Franchising

Franchising can be a great option for you to go into business for yourself. One of the best things about franchising is utilizing a proven system that has demonstrated success. There are several Pro's to franchising that are fairly self evident. Before you plunk down a large franchise fee you do need to consider some of the drawbacks to doing so.

1. Be prepared for the expense. Franchising can provide tremendous financial rewards. The up front costs of a quality and in demand franchise can be quite expensive. In today's market, most turn key franchises will require a minimum of $50,000 in the form of a franchise fee, start up capital requirements of at least $25,000 and usually it is advisable to have a minimum of 6 months worth of your home expenses saved to avoid having to take any money out of the business until well after initial start up.
2. Be prepared for the work/hours required. When you go into business for yourself you are going to find that a 40 hour work week is something of the past. Most new franchise owners find that a more typical work week is around 80%2Bhours per week. This is especially the case if your new franchise is in the retail arena. When you purchase your franchise you are really buying yourself an 80%2B hour a week job. Never forget that if an new employee decides not to show up for work 10 minutes before their shift that you have to cover/fill in for them until you can find a replacement.
3. Speaking of employees. Employees are going to be an essential part of your success. Employees are also going to consume a large amount of the 80%2B hours you spend each week. From scheduling, payroll, management, training and development to a myriad of other issues, employees will be one of your greatest challenges. If you come from a supervisory background or management background you will certainly be able to bring some skills to your new business that will serve you well. If however your past work experience provided little time spent directing and supervising others, you may want and need to consider hiring a manager right out of the gate. The learning curve for dealing with and working with employees can not be cut short. You have to spend the time learning how to deal with all of the above issues while also simultaneously running a successful business.
4. Be prepared for the unexpected. There has never been nor will there ever be a business that does not have to travel over the inevitable speed bump. There will be times when suppliers and vendors are demanding their payments all at the same time. There will be times when your unemployment taxes, sales tax, business and personal income tax all seem to be due at the same time. You need to prepare yourself financially for these speed bumps and know they are a part of business. This will also be the time when you may have to forego your own paycheck until the cash flow gets back on track. If your business and your cash flow is in any way seasonal, you have to be able to manage your cash flow well. Seek professional advice and assistance as the cost will be far less than learning the hard way!
5. Be prepared for the social consequences. When you own and operate your own franchise, you will soon find that your friends and family no longer see you much. It will be imperative to make the time that you do have quality time with your family and friends. You will also find that some people will change their opinion of you. Now that you are a business owner some people will believe that you are now wealthy and will either try to take advantage of you or will snub you in some subtle ways. This of course does not always happen, but be prepared none-the-less.
6. Be prepared to be more of a follower than a leader. When you purchase a franchise, one of the things you will be required to do is to follow a strict system. For instance, a food franchise will provide you with little, if any, flexibility in varying your menu. You will be required to provide a system exactly like all other franchises with your same brand name. If you are a person that is truly an entrepreneur, you may find this to be a system that will box you in. New ideas and cutting edge marketing are something you will not be able to do.
7. Be prepared to pay a lot in Royalties. Royalty fees are a part of every legitimate franchise. Every single dollar that flows into your business will be subject to a percentage royalty fee. Most franchises are in the 3-10% range. This of course comes right off the top from your gross sales. This amount of money can be quite significant over the term of a franchise agreement. One million dollars in annual sales for 15 years at a 5% royalty fee will equate to $750,000 right off of your bottom line.
8. Franchise Agreement and Franchise Term. The franchise agreement will spell out exactly how many years the franchise will cover. Most franchises will be a 10-15 year agreement which will require your royalties and complete following of their system. The downside to this is that you will be at the mercy of the franchisor at the end of the term and your new royalty fees could certainly be increased. It is very rare that the fees go down. Even if you elect to end the franchise relationship, there is no guarantee that you will be able to provide substantially the same products/services to your now loyal customer base without the franchise. The company now also has a right (and usually will exercise this right) to place a new franchise in your same location. I have even seen them open a new business within a block of their former franchisee.
9. Purchasing or Renting Real Estate. You will have to decide whether to purchase/build an existing facility or whether or not you should rent a location. In either situation you will have to make sure that your mortgages or leases line up or will line up with the expiration of your franchise agreement/term. With only 15 years, purchasing may not be the best option as you will want to have a 20%2B year term if possible for your business property mortgage at your bank. High monthly payments early on will not be desired to maximize your cash flow during the first few years. Leasing a location normally is in 5 year increments and the renewal rate may be quite high and if your franchise agreement covers 15 years, you could be through 3 leases by then and may have just as well bought your location.
10. Location location location. The final consideration you need to consider is that your location that is great today may not be great in 10 years. If you open a sandwich shop across from a large industrial plant, you may have the perfect location. What if the business goes under or has massive layoffs? Now your location is completely wrong. You have to break leases/sell property (both of which will now cost you a lot of money), find a new location and in reality start all over again. If the franchisor has several other franchises in the area, you may be relegated to a less than prime location with which to rebuild.

My goal is certainly to not dissuade you from purchasing a franchise. The franchise model is one of the proven ways to own and operate a successful business and to help ensure it is open five years from now. The systems do work as long as you work the system! These 10 areas of consideration really should be thought about and evaluated before you make your final decision to part with all of your hard earned money! If you can live with these areas of concern and can address them with confidence, certainly proceed ahead. Success is 90%%2B your attitude and 10% your system.