A franchise is a business concept that is owned by a parent company and licensed to an individual or another company. Franchisors, companies offering franchises for sale, do all of the up-front work–from dreaming up the concept to marketing it to the World. The franchisees, those who buy the franchises, pay a franchise fee, plus a royalty or percent of sales, and in some cases, development fees for the right to operate a business under the franchisors well-known name, to benefit from the franchisors national marketing, well-known brand, training programs and supplier relationships.
Franchises range from the super cheap janitorial services, vending machine and sign-making franchises to the ultra-expensive branded franchises (Hampton Inn at $3M-$10M).
Reasons for choosing to become a franchisor vary, but the biggies are (1) buy into success (why start from scratch when you can simply be a new location of a thriving business), (2) not going it alone (good franchisors provide a complete business plan, training on business operations, equipment and other products, supplier relationships, ongoing support, regional/national marketing, site selection assistance and more) and (3) easier to land financing (compared to untested startups).
So, is franchising for you?
Entrepreneur magazine’s 2006 survey of over 500 franchisors revealed…
- 94 percent of franchisors said “good people skills†are either important or very important for prospective franchisees
- 87 percent of surveyed franchisors said “ability to be coached†is important or very important
- 76 percent of surveyed franchisors said “entrepreneurial mindset” was important or very important
- 86 percent of surveyed franchisors ranked “general business skills†as important or very important
- 84 percent of franchisors ranked “access to capital†as important or very important
Is this you? If these qualities don’t absolutely describe you, don’t despair. Access to capital, general business skills and even people skills can be improved. Entrepreneurial mindset, however, is not something you can get from a class or even a mentor. Betting the farm on a pricey franchise that you may learn to hate running is ill-advised.
But, if you still want to roll the dice, don’t invest your entire retirement savings in a franchise without first investigating whether the franchises you are considering are right for you.
To research a franchise:
- Explore the possibilities! (Check out this free franchise search tool)
- Visit the business if possible
- Talk to current franchisees
- Dig deep into the Uniform Franchise Offering Circular (UFOC), a document that all franchisors must file with the Federal Trade Commission
- Ask hard questions of franchisors (What did company-owned and franchisees actually earn in revenue and profit? On what do they base sales projections? What kind of support is offered after the sale?)
- Conduct online research on the industry and the franchisor
- Read the free FTC Consumer Guide to Buying a Franchise
- Read books!
- Enlist the help of consultants
- Join the International Franchise Association and/or attend events
- Talk to potential lenders (bankers, credit unions, finance companies, investors about their willingness to fund a specific franchise)
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