Franchises 101

How to Start a Turnkey Business

Franchises 101
July 25, 2014

There is a high degree of risk involved in starting a new business venture. The statistics regarding the success rate of small business startups are not very encouraging: Only half of small businesses survive for five years, and only about one-third survive for ten years or longer, according to the SBA’s Office of Advocacy.

One way to reduce this risk is to buy into a business franchise. Franchises have become ubiquitous across the American landscape, with industries ranging from restaurants, hotels and car repair services to health clubs, hair salons, commercial cleaning/janitorial and tax preparation services offering entrepreneurial opportunities for those who want to start their own business.

Approximately 770,000 franchise business locations are currently operating in the U.S. These businesses employ 8.5 million workers and generate approximately $840 billion in revenue, or 3.5 percent of U.S. GDP.

Franchising Advantages and Drawbacks

There is no question that buying into a franchise can help reduce the risk of starting a new business. Franchise operators have created a business model that has proven successful in the marketplace in many cases, and the franchisor will usually provide a high level of upfront and ongoing support to help franchisees succeed.

This usually includes a detailed business plan that spells out everything franchisees need to know to start and run the business — from training and operational processes to marketing strategies and proprietary information and trade secrets that are key to the franchise’s success. Most franchises also already have at least some degree of name recognition and market presence, so owners are not starting from scratch when it comes to building brand awareness.

Nevertheless, none of this means that starting a franchise business is risk-free — far from it. While buying a franchise may provide you with a good head start toward business success, what you do with this head start is up to you. Running a successful franchise business requires just as much hard work, intelligence and perseverance as running any other kind of business.

One of the biggest drawbacks to starting a franchise is the fact that there will usually be an upfront franchise fee that must be paid to the franchisor in order to start your business. This fee can be as low as several thousand dollars, or as high as hundreds of thousands of dollars. In addition, the franchisor may also require you to pay ongoing royalties and other fees, a portion of which is typically used to fund advertising for the brand.

Another drawback is the lack of total control you will have over your business. Franchisees are usually required to follow narrow and well-defined guidelines covering almost every aspect of how the business is run. This includes the specific products and services that can be sold, how products are manufactured and services are provided, the pricing of products and services, marketing strategies that can be implemented, hiring practices that must be followed, and operational processes that must be adhered to, just to name just a few. While this may cramp your management style in some ways, it also helps assure consistency in both product delivery and branding.

Choosing the Right Franchise

If you determine that buying into a franchise is the right business startup option for you, your first step is to decide which franchise. There are literally thousands of options to choose from, so start by narrowing down the industries where you think you would like to own a business. The first industry many people think of when it comes to franchises is restaurants and fast food, since there are numerous franchise restaurants and fast food locations in virtually every city in America. Indeed, nine of the top twenty franchise opportunities in the U.S., as ranked in Entrepreneur 2014 Franchise 500®, are restaurants or fast food businesses.

However, as noted earlier, there are many other industries where franchising is also a way to get started in business for yourself. For example, the top-ranked franchise opportunity in the Entrepreneur 2014 Franchise 500 is Anytime Fitness, while Supercuts (hair salons), Jan-Pro (commercial cleaning), Kumon Math, and Reading Centers (tutoring and supplemental education) also rank in the top 20.

There are a number of different factors upon which you can base your decision on which type of franchise to buy. These typically include your skills, background and experience; your business interests and strengths; the profit potential and startup costs of the franchise; societal trends that are impacting different franchise industries; and the degree of control you will be able to retain over the business, among others.

Once you have narrowed your franchise choices down to a particular industry, start doing research into the top-ranked franchise businesses in this industry. The Entrepreneur 2014 Franchise 500 is one place to start — this list includes basic information about 500 different franchise business opportunities in the U.S. From here, you can do more in-depth research, including accessing the detailed franchise information that most franchisors have on their websites.

You could also attend a franchise exhibition where dozens or more franchisors are marketing themselves to potential new franchisees under one roof. In addition, you could contact a franchise broker who specializes in matching franchisors with the right potential franchisees.

Digging Deeper

Your goal during this initial research process should be to narrow your franchise options down to just a handful of possible franchisors. Then you can perform more detailed and in-depth research and due diligence on these opportunities.

Ask for a copy of the disclosure document of any franchise in which you are seriously interested. By law, you must receive this document at least fourteen days before you are asked to sign a contract with or pay any money to the franchisor.

The disclosure document will include detailed information about virtually every aspect of the franchise opportunity. This includes the franchisor’s background (e.g., how many years in business), key executives and the management team, the startup and ongoing costs of participating in the franchise, any restrictions on franchisees, any required advertising costs or fees, the training provided by the franchisor, and the franchise’s financial history, including past and projected earnings and bankruptcy if applicable.

If you decide that you are ready to buy into one of the franchise operations you are seriously considering, it is smart to have an accountant and/or attorney carefully review the franchise disclosure document before you make a commitment. An accountant can help you better grasp the financial aspects of the business opportunity, while an attorney can help make sure you understand the legal obligations you are agreeing to under the contract.

Weigh the Pros and Cons

There are definite pros and cons to starting a franchise business. While buying into a franchise can help reduce the risk of starting a small business, it does not eliminate this risk completely. Moreover, the potentially high startup costs and lack of ultimate control over the business are enough to convince some would-be entrepreneurs that they are better off starting a non-franchise business.

If you dream of starting your own small business, carefully weigh the pros and cons of franchising to help you make the right decision.

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