How to Start a Franchise Business
Franchising is a legal and commercial agreement by a person to use the intellectual property of another individual, a company, or group. You can either enter a franchise for a product/trade name or a business format.
If you get a franchise for a business, you subject yourself to the franchisor's method of conducting business and agree to sell goods or services supplied by the franchisor, and meet their quality standards.
Looking for a Franchisor
The search for a franchisor is on top of a prospective franchisee’s list. That is why many literatures are devoted to helping potential investors choose a franchisor. Most experts recommend that you do your homework to avoid costly mistakes. You could start by asking at least two competing franchisers for their offering circulars, visiting franchise trade shows, contacting a franchise agent, talking to people who have set up a franchise. It is even better if you can talk to franchise owners who are into a franchise similar with the one are interested in. Investing in companies with services or products that you know or interested in is always a sound move.
Look for a franchisor with good figures for franchise turnover. This information is contained in the Uniform Franchise Offering Circular, a disclosure document required of franchisors. While typical returns aren't stated in the circular, they can be calculated from the revenue and expenses disclosed. Also look in the circular for all administrative, criminal or civil litigation that a franchisor faced or facing to be warned to avoid those that have several lawsuits in their record.
Focus on tried-and-tested name brands, though be warned that they are naturally more expensive to subscribe to. These products or services have already been tried, operating, and recognized, and therefore, are most surely to be successful. And owners of such highly recognized brand names are better equipped to fight legal problems, if any, because of their long experience.
Also study the size, territory, and customer base of your prospect. Prefer core goods and businesses -- necessities that don't depend on customer's disposable income. In selecting a site, you might be tempted to opt for marginal location because it's cheaper, but a highly priced good location could pay off in the end -- and you are only paying for it once.
Ask for recommendations from former franchisees if possible. You could find their contact information in the circulars. In determining how successful a potential franchise is, look at the number of franchise that are in operation and how long has the franchisor and its franchisees have been in operation. Also look at the failure rate.
And of course, compare costs -- all costs that may be required of you in getting a franchise. The cost of a franchise is different from one company or industry to another because each has its own financial requirements, depending on factors such as the size and location of the franchise. But usually, you will be required to pay a franchise fee, built-out costs for your location, professional fees, contractor fees, signage and inventory. These, you should shoulder.
All these surveys are must before proceeding further. You can always hire a franchise business consultant to help you figuring what kind of business you should start, where to start, how to find a franchisor, how much you should invest and etc.
The initial franchise fee typically costs between $10,000 and $80,000, literatures say. Those that are lower than $20,000 or $10,000 are often home-based or mobile. The initial franchise fee will usually cover the cost of training, support and site selection. But because franchise fee varies from one company to another, some would exclude these and cover only the upfront licensing fee for the rights to use the franchise name. That is why it is necessary to look into the contract to see what's inclusive in the fee you are paying. Viewing the circular also comes with a fee, though there is no set fee for this.
Once you have decided on a franchise and a site, you will be given an estimate from the franchisor of your overall build-out costs, including furniture, fixtures, equipment and signage.
You may be required to buy between $20,000 and $150,000 worth of inventory, and supplies to properly run your business. And of course you will need day-by-day cash to fund your business. Ongoing costs may include the royalties you pay to your franchisor, which is four to six percent of revenue. It will also include advertising fees, equipment maintenance, employees, insurance, and inventory. This amount will depend on the type of business, but it is important that the amount you would come up with will last from a reasonable period of time, from months to three years. The franchisor typically provides an idea on how much you would need.
Generally, lodging franchises, which require the largest initial investment and ongoing expenses, would cost between $4 million and $6 million in total, according to AllBusiness.com. It is followed by full-service restaurants, which could require from $700,000 to $3.5 million. Fast food restaurants would need from $250,000 to $1 million, AllBusiness says.
The Process of Starting a Franchise Business
After you've decided on a franchisor, and gotten all the information about the franchisor, you usually contact the franchisor and present your request or application. Franchisors might require certain information to be included in your application. Several meetings will follow in which you will learn more of the business, and how it works, sometimes with an optional visit to one franchise. If the application requires a site proposal on your site, the franchisor will have to approve of it. Once the discovery is done, the final decision and acceptance will be made. The franchise agreement will be signed with them approving your application and you agreeing to their terms.
To facilitate all of these, you might need to hire an accountant to review the audited financial statements or a franchise business consultant. Or get a lawyer to help you review the legal documents. Budget between $1,500 and $5,000 to pay the fees of a franchise attorney, depending on the length of time you will be needing the professional service.
Advantages of Starting a Franchise Business
Most business experts agree that the benefit of franchising rather than starting up your own business from scratch has the lower risk of failure. If you are franchising, you are dealing with a produce or service that has already been tried and operating, and possibly a brand name that is already recognized. You also get the expertise of the franchisor by availing of their training and formal instruction, and getting management and marketing assistance from them. This could help reduce costly errors. Still, another advantage is that you could possibly obtain lower-cost goods and supplies by getting them from a franchisor, which has a greater purchasing power because it buys goods in bulk.
Further, a franchisor could offer you assistance in financing by making arrangements with a lending institution. You still shoulder the responsibility for the loan, but the franchisor's endorsement could help you actually get the loan.
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