The Price for Getting it Right...
By Michael J. Childs
As a franchise consultant that works with both buyers and sellers, I am often asked by franchise buyers; what do I get for my money when I buy a franchise?
Here’s an article I wrote a few years ago to help franchise buyers understand what buying a franchise represents. It may give you some ideas that will help you with franchise sales. Let me know what you think.
There is a common myth that businesses fail because of a lack of capital. In reality, new companies fail because they don’t have a proven business plan and system for making money.
This is why so many independent startups fail, while most franchises succeed.
They burn through their cash during the trial and error period, which can last five years or more, trying to figure out how to perfect their business model. If they ever do.
That’s the "getting it wrong" first part.
All new franchise concepts go through this. They spend a ton of time and money perfecting the business and model, so you don’t have to.
Some people confuse the investment in a franchise as the purchase of physical property such as equipment, inventory, furnishings, fixtures, and location build-out. But those costs are a part of any business, franchised or not.
What buying a franchise represents is an investment in the Intellectual Property (IP) of the franchisor. The real value of a franchise is that you start with a fully developed business model and a proven system for making money.
With the right franchise, you will hit the ground running and get a valuable jump-start on the competition.
Fees and Royalties – What You Get for Your Money
Initial franchise fees in the U.S. average about $40K.
The costs of perfecting a business model from scratch will almost always be higher than the price of the initial franchise fee. Just experimenting with different marketing strategies alone can be more than the initial franchise fee.
Monthly royalty fees in the U.S. average about 8%.
Royalty is a fee paid for the ongoing support of all franchisees and maintaining the franchise system, including continuous improvement to the business model, unlimited support, access to vendor discounts, product and service R&D, updating marketing and advertising programs, ongoing and refresher training and so on.
The royalty will usually more than pay for itself with savings from negotiated, national account purchases that are below market, including branded products that are higher quality with better margins compared to buying from outside suppliers.
And franchisees typically enjoy higher gross sales because of the franchisor’s well-designed marketing programs, both local and national, quickly creating more brand awareness for your new business than you could ever achieve on your own.
A franchise may not be right for everyone, and not all franchises are created equal. You still have to do your homework and due diligence. But a perfected business model will drastically reduce your initial risk with a higher potential for long-term success.
There’s an old cliché that says with a franchise you’re in business for yourself, but not by yourself. It’s true.
Not to mention you get to skip the expensive "getting it wrong" first part.