Thinking About Buying a Low Price Franchise?
After studying the franchise model you probably like:
- the idea of working with an established brand
- corporate headquarters support and training
- leveraging the national marketing efforts of the company
Can you afford the Franchise?
The average initial franchise investment is $250,000, excluding real estate, though there are many franchising opportunities available for smaller investments. The average royalty fees paid by franchisees to the franchisor range from 3 to 6 percent of monthly gross sales. The average length of a franchise contract is 10 years.
The Real Cost of Owning a Franchise
In the excitement of working with an established brand many new franchise owners don’t look carefully at the real fees:
- Initial payout. Your franchise fees and startup costs can significantly increase once you start reading ‘unrealized’ costs in your contract.
- Royalty payments. You will NEVER stop paying a percentage of your monthly profits out for royalties.
- No Freedom. If you have a great promotional idea for your business it may be hampered by the rules of the franchise.
- Higher profit. You may discover a resource to provide you with products for a much lower cost. But contract terms may stipulate that you work with a specific vendor.
- Locked in. This may be one of the worst realities of franchising because you may be stuck in a contract (on an underperforming franchise) for up to 10 years!
A Little Known Fact About Franchising!
The corporation can actually ‘take back’ the franchise if they feel you, or the store, are not performing according to standards. The changing ‘economic landscapes’ of communities and new competition makes such performance impossible to predict or control.
Ready for Some Statistics?
If you look for the data it is nearly impossible to find because there is so much positive ‘hype’ about franchising. But the Small Business Administration published its findings on the performance of franchise loans, stating, “Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.”
From 1991 to 2000, 7 percent of franchise loans defaulted versus 6.3 percent of non-franchise business loans.
Selecting A “Cheaper” Franchise Under 30k
The real problem with starting a lower priced franchise is that the franchisor just can’t give you the same level of support that higher-priced franchises can.
The Bottom Line?
Opening a franchise rather than starting your own business offers no guarantees of success. When you stack up the fees involved and your time commitment the job you just left may have been a better option (plus, it probably had medical insurance).
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