What You Must Know Before Buying a Franchise

Thinking of buying a franchise? Starting a new business is a risky endeavor. There is absolutely no guarantee of success or profit.

Many new businesses barely make enough money to break even against expenses. More than one in five businesses fail within a year.

Well over half of all businesses fail after five years in operation.

There are many reasons why new businesses fail. One us not taking care to establish a brand presence. Or not taking advantage of social media marketing. Not identifying, targeting, or engaging a consumer demographic.

Many new businesses don’t understand their relative business market. They just assume that opening a business is enough to succeed on its own.

That’s why buying a franchise can be the difference between failure and success. Many franchises have these problems solved.

Franchise beginnings

To escape the pitfalls of starting a business from scratch, many new entrepreneurs opt to buy a franchise.

A franchise can count on regular business to some degree due to the benefit of buying into a brand name. Franchises instantly appeal to a built-in consumer base that is already loyal to an established brand name.

Sound like easy money?

Well, there is no such thing as easy money. If you are considering become a franchisee, know two things: The franchisor always wins and, as a franchisee, you need to think strategically to prosper.

Buying a franchisee investment costs

The cost to launch a new, independent business could cost anywhere from $5,000 to $50,000 by most conservative estimates.

Those are the initial costs to start up a business without taking into consideration operating costs. If you are buying a franchise, you may have to pay anywhere from $50,000 to $100,000 just to launch.

The bigger the franchise, the more expensive the startup costs.

If you buy into one of the more notable and brand established franchises, you will definitely have to pay more in initial investment costs.

You must remember that as a franchisee, you are buying in the convenience of selling products via an established brand.

Buying into a national or internationally known franchise, or multiple franchises, could cost between $1 million and $5 million.

Keep in mind that buying into a brand with an initial investment does not take into paperwork costs, utilities, supplies, and other monthly, seasonal, and annual operating expenses.

It might take months, years, or decades for you to make back your original investment.

Why? Because, along with worrying about operational costs, you will be very busy paying franchise fees on a recurring basis.

The fee is always right

How do you think that McDonald’s, Burger King, Pizza Hut, Dunkin’ Donuts, Hertz Rent A Car, and other globally known brands make their money?

They profit by taking significant cuts of their franchisees’ sales and profit margins.

They also mandate that their franchisees buy all of their supplies from the franchisor home office. Franchisees can’t just buy their supplies on their own.

Franchisees must pay any and all fees mandated by the franchisor. Also, franchisees must comply with all staff retraining orders made by the franchisor, at the expense of the franchisee.

If you open a franchise restaurant, jewelry store, or auto parts store, you don’t just get to sit back and rake in the dough.

Besides fees you pay on a monthly, seasonal, and yearly basis, new fees can be established by the franchisor. They must be contractually paid by franchisees.

Revolving fees

What kind of fees? It might be easier to ask what kind of franchisee fees don’t exist. A “franchise fee,” is usually a one-time fee for the convenience of buying into an established brand.

A franchise fee might be anywhere from $20,000 to $50,000. If you take over a franchise region of locations and oversee or sell them, you would be a master franchisee.

A master franchisee fee could be $100,000 or significantly more.

As a franchisee you will be expected to help the franchisor with their marketing and advertising costs. You will be charged a monthly marketing fee to help pay for regional and national marketing costs to help expand the brand.

This could be a 2% to 4% of sales as monthly marketing fee. It may go as high as 8% depending on the brand.

Paying the royalty fee

Then there is the royalty fee. The royalty fee is monthly based, taken from sales, and is 4% on average. It can be considerably more.

For instance, if your franchise makes $750,000 in a year and your franchisor charges a monthly 5% royalty, then you would owe the franchisor $37,500 for the year.

Keep in mind that would be an expense on top of the other operating expenses.

If the franchisor requires you and your staff to undergo new training procedures you must comply at your own expense. Exactly how many franchisor fees that you will be responsible for depends on the franchisor.

It behooves you to be acquainted with fee structures to calculate your own potential earning potential as a franchisee.

Less than 7% of all franchises ever make more than $250,000 a year.

Self-market your franchise

The average franchisee makes between $66,000 and $82,000 a year.

Considering the amount required for investment costs, and the expenses required for operational costs and recurring franchise fees, it’s easy to see how even a well-known franchise can fail.

The franchisor is like a casino — the house always wins. But the player wins the jackpot every now and then.

Make sure that you dedicate a significant portion of your first-year operating budget to local self-promotion. Pay your franchisor marketing fee and market locally on your own.

Engage your local consumer base and assess their needs.

Such a marketing endeavor will have to be paid out of your pocket but will be worth it. This will be the most optimal way to stand out as a franchisee and to profit.