In general, franchises have a lower failure rate than solo businesses. When a franchisee buys into a franchise, they’re joining a successful brand. The franchisee is the one who buys the franchise license and invests their money in the new business. If you want to open a franchise business, you are the franchisee. You need to understand what is the franchise fee. The Franchise Fee can be very expensive: it can even reach $50,000.
If you’re an entrepreneur looking to become a franchise owner within the hospitality industry, this blog will take a look at the pros and cons of franchising to help you decide whether owning a franchise is worth it for your specific needs. Owning a franchise is an opportunity to buy an established business with branding, process and marketing material already in place.
The Pros and Cons of Franchising
Whether owning a franchise is worth it depends on various factors, including your personal goals, financial situation, and the franchise you are considering. Owning a franchise also comes with certain limitations, such as strict adherence to franchisor rules and guidelines, the need to pay ongoing franchise fees, and limited control over business operations. High starting expenses aren’t the only large expenses you will have.
When starting your own business, it is very difficult to accurately calculate the profit. But if you decide to open a coffee shop franchise, for example, everything will be much easier. The entrepreneur is provided with data to accurately predict the prospects.
There are many misconceptions about franchise ownership and its costs and benefits. People immediately think of fast food places like McDonald’s, and these types of franchises require a very hefty investment. But there are other less costly options that can produce a great return and high income with a small investment.
The support of a franchisor means that you have more power behind you – the franchise you’ve bought already has a trustworthy name, meaning you don’t need to worry about creating an audience. Starting a franchise is a much easier and safer way of ensuring your venture goes smoothly.
Franchise Profitability and Investment
Is owning a franchise profitable?
Research suggests that franchise businesses overall have a startup success rate of greater than 90% and better longevity. Understanding profitability: is owning a franchise worth it? The short answer is yes, franchises can be very profitable. When investing in a franchise, it’s essential to do your research and ensure you are choosing a brand that coincides with your values, has a track record of success, and is positioned in an industry for growth.
What Can You Expect to Make from a Franchise?
Calculating an exact estimate of what you can make from a franchise is incredibly difficult. However, factors such as the initial investment, ongoing support, and location can impact your success. One example is if a franchise has an initial investment of $1.5 million, the franchisor may offer help with a loan for $1 million and require you to cover the remaining $500,000 from your own resources.
In the 2021 Franchise 500 Ranking published by Entrepreneur.com, the investments for the top ten franchises in the nation ranged from:
- RE/MAX, LLC: Minimum of $38,000
- Taco Bell: Maximum of $2.6 million
Even within a franchise, wide variation exists depending on the specific location and the price of commercial real estate in the area.
The best way to establish the most profitable franchise businesses is to review Franchise Disclosure Documents, which include profit margins for over 2,000 franchises. An Insider Monkey report ranked the top 10 most profitable franchises, providing annual sales numbers and maximum initial costs.
Deciding to Invest in a Franchise
Is it a good idea to invest in a franchise?
Investing in a franchise can be a good option for those who want to be their own boss without the added risk of starting a business from scratch. You will have to pay ongoing royalty fees and advertising fees to the franchisor, which cuts into your profits. You will also have less flexibility and control over how to run the business compared to an independent small business owner.
When evaluating a franchise opportunity, consider:
- The initial franchise fee (can range from $10,000 to over $1 million)
- Royalties (often range from 5% to 8% of gross sales)
- The total investment required
- The franchise’s proven track record of profitability
You also need to carefully study the franchise disclosure document and consult with an attorney to fully understand the franchise agreement before signing. With smart decision making, franchising can provide a faster pathway to business ownership, but it doesn’t eliminate all the risk.