The Franchise

In terms of investing, there is no shortage of vehicles which to invest in. Some require your active involvement and some require very little of your time. Some require a large initial investment and some require very little investment. Finally, some have high rates of return and some have very low rates of return. The proper mixture is a personal decision and often involves you assessing your age, income level, risk tolerance, and overall financial goals.

My goal isn’t to answer those questions for you but instead to introduce (or not) an investment vehicle that is all of the above in one bread basket. That investment vehicle is franchising!

So what is franchising?

Franchising, at its most basic level, is when an investor pays a franchisor (franchise owner) for the right to use that franchisor’s trademark and business systems in order to turn a profit. Some of your most popular franchises include McDonalds, Subway, ServiceMaster Clean and Dunkin’ Donuts. If you have never heard of the franchising concept, then you may incorrectly think McDonalds Corporation owns every single McDonalds you see throughout your city. In actuality, they own a percentage of these locations and the rest are owned by individuals who pay them for the right to own and operate under the McDonalds name and image and to sell McDonalds products.

Who can own a franchise?

One of the benefits of franchising is just about anyone can own a franchise. I’m not saying anyone can own any franchise they want, but I am saying anyone has the ability to own any franchise they want if they meet the established criteria of the individual franchisor. In the very beginning stages of pursuing the idea of owning a franchise, you need to determine whether or not franchising is actually for you. Some of the questions you might ask yourself might include:

Are you willing to make the time and financial commitment owning a franchise requires?
What type of franchise do you want to own?
Do you have the financial capital to invest in a franchise or can you obtain it?
Are you willing to take the financial risks involved and can you handle those risks?
*This list is by no means exhaustive but you should at least answer these few questions before you decide to move forward*

Once you have answered these questions and decided investing in a franchise is in fact what you want to do, the next step is to contact the franchise to obtain necessary information and documentation.

What are the benefits of buying a franchise?

The benefits of franchising are plenty and can really be broken down into two categories. What are the benefits personally and what are the benefits professionally. From a personal standpoint, you become your own boss and the master of your own fate. I won’t go into detail here because the personal benefits are pretty self explanatory. From a professional standpoint, buying a franchise provides a better safety net from business failure as opposed to starting a business from scratch. A snap shot of the benefits include:

You get a proven business system and training on how to use it
The franchisor often does all the market research and gives you a picture of your local competition and gives you ideas on how to differentiate yourself
You benefit from the buying power of the franchisor through vendor discounts for materials, supplies, services and leasing terms
Less risk of business failure and automatic brand awareness
The likelihood and speed at which you will expand to open two and three locations increases dramatically
So what are some of the costs involved in buying a franchise?

If any of these sounds too good to be true, I’m here to tell you it’s not! However, none of the benefits are free and there are some upfront costs you will incur. Most franchisors require an upfront fee that can range from $2,000-$100,000 and up. Some may even require you to pay an annual royalty fee ranging from 2-10%. There may also be costs associated with securing land or a building in which to operate the business in and all associated costs. Although, some franchisors do pay for leasehold improvements as part of the initial service package.

You may also be required to purchase equipment via a long-term lease which can be beneficial to you in the future since banks will consider the equipment as collateral. Other initial expenses may include opening inventory, working capital, outdoor signs, and advertising fees.

The details, benefits and requirements of each franchise are very different. As a resource, I would suggest doing your research through each individual franchise company as well as websites like Entrepreneur.com and Franchise.com. Also, check with your local city and state government’s economic development office for tax incentives, seed money programs, free business training and other business resources to assist you in the planning and executing stages. The government and local community based organizations highly support business creation in their communities and have an endless amount of resources to assist you.

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