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So Long, Burgers & Fries: Franchises of the Future

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February 20, 2015

Editor’s note: This is the first of a two-part Perspectives on Money Culture series on franchising.

Love the thought of serving eggs sunny side up with a smile and being your own boss, but don’t have the $2.4 million initial investment required to open a Denny’s®? Maybe a franchise business is for you.

Franchises attract aspiring business owners who’d rather lean on an existing brand and model—and a network of fellow franchisees—than go it alone. Franchises are attractive to some retirees and career-shifters who are drawn to the potential profits. But there’s also plenty of downside risk. After all, a given brand may be strong, but few are recession-proof.

“The benefits of owning a business can be huge,” Joel Libava, franchise author and lecturer, wrote recently on his blog. “You’ll have more freedom and more control … certainly more than you had when you were an employee. But starting a franchise business is a big deal. It’s not for the meek.”

There’s a wide range of opportunities in franchises, from familiar fast-food chains to home fix-it and storage services to retail spaces that resell used designer clothes. Long-established names like Denny’s and McDonald’s® are often owned by groups or franchise corporations, and, in some cases, individuals.

Denny’s, for example, will only consider you if you (and your partners) have $5 million to $10 million liquid capital available. You’ll need an estimated initial investment of $700,000 to $2.4 million and a $40,000 franchise fee, plus other costs. By comparison, a Subway® franchise fee is $15,000 and the total investment can be around $78,600 depending on location and other factors.

The Might of Many

Jumping on the back of big-muscle corporate HQ can help some small businesses hit the ground running. The buying power and efficiencies of scale in the franchise system means the franchisor can negotiate lower prices for the products and services needed to run the business. You can also bounce ideas off fellow franchisees.

According to the International Franchise Association, there were 781,794 franchise establishments in the U.S. last month, up nearly 6% over the past five years. U.S. franchises will generate an estimated total revenue of $889 billion in 2015, up 5.4% from 2014.

Not Really “The Boss”

Of course, the franchise reality is, you’re not really your own boss. You do oversee hiring and firing at the local level, but remember, the whole point of a franchise is that you’re buying an established brand. With it come established rules.

Franchise risk may start with the potentially steep entry points. Often, a franchisee is paying the franchisor for everything from leasing commercial property to buying inventory and equipment. There will likely be a one-time franchise fee, which gives you permission to use the franchisor's signage and logo. You'll also pay the corporate office an ongoing royalty fee, which is essentially a percentage of your sales, every year, and you may have to contribute to a marketing fund.

Do Your Homework

Companies can provide franchise reps to help get you going, but plan to do much of the groundwork on your own, and don’t get wooed by dreams of “business in a box.” There’s much work to do before you frame your first dollar bill. But if there’s unmet demand in your community and you can shoulder the risk, a franchise can be an inroad into business ownership.

Be sure to check Perspectives on Money Culture next week as we describe some of the current franchise trends that remind us this business stretches well beyond fast-food chains.