and the territory.
Distribution franchise
In a distribution franchise arrangement, the franchisee buys the right to use a trademark and sell the parent company’s product. Franchisees are not purchasing a business system but are incorporating a product into their own. Examples include gasoline, automobile tires, home appliances and farm equipment. A variation on the distribution franchise model is soft drink bottling, where the franchisee is involved in actual product production.
Service franchise
These franchises offer a wide range of services using the parent company’s name. Some will require a team of workers. Others can operate with the hands-on franchisee as the sole employee. Service franchises come with a wide range of price tags. Dryer Vent Squad advertises a total initial investment of $47,000 while The Maids estimates a first year investment of $200,000 to get a franchise up and operating.
Though generally not storefront operations, the cost of a physical location should be taken into consideration when choosing among them. A Mosquito Squad franchise, for example, will not require a brick-and-mortar location, but the franchisee will need storage for the equipment and inventory included in the estimated $65,000 and $90,000 startup cost.
The buy-in costs can be considerable, but so can the advantages. The increased visibility of a national drain cleaning company like Mr. Rooter may be well worth the $80,00 — $190,000 initial investment to a stand-alone plumbing business. Likewise, a new lawn care company can gain instant name recognition and benefit from the national marketing of a franchisor like Lawn Doctor, at a cost of $102,000 to $120,000.
Business format franchise
What most of us picture when we hear the word franchise, the business format franchisee purchases a complete system. Franchisors typically provide everything from physical layout to employee training, equipment and supplies. Examples include restaurants, fitness centers and business services, such as copying and shipping.
Adding up the costs of a business format franchise and comparing one to the next can be a complex calculation. In addition to the franchise purchase price there are royalties (a percentage of sales volume) and the layout for equipment and supplies (which often must be purchased from the franchisor) to be considered.
There are a lot of ways these agreements can vary. The cost of a Dunkin’ franchise—estimated by the company at between $110,000 and $1.6 million—does not include real estate, which franchisees must source and develop themselves. Prospective McDonald's franchisees must complete 12 to 18 months of part-time training before they are qualified to purchase a $45,000 franchise. Only then will a location—owned by the parent company—be made available. As a practical matter, that means a McDonald’s franchisee needs not only the minimum of $500,000 in liquid assets the franchisor states, but time to devote to training and the willingness to relocate to an available site.
[Read:What You Need to Know About Franchise Financing]
Franchises come with different terms—from just a few years to ten or twenty.
Consider your long-range plans
How long do you want to be in business? Do you foresee one location for a few years or a multi-location empire to employ your children and grandchildren? Franchises come with different terms—from just a few years to ten or twenty. A short term could mean renegotiating the rights to your territory just when you’re getting the hang of things.
Conversely, for business owners on their second (or third) act, a twenty-year franchise term may be too long. Questions of termination—by the franchisee or the parent company—are addressed in the Franchise Disclosure Document (FDD). The key is to anticipate the issue of duration and make sure what’s spelled out in the FDD matches your vision of the future.
While you’re thinking long term, consider the question of territory. Is yours protected? Is there potential for the franchisor to shrink your customer base by creating another in your backyard? Contingencies—an increase in your territory’s population, for example, or your failure to meet a sales quota—might open the door for competition from a new player. It’s all fair, if it’s spelled out in the FDD.
Your franchise agreement can also affect future business activities. According to the FTC, agreements often restrict a former franchisee’s ability to open a similar business for as long as three years. It makes sense that the franchisor doesn’t want you to set up a similar business across the street—the secret sauce is called that for a reason. Just make sure you understand exactly what business activities you will be precluded from, once your franchise term is up.
Knowing your future plans will also be helpful when considering the type of franchise arrangement to buy. Single-unit franchises entitle you to one location in a specific territory. Multi-unit agreements allow the operation of more than one location, typically in the same geography. Finally, a master franchise allows for an increased revenue stream when the franchisee becomes the franchisor, opening sub-franchises.
Consider the available choices
Clearly there is a lot of variation in the world of franchising. When you are ready to drill down to the opportunities in your chosen area, you can check the Small Business Administration’s list of approved franchises, or take advantage of The International Franchise Association’s (IFA) interactive tool.
[Read: 3 Expert Strategies for Choosing the Right Franchise]
Franchising offers a wide range of options. Your chances of success will be greatly improved by finding the one that best fits your budget, personality and ultimate goals.
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