Did you know there are more than 3,000 franchise companies in the U.S.? They encompass more than 80 industries, such as education, retail, real estate, home repair and more. But you don’t need specialized experience in these growing industries to start a small business.
If you have broad business, management and communication skills, opening a franchise business may be right for you.
“A lot of people don’t consider franchising,” John Blair of FranNet said in SCORE’s live webinar “How to Identify and Select Your Ideal Business.” “One of the great things that it does is mitigate some risk because it’s a business model that’s been done before. Someone’s providing a playbook to execute the game plan for that franchise.”
What does franchising mean?
Franchising a business gives you a license to use a company’s name and trademarks, sell their products and use their business systems in exchange for an upfront fee and ongoing royalties. Franchise contracts typically last for seven to 10 years.
“They all have their own unique personality,” Blair said. But they all have one thing in common: a system franchisees follow to put them on a path to business success.
What does it cost to open a franchise?
As with starting a business from scratch, the investment to open a franchise can vary greatly.
According to FRANdata, 28 percent of franchises require an initial investment of $100,000 to $250,000. Sixteen percent require between $50,000 and $100,000. Eleven percent require an initial investment below $50,000. 11% below that. Service-based businesses usually require a lower capital investment.
Blair noted that 25 to 30 percent of the initial investment required to open a franchise will need to come from your personal funds, versus through financing.
What’s the catch?
There’s no catch, as long as you do your research before buying into a franchise.
Beyond name recognition and a proven business plan, franchise owners receive ongoing training and support from the franchise they’re a part of. The Federal Trade Commission regulates franchises to provide plain English franchise disclosure documents (FDD) that outline any bankruptcies or litigation; these documents also tally the total investment required of potential franchisees.
But there are disadvantages. The structured operating system in some franchises isn’t a good fit for everyone, and some franchises have territory restrictions that limit potential franchisee’s options. Ongoing royalties to the franchisor totaling four to eight percent of your gross revenue can also be a deterrent for some candidates.
Is franchising right for you?
Blair recommended talking with current franchisors, asking them if they’d repeat the experience if they could. Then, talk to a SCORE mentor about your small-business options and which fit your skills and goals.